UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

 

Commission file number 1-9114

 

 

MYLAN LABORATORIES INC.
(Exact name of registrant as specified in its charter)

 

 

 

 

(724) 514-1800
(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES þ     NO o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer þ     Accelerated Filer o     Non-Accelerated Filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o     NO þ

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

MYLAN LABORATORIES INC. AND SUBSIDIARIES

 

FORM 10-Q
For the Quarterly Period Ended
September 30, 2006

 

INDEX

 

MYLAN LABORATORIES INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Earnings

 

 

See Notes to Condensed Consolidated Financial Statements

MYLAN LABORATORIES INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

 

 

See Notes to Condensed Consolidated Financial Statements

MYLAN LABORATORIES INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Cash Flows

 

 

See Notes to Condensed Consolidated Financial Statements

MYLAN LABORATORIES INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

(unaudited; dollars in thousands, except per share amounts)

 

MYLAN LABORATORIES INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements — (Continued)

 

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements (interim financial statements) of Mylan Laboratories Inc. and subsidiaries (“Mylan” or “the Company”) were prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q; therefore, as permitted under these rules, certain footnotes and other financial information included in audited financial statements were condensed or omitted. The interim financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the interim results of operations, financial position and cash flows for the periods presented.

 

These interim financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006.

 

The interim results of operations for the three and six months ended September 30, 2006, and the interim cash flows for the six months ended September 30, 2006, are not necessarily indicative of the results to be expected for the full fiscal year or any other future period.

 

Certain prior year amounts were reclassified to conform to the current year presentation. Such reclassifications had no impact on reported net earnings, earnings per share or shareholders’ equity.

 

 

Revenue is recognized for product sales upon shipment when title and risk of loss transfer to the Company’s customers and when provisions for estimates, including discounts, rebates, price adjustments, returns, chargebacks and other promotional programs are reasonably determinable. No revisions were made to the methodology used in determining these provisions during the three and six month periods ended September 30, 2006. Accounts receivable are presented net of allowances relating to these provisions. Such allowances were $408,908 and $381,800 as of September 30, 2006 and March 31, 2006. Other current liabilities include $53,185 and $60,374 at September 30, 2006, and March 31, 2006, for certain rebates and other adjustments that are payable to indirect customers.

 

 

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement 109 (“FIN 48”), which clarifies the accounting for uncertain tax positions. This Interpretation provides that the tax effects from an uncertain tax position be recognized in the Company’s financial statements, only if the position is more likely than not of being sustained upon audit, based on the technical merits of the position. The provisions of FIN 48 will be effective for Mylan as of the beginning of fiscal 2008. The Company is currently evaluating the impact of adopting FIN 48 on its consolidated financial statements.

 

 

On August 28, 2006, Mylan entered into a Share Purchase Agreement (the “Share Purchase Agreement”) to acquire, through MP Laboratories (Mauritius) Ltd, its wholly-owned indirect subsidiary, approximately 51.5% of the outstanding share capital of Matrix Laboratories Limited (“Matrix”), a publicly traded Indian company. Matrix is engaged in the manufacture of active pharmaceutical ingredients (“APIs”) and solid oral dosage forms and is based in Hyderabad, India. Pursuant to the Share Purchase Agreement, Mylan has agreed to pay a cash purchase price of 306 rupees per share (or approximately $6.58 per share at the August 28, 2006, exchange rate), for shares held by the selling shareholders, Mr. Prasad Nimmagadda, Prasad Nimmagadda-HUF, G2 Corporate Services Limited, India Newbridge Investments Limited (“Newbridge Investments”), India Newbridge Coinvestment

Limited (“Newbridge Coinvestment”), India Newbridge Partners FDI Limited (“Newbridge Partners” and, together with Newbridge Investments and Newbridge Coinvestment, the “Newbridge Selling Shareholders”), Maxwell (Mauritius) Pte. Limited and Spandana Foundation (collectively, the “Selling Shareholders”).

 

In accordance with applicable Indian law, the Company has also made a public announcement for an open offer to acquire up to an additional 20% of the outstanding shares of Matrix (the “Public Offer”) from Matrix’s shareholders (other than the Selling Shareholders). The price in the Public Offer will be 306 rupees per share, in accordance with applicable Indian regulations.

 

Mr. Prasad Nimmagadda, the Newbridge Selling Shareholders and Maxwell (Mauritius) Pte. Limited have agreed to use a portion of the proceeds from their sale of Matrix shares, approximately $164,000 in the aggregate, to acquire shares of Mylan common stock in a private sale at a price of $20.85 per share, which is conditioned upon the closing of the Share Purchase Agreement and other customary closing conditions. Assuming the open offer is fully subscribed, and taking into account the private sale of Mylan common stock, the net cash to be paid, excluding transaction costs, is expected to be approximately $572,000. The transaction will be funded using Mylan’s existing revolving credit facility and cash on hand.

 

Mylan and certain of the Selling Shareholders have entered into a Shareholders’ Agreement (the “Mylan Shareholders’ Agreement”) relating to their share ownership of Mylan, which agreement will be effective upon the closing of the private sale of the Mylan shares. The Mylan Shareholders’ Agreement requires registration of the Mylan shares, restricts transfer of the Mylan shares by Mr. Prasad Nimmagadda for a limited period of time, provides for the Company, using its reasonable best efforts, to nominate Mr. Prasad Nimmagadda to the Company’s Board of Directors for a certain period of time, and restricts Mr. Prasad Nimmagadda from competing with Matrix’s pharmaceutical business for a certain period of time.

 

The consummation of the acquisition of Matrix shares from the Selling Shareholders is subject to regulatory approval in India and other closing conditions. The consummation of the acquisition of shares in the Public Offer is also subject to regulatory approval in India. The parties anticipate that the transaction will be completed by the end of fiscal 2007. Matrix will remain a publicly traded company in India and will continue to operate on an independent basis.

 

In conjunction with this planned transaction, on August 26, 2006, the Company entered into a foreign exchange forward contract to purchase Indian rupees with U.S. dollars. The contract is contingent upon the close of the potential Matrix acquisition. The purpose of the forward contract is to mitigate the risk of foreign currency exposure related to the pending transaction.

 

The Company accounts for this instrument under the provisions of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”). This instrument does not qualify for hedge accounting treatment under SFAS 133 and therefore was required to be adjusted to fair value with the change in the fair value of the instrument recorded in current earnings. At September 30, 2006, the Company recorded a loss of $7,800 related to this deal contingent forward contract. This amount is included as other income (expense), net in the Condensed Consolidated Statement of Earnings for both periods ended September 30, 2006.

 

 

Mylan’s shareholders approved the Mylan Laboratories Inc. 2003 Long-Term Incentive Plan on July 25, 2003, and approved certain amendments on July 28, 2006 (the “2003 Plan”). Under the 2003 Plan, 22,500,000 shares of common stock are reserved for issuance to key employees, consultants, independent contractors and non-employee directors of Mylan through a variety of incentive awards, including: stock options, stock appreciation rights, restricted shares and units, performance awards, other stock-based awards and short-term cash awards. Awards are granted at the market price of the shares underlying the options at the date of the grant and generally become exercisable over periods ranging from three to four years and generally expire in ten years.

The Company adopted SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”), effective April 1, 2006. SFAS 123R requires the recognition of the fair value of stock-based compensation in net earnings. Prior to April 1, 2006, the Company accounted for its stock options using the intrinsic value method of accounting provided under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, (“APB 25”), and related Interpretations, as permitted by SFAS No. 123, Accounting for Share Based Compensation, (“SFAS 123”).

 

Mylan adopted the provisions of SFAS 123R, using the modified prospective transition method. Under this method, compensation expense recognized in the three and six month period ended September 30, 2006 of fiscal 2007 includes: (a) compensation cost for all share-based payments granted prior to April 1, 2006, but for which the requisite service period had not been completed as of April 1, 2006, based on the grant date fair value, estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all share-based payments granted subsequent to April 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. Results for prior periods have not been restated.

 

The previously disclosed pro forma effects of recognizing the estimated fair value of stock-based employee compensation for the three and six months ended September 30, 2005, were as follows:

 

 

Upon approval of the 2003 Plan, the Mylan Laboratories Inc. 1997 Incentive Stock Option Plan (the “1997 Plan”) was frozen, and no further grants of stock options will be made under that plan. However, there are stock options outstanding from the 1997 Plan, expired plans and other plans assumed through acquisitions.

required to respond to any complaint. Mylan Labs has filed a motion to dismiss the Apotex action, which is pending. Mylan Labs intends to defend each of these actions vigorously. In addition, by letter dated July 11, 2006, Mylan was notified by the U.S. Federal Trade Commission (“FTC”) of an investigation relating to the settlement of the modafinil patent litigation. In its letter, the FTC requested certain information from Mylan Labs, MPI and Mylan Technologies, Inc. pertaining to the patent litigation and the settlement thereof. Mylan is collecting information requested by the government and is cooperating with the government’s investigation.

 

Other Litigation

 

The Company is involved in various other legal proceedings that are considered normal to its business. While it is not feasible to predict the ultimate outcome of such other proceedings, the Company believes that the ultimate outcome of such other proceedings will not have a material adverse effect on its financial position or results of operations.

 

The following discussion and analysis addresses material changes in the results of operations and financial condition of Mylan Laboratories Inc. and Subsidiaries (“the Company”, “Mylan” or “we”) for the periods presented. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements, the related Notes to Consolidated Financial Statements and Management’s Discussion and Analysis of Results of Operations and Financial Condition included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006, the unaudited interim Condensed Consolidated Financial Statements and related Notes included in Item 1 of this Report on Form 10-Q (“Form 10-Q”) and the Company’s other SEC filings and public disclosures.

 

This Form 10-Q may contain “forward-looking statements”. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may include, without limitation, statements about the Company’s market opportunities, strategies, competition and expected activities and expenditures, and at times may be identified by the use of words such as “may”, “could”, “should”, “would”, “project”, “believe”, “anticipate”, “expect”, “plan”, “estimate”, “forecast”, “potential”, “intend”, “continue” and variations of these words or comparable words. Forward-looking statements inherently involve risks and uncertainties. Accordingly, actual results may differ materially from those expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the risks described below under “Risk Factors” in Part II, Item 1A. The Company undertakes no obligation to update any forward-looking statements for revisions or changes after the date of this Form 10-Q.

 

Overview

 

Mylan’s financial results for the three months ended September 30, 2006, included total revenues of $366.7 million, net earnings of $77.5 million and earnings per diluted share of $0.36. Comparatively, the three months ended September 30, 2005, included total revenues of $298.0 million, net earnings of $35.8 million and earnings per diluted share of $0.16. This represents an increase of 23% in total revenues, 117% in net earnings and 125% in earnings per diluted share when compared to the same prior year period. Included in earnings per share for the second quarter of fiscal 2007 is stock based compensation expense totaling $0.02 per share as a result of the Company’s adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”), a mark to market loss on a foreign exchange forward contract of $0.02 per share and a gain of $0.03 per share related to the favorable settlement of certain litigation. Included in earnings per share in the second quarter of fiscal 2006 was $0.03 per share related to restructuring costs associated with the closure of Mylan’s subsidiary, Mylan Bertek Pharmaceuticals Inc. (“Mylan Bertek”).

 

For the six months ended September 30, 2006, Mylan reported total revenues of $722.8 million, net earnings of $153.1 million and earnings per diluted share of $0.71. For the first six months of fiscal 2006, total revenues were $621.4 million, net earnings were $78.7 million and earnings per diluted share were $0.31. This represents an increase of 16% in total revenues, 95% in net earnings and 129% in earnings per diluted share when compared to the prior period. Stock based compensation costs of $0.04 per share are included in the results for the six months ended September 30, 2006, as a result of the adoption of SFAS 123R, as is $0.02 per share of a mark to market loss on a foreign exchange forward contract and a gain of $0.03 per share related to the favorable settlement of certain litigation. Included in the prior year results are $0.03 per diluted share, with respect to a contingent legal liability related to previously-disclosed litigation in connection with the Company’s lorazepam and clorazepate products, and $0.05 per diluted share of restructuring costs. A more detailed discussion of the Company’s financial results of the three and six month periods ended September 30, 2006, can be found under the section titled “Results of Operations”.

 

Significant developments which have occurred during the second quarter include:

 

 

Mylan and Matrix together will have approximately 5,100 employees in 10 countries. Matrix will provide Mylan with a significant presence in important emerging pharmaceutical markets, including India, China and Africa, as well as a European footprint and distribution network through Matrix’s Docpharma subsidiary. This transaction will combine Matrix’s active pharmaceutical ingredient and drug development business with Mylan’s expertise in finished dosage forms. The transaction will also expand Mylan’s high-barrier-to-entry product capabilities, particularly in the area of anti-virals.

 

The consummation of the acquisition of Matrix shares is subject to regulatory approval in India and other closing conditions. The parties anticipate that the transaction will be completed by the end of fiscal 2007.

 

This transaction will be funded using Mylan’s existing revolving credit facility and cash on hand. Approximately $164.0 million of the funds received by three of the selling shareholders will be used to purchase shares of Mylan common stock resulting in net cash to be paid of approximately $572.0M.

 

 

 

Results of Operations

 

Quarter Ended September 30, 2006, Compared to Quarter Ended September 30, 2005

 

Total Revenues and Gross Profit

 

Total revenues for the current quarter increased by 23% or $68.7 million to $366.7 million from $298.0 million in the same prior year period. This increase was driven by both increased volume and stable pricing. During the quarter fentanyl continued to be the only AB-rated generic alternative to Duragesic^® on the market and accounted for approximately 20% of net sales. As a result of a continued shift from brand to generic, fentanyl contributed favorably to both pricing and volume.

 

Excluding fentanyl, Mylan’s product portfolio realized overall stable pricing and volume. In total, doses shipped increased by 6% to approximately 3.5 billion.

 

Other revenue for the quarter ended September 30, 2006, consisted primarily of amounts recognized with respect to Apokyn^®, which was sold in the prior year, with the remainder related to other business development activities.

 

Consolidated gross profit increased 37% or $52.9 million to $196.1 million and gross margins increased to 53.5% from 48.1%. A significant portion of gross profit was generated by fentanyl sales which contribute margins well in excess of most other products in our portfolio. Absent any changes to market dynamics or significant new competition for fentanyl, the Company expects the product to continue to be a significant contributor to sales and gross profit. As is the case in the generic industry, the entrance into the market of other generic competition generally has a negative impact on the volume and pricing of the affected products.

 

Operating Expenses

 

Research and development (“R&D”) expenses for the current quarter decreased 20% or $5.6 million to $22.7 million from $28.3 million in the same prior year period. This decrease was due primarily to a decline in the number of ongoing R&D studies, including those with respect to nebivolol, which was outlicensed in the fourth quarter of fiscal 2006.

 

Selling, General and Administrative (“SG&A”) expenses decreased by 12% or $6.6 million to $50.3 million from $56.9 million. This decrease is primarily the result of savings, mostly payroll and payroll related, as a result of the closure of Mylan Bertek in the prior year. Included in SG&A in the prior year was $8.6 million of restructuring costs, related to the Mylan Bertek closure. Partially offsetting these favorable items is $3.3 million in stock based compensation cost recognized as a result of the Company’s adoption of SFAS 123R in the first quarter of fiscal 2007.

 

Litigation, net

 

The second quarter of fiscal 2007 included a gain of $11.5 million related to the favorable settlement of certain litigation.

 

Interest Expense

 

Interest expense related to the Company’s outstanding borrowings was $10.4 million in the second quarter of fiscal 2007, which is an increase of $1.5 million from second quarter of fiscal 2006. The Company’s borrowings were outstanding for the entire second quarter of fiscal 2007, compared to only a portion of the second quarter of

fiscal 2006. Included in interest expense is a commitment fee on the unused portion of the revolving credit facility and the amortization of debt issuance costs.

 

Other (Expense) Income, net

 

Other expense, net, was $2.2 million in the second quarter of fiscal 2007 compared to $4.3 million of income in the same prior year period. The change is primarily the result of an unfavorable, non-cash $7.8 million mark to market adjustment on a foreign currency forward contract related to the pending acquisition of Matrix. The purpose of the forward contract was to fix the exchange rate on the rupee denominated acquisition price that Mylan will be required to pay at the time of closing. In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, this derivative instrument is marked to market each period with any change in the fair value reported in current earnings. As of October 31, 2006, exchange rates had fluctuated such that the mark to market fair value adjustment of this forward contract on such date would have been favorable.

 

Income Tax Expense

 

The Company’s effective tax rate has increased in the current quarter to 36.4% from 33.0% in the same period of the prior year. This increase is due to higher pre-tax income, which results in higher state taxes, and fewer deductions for research and development when compared to fiscal 2006.

 

Six Months Ended September 30, 2006, Compared to Six Months Ended September 30, 2005

 

Total Revenues and Gross Profit

 

Total revenues for the six months ended September 30, 2006 increased by 16% or $101.4 million to $722.8 million from $621.4 million in the same prior year period.

 

Net revenues increased by $88.9 million to $706.6 million, which was the result of overall stable pricing as well as increased volume. Fentanyl continues to be the main driver behind these increases and has accounted for over 20% of net revenues through the first half of fiscal 2007.

 

Exclusive of fentanyl, the remaining product portfolio experienced both overall stable pricing and increased volume. In total, doses shipped for the six month period ended September 30, 2006 were approximately 6.9 billion, an increase of 11% over the same period of the prior year.

 

Other revenue for the six month period ended September 30, 2006, consisted primarily of amounts recognized with respect to Apokyn^®, which was sold in the prior year, with the remainder related to other business development activities.

 

Consolidated gross profit increased 24% or $73.2 million to $384.3 million from $311.1 million, and gross margins increased to 53.2% from 50.1%. A significant portion of gross profit was comprised of fentanyl which contributes margins well in excess of most other products in our portfolio. Absent any changes to market dynamics or significant new competition for fentanyl, the Company expects the product to continue to be a significant contributor to sales and gross profit. As is the case in the generic industry, the entrance into the market of other generic competition generally has a negative impact on the volume and pricing of the affected products.

 

Operating Expenses

 

R&D expenses for the six months ended September 30, 2006 decreased 18% or $9.5 million to $43.9 million from $53.4 million in the same prior year period. This decrease was due primarily to a decline in the number of ongoing R&D studies, including those with respect to nebivolol, which was outlicensed in the prior year. Also included in R&D in the prior year was $1.0 million of restructuring costs.

 

SG&A expenses decreased by 22% or $27.8 million to $100.2 million from $128.0 million. This decrease was primarily the result of the restructuring charge of $18.6 million recorded in the prior period. This restructuring charge consisted primarily of employee termination and severance costs, mostly associated with the Mylan Bertek sales force, as well as asset write-downs and lease termination costs. Cost savings derived as a result of the restructuring accounted for the remaining decrease.

Litigation, net

 

The six months ended September 30, 2006, included a favorable settlement of litigation for $11.5 million. In the same period of the prior year, there was a charge recorded in the amount of $12.0 million for a contingent liability with respect to the Company’s previously disclosed lorazepam and clorazepate product litigation.

 

Interest Expense

 

Interest expense for the six months ended September 30, 2006 totaled $20.8 million compared to $8.9 million for the same period of the prior year. The Company has had their financing outstanding for the entire first half of fiscal 2007, while it was only completed during the second quarter of fiscal 2006. Included in interest expense is a commitment fee on the unused portion of the revolving credit facility and the amortization of debt issuance costs.

 

Other (Expense) Income, net

 

Other income, net, was $7.4 million in the first half of fiscal 2007 compared to $9.9 million in the same prior year period. The change is primarily the result of an unfavorable, non-cash $7.8 million, mark to market adjustment on a foreign currency forward contract related to the pending acquisition of Matrix. The purpose of the forward contract was to fix the exchange rate on the rupee denominated acquisition price that Mylan will be required to pay at the time of closing. In accordance with SFAS 133, this derivative instrument is marked to market each period with any change in the fair value reported in current earnings. As of October 31, 2006, exchange rates had fluctuated such that the mark to market fair value adjustment of this forward contract would have been favorable. Partially, offsetting this adjustment was income related to our investment in Somerset Pharmaceuticals, Inc. (“Somerset”). We own a 50% equity interest in and account for this investment using the equity method of accounting. During the first quarter of fiscal 2007, Mylan received a cash payment from Somerset of approximately $5.5 million. The amount in excess of the carrying value of our investment in Somerset, approximately $5.0 million, was recorded as equity income.

 

Income Tax Expense

 

The Company’s effective tax rate increased for the first half of fiscal 2007 to 35.7% from 33.6% in the same period of the prior year. This increase is due to higher pre-tax income, which results in higher state taxes, and fewer deductions for research and development when compared to fiscal 2006.

 

Liquidity and Capital Resources

 

The Company’s primary source of liquidity continues to be cash flows from operating activities, which were $156.2 million for the six months ended September 30, 2006. Working capital as of September 30, 2006, was $1.1 billion compared to $926.7 million at March 31, 2006. This increase is primarily the result of increased receivables, due to the timing of cash collections and shipments, an increase in inventory due to aligning production to forecasted volumes, and an increase in marketable securities.

 

Cash used in investing activities for the six months ended September 30, 2006, was $136.0 million. Of the Company’s $2.0 billion of total assets at September 30, 2006, $611.7 million was held in cash, cash equivalents and marketable securities. Investments in marketable securities consist of a variety of high credit quality debt securities, including U.S. government, state and local government and corporate obligations. These investments are highly liquid and available for working capital needs. As these instruments mature, the funds are generally reinvested in instruments with similar characteristics.

 

Capital expenditures during the six months ended September 30, 2006, were $49.8 million. These expenditures were incurred primarily with respect to the Company’s previously announced planned expansions and the implementation of an integrated ERP system. The Company expects capital expenditures for fiscal 2007 to approximate $135.0 million.

 

Cash used in financing activities was $10.5 million for the six months ended September 30, 2006. As part of the refinancing of the Company’s debt completed in July 2006, $187.0 million dollars was borrowed under the new credit facility and used along with existing cash to repay an existing term loan.

Also included in cash flows from financing activities are proceeds of $21.7 million from the exercise of stock options and cash dividends paid of $25.3 million. In the first quarter of fiscal 2006, the Board voted to double the amount of the quarterly dividend to 6.0 cents per share from 3.0 cents per share, effective with the dividend paid for the first quarter of fiscal 2006.

 

The Company is involved in various legal proceedings that are considered normal to its business (see Note 13 to Condensed Consolidated Financial Statements). While it is not feasible to predict the outcome of such proceedings, an adverse outcome in any of these proceedings could materially affect the Company’s financial position and results of operations.

 

The Company is actively pursuing, and is currently involved in, joint projects related to the development, distribution and marketing of both generic and brand products. Many of these arrangements provide for payments by the Company upon the attainment of specified milestones. While these arrangements help to reduce the financial risk for unsuccessful projects, fulfillment of specified milestones or the occurrence of other obligations may result in fluctuations in cash flows.

 

The Company is continuously evaluating the potential acquisition of products, as well as companies, as a strategic part of its future growth. Consequently, the Company may utilize current cash reserves or incur additional indebtedness to finance any such acquisitions, which could impact future liquidity. On August 28, 2006, the Company announced that it will acquire up to 71.5% of the shares outstanding of Matrix, for 306 rupees per Matrix share, or approximately $736.0 million. Approximately $164.0 million of funds received by three of the selling shareholders will be used to purchase shares of Mylan common stock resulting in net cash to be paid of approximately $572.0 million. This transaction is expected to be funded through the credit facility and cash on hand.

 

Recent Accounting Pronouncements

 

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement 109 (“FIN 48”), which clarifies the accounting for uncertain tax positions. This Interpretation provides that the tax effects from an uncertain tax position be recognized in the Company’s financial statements, only if the position is more likely than not of being sustained upon audit, based on the technical merits of the position. The provisions of FIN 48 will be effective for Mylan as of the beginning of fiscal 2008. The Company is currently evaluating the impact of adopting FIN 48 on our consolidated financial statements.

 

The Company is subject to market risk from changes in the market values of investments in its marketable debt securities, interest rate risk from changes in interest rates associated with its long term debt and foreign currency exchange rate risk as a result of its pending acquisition of up to 71.5% of the shares outstanding of Matrix. In addition to marketable debt and equity securities, investments are made in overnight deposits, money market funds and marketable securities with maturities of less than three months. These instruments are classified as cash equivalents for financial reporting purposes and have minimal or no interest rate risk due to their short-term nature.

 

The following table summarizes the investments in marketable debt and equity securities which subject the Company to market risk at September 30, 2006 and March 31, 2006:

 

 

Marketable Debt Securities

 

The primary objectives for the marketable debt securities investment portfolio are liquidity and safety of principal. Investments are made to achieve the highest rate of return while retaining principal. Our investment

policy limits investments to certain types of instruments issued by institutions and government agencies with investment-grade credit ratings. At September 30, 2006, the Company had invested $448.1 million in marketable debt securities, of which $79.1 million will mature within one year and $369.0 million will mature after one year. The short duration to maturity creates minimal exposure to fluctuations in market values for investments that will mature within one year. However, a significant change in current interest rates could affect the market value of the remaining $369.0 million of marketable debt securities that mature after one year. A 5% change in the market value of the marketable debt securities that mature after one year would result in a $18.5 million change in marketable debt securities.

 

Long-Term Debt

 

On July 21, 2005, the Company issued $500.0 million in Senior Notes with fixed interest rates (which were exchanged for registered notes, as described previously) and, on July 24, 2006, entered into a five-year $700.0 million senior unsecured revolving credit facility (the “2006 Credit Facility”). Loans under the 2006 Credit Facility bear interest at a rate equal to either LIBOR plus an applicable margin of 0.60% or at a base rate, which is defined as the higher of the rate announced publicly by the administrative agent, from time to time, as its prime rate or 0.5% above the federal funds rate. In the case of the applicable margin for advances based on LIBOR, the applicable margin may increase or decrease, within a range from 0.40% to 0.70%, based on the Company’s total leverage ratio. In addition, the Company is required to pay a facility fee on average daily amount of the commitments (whether used or unused) of the Credit Facility at a rate, which ranges from 0.10% to 0.175%, based on the Company’s total leverage ratio. On July 24, 2006, the Company borrowed $187.0 million under the 2006 Credit Facility and used the proceeds to repay the aggregate principal amount outstanding under the Company’s previous credit agreement, dated as of July 21, 2005 (the “Previous Credit Agreement”), among the Company, the lenders and other financial institutions party thereto and Merrill Lynch Capital Corporation, as administrative agent. The interest rate on the 2006 Credit Facility at September 30, 2006 was 5.98%.

 

Generally, the fair market value of fixed interest rate debt will decrease as interest rates rise and increase as interest rates fall. At September 30, 2006 the fair value of the Notes were approximately $487.0 million. The 2006 Credit Facility’s fair value approximated carrying value at September 30, 2006. At March 31, 2006, the carrying value of our total long-term debt approximated fair value. A 10% change in interest rates on the 2006 Credit Facility would result in a change in interest expense of approximately $1.1 million per year.

 

Foreign Exchange Forward Contract

 

In conjunction with the planned acquisition of Matrix, on August 26, 2006, the Company entered into a foreign exchange forward contract to purchase Indian rupees with U.S. dollars. The contract is contingent upon the close of the potential acquisition. The purpose of the contract is to mitigate the risk of foreign currency exposure related to the pending transaction. The value of the foreign exchange contract fluctuates depending on the value of the U.S. dollar compared to the Indian rupee. At September 30, 2006, for every one percent change in the value of the U.S. dollar compared to the Indian rupee, the value of the foreign exchange contract will fluctuate by approximately $6.0 million. On September 30, 2006, the mark to market value of our foreign exchange contract resulted in a loss of $7.8 million. We expect the foreign exchange contract to be settled concurrent with our payment of the purchase price for Matrix upon closing of the transaction.

 

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2006. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective. No change in the Company’s internal control over financial reporting occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

For a description of the material pending legal proceedings to which the Company is a party, please see our Annual Report on Form 10-K for the year ended March 31, 2006. During the quarter ended September 30, 2006, there were no new material legal proceedings or material developments with respect to pending proceedings other than as described below. While it is not possible to determine with any degree of certainty the ultimate outcome of the following legal proceedings, the Company believes that it has meritorious defenses with respect to the claims asserted against it and intends to vigorously defend its position. An adverse outcome in any of these proceedings could have a material adverse effect on the Company’s financial position and results of operations.

 

Omeprazole

 

In fiscal 2001, Mylan Pharmaceuticals Inc. (“MPI”), a wholly-owned subsidiary of Mylan Labs, filed an Abbreviated New Drug Application (“ANDA”) seeking approval from the FDA to manufacture, market and sell omeprazole delayed-release capsules and made Paragraph IV certifications to several patents owned by AstraZeneca PLC (“AstraZeneca”) that were listed in the FDA’s “Orange Book.” On September 8, 2000, AstraZeneca filed suit against MPI and Mylan Labs in the U.S. District Court for the Southern District of New York alleging infringement of several of AstraZeneca’s patents. On May 29, 2003, the FDA approved MPI’s ANDA for the 10 mg and 20 mg strengths of omeprazole delayed-release capsules, and, on August 4, 2003, Mylan Labs announced that MPI had commenced the sale of omeprazole 10 mg and 20 mg delayed-release capsules. AstraZeneca then amended the pending lawsuit to assert claims against Mylan Labs and MPI and filed a separate lawsuit against MPI’s supplier, Esteve Quimica S.A. (“Esteve”), for unspecified money damages and a finding of willful infringement, which could result in treble damages, injunctive relief, attorneys’ fees, costs of litigation and such further relief as the court deems just and proper. MPI has certain indemnity obligations to Esteve in connection with this litigation. MPI, Esteve and the other generic manufacturers who are co-defendants in the case filed motions for summary judgment of non-infringement and patent invalidity. On January 12, 2006, those motions were denied, and a non-jury trial regarding liability only commenced on April 3, 2006, and was completed on June 14, 2006.

 

Pricing and Medicaid Litigation

 

On June 26, 2003, MPI and UDL Laboratories Inc. (“UDL”), a subsidiary of Mylan Labs, received requests from the U.S. House of Representatives Energy and Commerce Committee (the “Committee”) seeking information about certain products sold by MPI and UDL in connection with the Committee’s investigation into pharmaceutical reimbursement and rebates under Medicaid. MPI and UDL cooperated with this inquiry and provided information in response to the Committee’s requests in 2003. Several states’ attorneys general (“AG”) have also sent letters to MPI, UDL and Mylan Bertek, demanding that those companies retain documents relating to Medicaid reimbursement and rebate calculations pending the outcome of unspecified investigations by those AGs into such matters. In addition, in July 2004, Mylan Labs received subpoenas from the AGs of California and Florida in connection with civil investigations purportedly related to price reporting and marketing practices regarding various drugs. As noted below, both California and Florida subsequently filed suits against Mylan, and the Company believes any further requests for information and disclosures will be made as part of that litigation.

 

Beginning in September 2003, Mylan Labs, MPI and/or UDL, together with many other pharmaceutical companies, have been named in a series of civil lawsuits filed by state AGs and municipal bodies within the state of New York alleging generally that the defendants defrauded the state Medicaid systems by allegedly reporting “Average Wholesale Prices” (“AWP”) and/or “Wholesale Acquisition Costs” that exceeded the actual selling price of the defendants’ prescription drugs. To date, Mylan Labs, MPI and/or UDL have been named as defendants in substantially similar civil lawsuits filed by the AGs of Alabama, California, Florida, Illinois, Kentucky, Massachusetts, Mississippi, Missouri, Hawaii, Alaska and Wisconsin and also by the city of New York and approximately 40 counties across New York State. Several of these cases have been transferred to the AWP multi-district litigation proceedings pending in the U.S. District Court for the District of Massachusetts for pretrial proceedings. Others of these cases will likely be litigated in the state courts in which they were filed. Each of the

cases seeks an unspecified amount in money damages, civil penalties and/or treble damages, counsel fees and costs, and injunctive relief. In each of these matters, with the exception of the California, Florida, Missouri and Hawaii AG actions and the actions brought by various counties in New York, excluding the actions brought by Erie, Oswego and Schenectady counties, Mylan Labs, MPI and/or UDL have answered the respective complaints denying liability. Mylan Labs and its subsidiaries intend to defend each of these actions vigorously.

 

Department of Justice Medicaid Rebate Investigation

 

By letter dated January 12, 2005, MPI was notified by the U.S. Department of Justice of an investigation concerning MPI’s calculations of Medicaid drug rebates. To the best of MPI’s information, the investigation is ongoing. MPI is collecting information requested by the government and is cooperating fully with the government’s investigation.

 

Modafinil Antitrust Litigation and FTC Inquiry

 

Beginning in April 2006, Mylan Labs, along with four other drug manufacturers, has been named in a series of civil lawsuits filed in the Eastern District of Pennsylvania by a variety of plaintiffs purportedly representing direct and indirect purchasers of the drug modafinil and one action brought by Apotex, Inc., a manufacturer of generic drugs seeking approval to market a generic modafinil product. These actions allege violations of federal and state laws in connection with the defendants’ settlement of patent litigation relating to modafinil. These actions are in their preliminary stages, and with the exception of the action brought by Apotex, Inc., Mylan Labs has not yet been required to respond to any complaint. Mylan Labs’ has filed a motion to dismiss the Apotex action, which is pending. Mylan Labs intends to defend each of these actions vigorously. In addition, by letter dated July 11, 2006, Mylan was notified by the U.S. Federal Trade Commission (“FTC”) of an investigation relating to the settlement of the modafinil patent litigation. In its letter, the FTC requested certain information from Mylan Labs, MPI and Mylan Technologies, Inc. pertaining to the patent litigation and the settlement thereof. Mylan is collecting information requested by the government and is cooperating with the government’s investigation.

 

Other Litigation

 

The Company is involved in various other legal proceedings that are considered normal to its business. While it is not feasible to predict the ultimate outcome of such other proceedings, the Company believes that the ultimate outcome of such other proceedings will not have a material adverse effect on its financial position or results of operations.

 

The following risk factors could have a material adverse effect on our business, financial position or results of operations and could cause the market value of our common stock to decline. These risk factors may not include all of the important factors that could affect our business or our industry or that could cause our future financial results to differ materially from historic or expected results or cause the market price of our common stock to fluctuate or decline.

 

OUR FUTURE REVENUE GROWTH AND PROFITABILITY ARE DEPENDENT UPON OUR ABILITY TO DEVELOP AND/OR LICENSE, OR OTHERWISE ACQUIRE, AND INTRODUCE NEW PRODUCTS ON A TIMELY BASIS IN RELATION TO OUR COMPETITORS’ PRODUCT INTRODUCTIONS. OUR FAILURE TO DO SO SUCCESSFULLY COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE.

 

Our future revenues and profitability will depend, to a significant extent, upon our ability to successfully develop and/or license, or otherwise acquire and commercialize new generic and patent or statutorily protected (usually brand) pharmaceutical products in a timely manner. Product development is inherently risky, especially for new drugs for which safety and efficacy have not been established, and the market is not yet proven. Likewise, product licensing involves inherent risks including uncertainties due to matters that may affect the achievement of

milestones, as well as the possibility of contractual disagreements with regard to terms such as license scope or termination rights. The development and commercialization process, particularly with regard to new drugs, also requires substantial time, effort and financial resources. We, or a partner, may not be successful in commercializing any of the products that we are developing or licensing (including, without limitation, nebivolol) on a timely basis, if at all, which could adversely affect our product introduction plans, financial position and results of operations and could cause the market value of our common stock to decline.

 

FDA approval is required before any prescription drug product, including generic drug products, can be marketed. The process of obtaining FDA approval to manufacture and market new and generic pharmaceutical products is rigorous, time-consuming, costly and largely unpredictable. We, or a partner, may be unable to obtain requisite FDA approvals on a timely basis for new generic or brand products that we may develop, license or otherwise acquire. Also, for products pending approval, we may obtain raw materials or produce batches of inventory to be used in efficacy and bioequivalence testing, as well as in anticipation of the product’s launch. In the event that FDA approval is denied or delayed we could be exposed to the risk of this inventory becoming obsolete. The timing and cost of obtaining FDA approvals could adversely affect our product introduction plans, financial position and results of operations and could cause the market value of our common stock to decline.

 

The ANDA approval process often results in the FDA granting final approval to a number of ANDAs for a given product at the time a patent claim for a corresponding brand product or other market exclusivity expires. This often forces us to face immediate competition when we introduce a generic product into the market. Additionally, ANDA approvals often continue to be granted for a given product subsequent to the initial launch of the generic product. These circumstances generally result in significantly lower prices, as well as reduced margins, for generic products compared to brand products. New generic market entrants generally cause continued price and margin erosion over the generic product life cycle.

 

The Waxman-Hatch Act provides for a period of 180 days of generic marketing exclusivity for each ANDA applicant that is first to file an ANDA containing a certification of invalidity, non-infringement or unenforceability related to a patent listed with respect to a reference drug product, commonly referred to as a Paragraph IV certification. During this exclusivity period, which under certain circumstances may be required to be shared with other applicable ANDA sponsors with Paragraph IV certifications, the FDA cannot grant final approval to other ANDA sponsors holding applications for the same generic equivalent. If an ANDA containing a Paragraph IV certification is successful and the applicant is awarded exclusivity, it generally results in higher market share, net revenues and gross margin for that applicant. Even if we obtain FDA approval for our generic drug products, if we are not the first ANDA applicant to challenge a listed patent for such a product, we may lose significant advantages to a competitor that filed its ANDA containing such a challenge. The same would be true in situations where we are required to share our exclusivity period with other ANDA sponsors with Paragraph IV certifications. Such situations could have a material adverse effect on our ability to market that product profitably and on our financial position and results of operations, and the market value of our common stock could decline.

 

OUR APPROVED PRODUCTS MAY NOT ACHIEVE EXPECTED LEVELS OF MARKET ACCEPTANCE, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR PROFITABILITY, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE.

 

Even if we are able to obtain regulatory approvals for our new pharmaceutical products, generic or brand, the success of those products is dependent upon market acceptance. Levels of market acceptance for our new products could be impacted by several factors, including:

 

 

Some of these factors are not within our control. Our new products may not achieve expected levels of market acceptance. Additionally, continuing studies of the proper utilization, safety and efficacy of pharmaceutical products are being conducted by the industry, government agencies and others. Such studies, which increasingly employ sophisticated methods and techniques, can call into question the utilization, safety and efficacy of previously marketed products. For example, on July 15, 2005, the FDA issued a Public Health Advisory regarding the safe use of transdermal fentanyl patches, a product we currently market, the loss of revenues of which could have a significant impact on our business. In some cases, studies have resulted, and may in the future result, in the discontinuance of product marketing or other risk management programs such as the need for a patient registry. These situations, should they occur, could have a material adverse effect on our profitability, financial position and results of operations, and the market value of our common stock could decline.

 

A RELATIVELY SMALL GROUP OF PRODUCTS MAY REPRESENT A SIGNIFICANT PORTION OF OUR NET REVENUES, GROSS PROFIT OR NET EARNINGS FROM TIME TO TIME. IF THE VOLUME OR PRICING OF ANY OF THESE PRODUCTS DECLINES, IT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE.

 

Sales of a limited number of our products often represent a significant portion of our net revenues, gross profit and net earnings. If the volume or pricing of our largest selling products declines in the future, our business, financial position and results of operations could be materially adversely affected, and the market value of our common stock could decline.

 

WE FACE VIGOROUS COMPETITION FROM OTHER PHARMACEUTICAL MANUFACTURERS THAT THREATENS THE COMMERCIAL ACCEPTANCE AND PRICING OF OUR PRODUCTS, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE.

 

Our competitors may be able to develop products and processes competitive with or superior to our own for many reasons, including that they may have:

 

 

Any of these factors and others could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline.

 

BECAUSE THE PHARMACEUTICAL INDUSTRY IS HEAVILY REGULATED, WE FACE SIGNIFICANT COSTS AND UNCERTAINTIES ASSOCIATED WITH OUR EFFORTS TO COMPLY WITH APPLICABLE REGULATIONS. SHOULD WE FAIL TO COMPLY WE COULD EXPERIENCE MATERIAL ADVERSE EFFECTS ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS, AND THE MARKET VALUE OF OUR COMMON STOCK COULD DECLINE.

 

The pharmaceutical industry is subject to regulation by various federal and state governmental authorities. For instance, we must comply with FDA requirements with respect to the manufacture, labeling, sale, distribution, marketing, advertising, promotion and development of pharmaceutical products. Failure to comply with FDA and other governmental regulations can result in fines, disgorgement, unanticipated compliance expenditures, recall or seizure of products, total or partial suspension of production and/or distribution, suspension of the FDA’s review of

NDAs or ANDAs, enforcement actions, injunctions and criminal prosecution. Under certain circumstances, the FDA also has the authority to revoke previously granted drug approvals. Although we have internal regulatory compliance programs and policies and have had a favorable compliance history, there is no guarantee that these programs, as currently designed, will meet regulatory agency standards in the future. Additionally, despite our efforts at compliance, there is no guarantee that we may not be deemed to be deficient in some manner in the future. If we were deemed to be deficient in any significant way, our business, financial position and results of operations could be materially affected and the market value of our common stock could decline.

 

In addition to the new drug approval process, the FDA also regulates the facilities and operational procedures that we use to manufacture our products. We must register our facilities with the FDA. All products manufactured in those facilities must be made in a manner consistent with current good manufacturing practices (“cGMP”). Compliance with cGMP regulations requires substantial expenditures of time, money and effort in such areas as production and quality control to ensure full technical compliance. The FDA periodically inspects our manufacturing facilities for compliance. FDA approval to manufacture a drug is site-specific. Failure to comply with cGMP regulations at one of our manufacturing facilities could result in an enforcement action brought by the FDA which could include withholding the approval of NDAs, ANDAs or other product applications of that facility. If the FDA were to require one of our manufacturing facilities to cease or limit production, our business could be adversely affected. Delay and cost in obtaining FDA approval to manufacture at a different facility also could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline.

 

We are subject, as are generally all manufacturers, to various federal, state and local laws regulating working conditions, as well as environmental protection laws and regulations, including those governing the discharge of materials into the environment. Although we have not incurred significant costs associated with complying with environmental provisions in the past, if changes to such environmental laws and regulations are made in the future that require significant changes in our operations or if we engage in the development and manufacturing of new products requiring new or different environmental controls, we may be required to expend significant funds. Such changes could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline.

 

OUR REPORTING AND PAYMENT OBLIGATIONS UNDER THE MEDICAID REBATE PROGRAM AND OTHER GOVERNMENTAL PURCHASING AND REBATE PROGRAMS ARE COMPLEX AND MAY INVOLVE SUBJECTIVE DECISIONS. ANY DETERMINATION OF FAILURE TO COMPLY WITH THOSE OBLIGATIONS COULD SUBJECT US TO PENALTIES AND SANCTIONS WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS, AND THE MARKET VALUE OF OUR COMMON STOCK COULD DECLINE.

 

The regulations regarding reporting and payment obligations with respect to Medicaid reimbursement and rebates and other governmental programs are complex, and as discussed elsewhere in this Form 10-Q, we and other pharmaceutical companies are defendants in a number of suits filed by state attorneys general and have been notified of an investigation by the U.S. Department of Justice with respect to Medicaid reimbursement and rebates. Our calculations and methodologies are currently being reviewed internally and likewise are subject to review and challenge by the applicable governmental agencies, and it is possible that such reviews could result in material changes. In addition, because our processes for these calculations and the judgments involved in making these calculations involve, and will continue to involve, subjective decisions and complex methodologies, these calculations are subject to the risk of errors.

 

In addition, as also disclosed in this Form 10-Q, a number of state and federal government agencies are conducting investigations of manufacturers’ reporting practices with respect to Average Wholesale Prices (“AWP”), in which they have suggested that reporting of inflated AWP has led to excessive payments for prescription drugs. We and numerous other pharmaceutical companies have been named as defendants in various actions relating to pharmaceutical pricing issues and whether allegedly improper actions by pharmaceutical manufacturers led to excessive payments by Medicare and/or Medicaid.

Any governmental agencies that have commenced, or may commence, an investigation of the Company could impose, based on a claim of violation of fraud and false claims laws or otherwise, civil and/or criminal sanctions, including fines, penalties and possible exclusion from federal health care programs (including Medicaid and Medicare). Some of the applicable laws may impose liability even in the absence of specific intent to defraud. Furthermore, should there be ambiguity with regard to how to properly calculate and report payments-and even in the absence of any such ambiguity-a governmental authority may take a position contrary to a position we have taken, and may impose civil and/or criminal sanctions. Any such penalties or sanctions could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline.

 

WE EXPEND A SIGNIFICANT AMOUNT OF RESOURCES ON RESEARCH AND DEVELOPMENT EFFORTS THAT MAY NOT LEAD TO SUCCESSFUL PRODUCT INTRODUCTIONS. FAILURE TO SUCCESSFULLY INTRODUCE PRODUCTS INTO THE MARKET COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS, AND THE MARKET VALUE OF OUR COMMON STOCK COULD DECLINE.

 

Much of our development effort is focused on technically difficult-to-formulate products and/or products that require advanced manufacturing technology. We conduct research and development primarily to enable us to manufacture and market FDA-approved pharmaceuticals in accordance with FDA regulations. Typically, research expenses related to the development of innovative compounds and the filing of NDAs are significantly greater than those expenses associated with ANDAs. As we continue to develop new products, our research expenses will likely increase. Because of the inherent risk associated with research and development efforts in our industry, particularly with respect to new drugs (including, without limitation, nebivolol), our, or a partner’s, research and development expenditures may not result in the successful introduction of FDA approved new pharmaceutical products. Also, after we submit an NDA or ANDA, the FDA may request that we conduct additional studies and as a result, we may be unable to reasonably determine the total research and development costs to develop a particular product. Finally, we cannot be certain that any investment made in developing products will be recovered, even if we are successful in commercialization. To the extent that we expend significant resources on research and development efforts and are not able, ultimately, to introduce successful new products as a result of those efforts, our business, financial position and results of operations may be materially adversely affected, and the market value of our common stock could decline.

 

A SIGNIFICANT PORTION OF OUR NET REVENUES ARE DERIVED FROM SALES TO A LIMITED NUMBER OF CUSTOMERS. ANY SIGNIFICANT REDUCTION OF BUSINESS WITH ANY OF THESE CUSTOMERS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS, AND THE MARKET VALUE OF OUR COMMON STOCK COULD DECLINE.

 

A significant portion of our net revenues are derived from sales to a limited number of customers. As such, a reduction in or loss of business with one customer, or if one customer were to experience difficulty in paying us on a timely basis, our business, financial position and results of operations could be materially adversely affected, and the market value of our common stock could decline.

THE USE OF LEGAL, REGULATORY AND LEGISLATIVE STRATEGIES BY COMPETITORS, BOTH BRAND AND GENERIC, INCLUDING “AUTHORIZED GENERICS” AND CITIZEN’S PETITIONS, AS WELL AS THE POTENTIAL IMPACT OF PROPOSED LEGISLATION, MAY INCREASE OUR COSTS ASSOCIATED WITH THE INTRODUCTION OR MARKETING OF OUR GENERIC PRODUCTS, COULD DELAY OR PREVENT SUCH INTRODUCTION AND/OR SIGNIFICANTLY REDUCE OUR PROFIT POTENTIAL. THESE FACTORS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE.

 

Our competitors, both brand and generic, often pursue strategies to prevent or delay competition from generic alternatives to brand products. These strategies include, but are not limited to:

 

 

The Food and Drug Modernization Act of 1997 includes a pediatric exclusivity provision that may provide an additional six months of market exclusivity for indications of new or currently marketed drugs if certain agreed upon pediatric studies are completed by the applicant. Brand companies are utilizing this provision to extend periods of market exclusivity.

 

Some companies have lobbied Congress for amendments to the Waxman-Hatch legislation that would give them additional advantages over generic competitors. For example, although the term of a company’s drug patent can be extended to reflect a portion of the time an NDA is under regulatory review, some companies have proposed extending the patent term by a full year for each year spent in clinical trials rather than the one-half year that is currently permitted.

 

If proposals like these were to become effective, our entry into the market and our ability to generate revenues associated with new products may be delayed, reduced or eliminated, which could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline.

THE INDENTURE FOR OUR SENIOR NOTES AND OUR CREDIT FACILITY IMPOSE SIGNIFICANT OPERATING AND FINANCIAL RESTRICTIONS, WHICH MAY PREVENT US FROM CAPITALIZING ON BUSINESS OPPORTUNITIES AND TAKING SOME ACTIONS. THESE FACTORS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE.

 

The indenture for our Senior Notes and credit facility impose significant operating and financial restrictions on us. These restrictions will limit the ability of us and our subsidiaries to, among other things, incur additional indebtedness at our subsidiaries, make investments, sell assets, incur certain liens, enter into agreements restricting our subsidiaries’ ability to pay dividends, or merge or consolidate. In addition, our senior credit facility requires us to maintain specified financial ratios. We cannot assure you that these covenants will not adversely affect our ability to finance our future operations or capital needs or to pursue available business opportunities. A breach of any of these covenants or our inability to maintain the required financial ratios could result in a default under the related indebtedness. If a default occurs, the relevant lenders could elect to declare our indebtedness, together with accrued interest and other fees, to be immediately due and payable. These factors could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline.

 

OUR ABILITY TO SERVICE OUR DEBT AND MEET OUR CASH REQUIREMENTS DEPENDS ON MANY FACTORS, SOME OF WHICH ARE BEYOND OUR CONTROL. THESE FACTORS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE.

 

Our ability to satisfy our obligations, including our Senior Notes and our credit facility, will depend on our future operating performance and financial results, which will be subject, in part, to factors beyond our control, including interest rates and general economic, financial and business conditions. If we are unable to generate sufficient cash flow, we may be required to: refinance all or a portion of our debt, including the notes and our senior credit facility; obtain additional financing in the future for acquisitions, working capital, capital expenditures and general corporate or other purposes; redirect a substantial portion of our cash flow to debt service, which as a result, might not be available for our operations or other purposes; sell some of our assets or operations; reduce or delay capital expenditures; or revise or delay our operations or strategic plans. If we are required to take any of these actions, it could have a material adverse effect on our business, financial condition or results of operations. In addition, we cannot assure you that we would be able to take any of these actions, that these actions would enable us to continue to satisfy our capital requirements or that these actions would be permitted under the terms of our senior credit facility and the indenture governing the notes. The leverage resulting from our notes offering and our senior credit facility could have certain material adverse effects on us, including limiting our ability to obtain additional financing and reducing cash available for our operations and acquisitions. As a result, our ability to withstand competitive pressures may be decreased and, we may be more vulnerable to economic downturns, which in turn could reduce our flexibility in responding to changing business, regulatory and economic conditions. These factors could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline.

WE DEPEND ON THIRD-PARTY SUPPLIERS AND DISTRIBUTORS FOR THE RAW MATERIALS, PARTICULARLY THE CHEMICAL COMPOUND(S) COMPRISING THE ACTIVE PHARMACEUTICAL INGREDIENT, THAT WE USE TO MANUFACTURE OUR PRODUCTS, AS WELL AS CERTAIN FINISHED GOODS. A PROLONGED INTERRUPTION IN THE SUPPLY OF SUCH PRODUCTS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS, AND THE MARKET VALUE OF OUR COMMON STOCK COULD DECLINE.

 

We typically purchase the active pharmaceutical ingredient (i.e. the chemical compounds that produce the desired therapeutic effect in our products) and other materials and supplies that we use in our manufacturing operations, as well as certain finished products, from many different foreign and domestic suppliers.

 

Additionally, we maintain safety stocks in our raw materials inventory, and in certain cases where we have listed only one supplier in our applications with the FDA, have received FDA approval to use alternative suppliers should the need arise. However, there is no guarantee that we will always have timely and sufficient access to a critical raw material or finished product. A prolonged interruption in the supply of a single-sourced raw material, including the active ingredient, or finished product could cause our financial position and results of operations to be materially adversely affected, and the market value of our common stock could decline. In addition, our manufacturing capabilities could be impacted by quality deficiencies in the products which our suppliers provide, which could have a material adverse effect on our business, financial position and results of operations, and the market value of our common stock could decline.

 

The Company utilizes controlled substances in certain of its current products and products in development and therefore must meet the requirements of the Controlled Substances Act of 1970 and the related regulations administered by the Drug Enforcement Administration (“DEA”). These regulations relate to the manufacture, shipment, storage, sale and use of controlled substances. The DEA limits the availability of the active ingredients used in certain of our current products and products in development and, as a result, our procurement quota of these active ingredients may not be sufficient to meet commercial demand or complete clinical trials. We must annually apply to the DEA for procurement quota in order to obtain these substances. Any delay or refusal by the DEA in establishing our procurement quota for controlled substances could delay or stop our clinical trials or product launches, or could cause trade inventory disruptions for those products that have already been launched, which could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline.

 

WE USE SEVERAL MANUFACTURING FACILITIES TO MANUFACTURE OUR PRODUCTS. HOWEVER, A SIGNIFICANT NUMBER OF OUR PRODUCTS ARE PRODUCED AT ONE LOCATION. PRODUCTION AT THIS FACILITY COULD BE INTERRUPTED, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE.

 

Although we have other facilities, we produce a significant number of our products at our largest manufacturing facility. A significant disruption at that facility, even on a short-term basis, could impair our ability to produce and ship products to the market on a timely basis, which could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline.

 

WE MAY EXPERIENCE DECLINES IN THE SALES VOLUME AND PRICES OF OUR PRODUCTS AS THE RESULT OF THE CONTINUING TREND TOWARD CONSOLIDATION OF CERTAIN CUSTOMER GROUPS, SUCH AS THE WHOLESALE DRUG DISTRIBUTION AND RETAIL PHARMACY INDUSTRIES, AS WELL AS THE EMERGENCE OF LARGE BUYING GROUPS. THE RESULT OF SUCH DEVELOPMENTS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE.

 

We make a significant amount of our sales to a relatively small number of drug wholesalers and retail drug chains. These customers represent an essential part of the distribution chain of generic pharmaceutical products.

Drug wholesalers and retail drug chains have undergone, and are continuing to undergo, significant consolidation. This consolidation may result in these groups gaining additional purchasing leverage and consequently increasing the product pricing pressures facing our business. Additionally, the emergence of large buying groups representing independent retail pharmacies and the prevalence and influence of managed care organizations and similar institutions potentially enable those groups to attempt to extract price discounts on our products. The result of these developments may have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline.

 

WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL AND OTHER PROPRIETARY PROPERTY IN AN EFFECTIVE MANNER, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE.

 

Although our brand products may have patent protection, this may not prevent other companies from developing functionally equivalent products or from challenging the validity or enforceability of our patents. If any patents we use in our business are found or even alleged to be non-infringed, invalid or not enforceable, we could experience an adverse effect on our ability to commercially promote our patented products. We could be required to enforce our patent or other intellectual property rights through litigation, which can be protracted and involve significant expense and an inherently uncertain outcome. Any negative outcome could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline.

 

OUR COMPETITORS INCLUDING BRAND COMPANIES OR OTHER THIRD PARTIES MAY ALLEGE THAT WE ARE INFRINGING THEIR INTELLECTUAL PROPERTY, FORCING US TO EXPEND SUBSTANTIAL RESOURCES IN RESULTING LITIGATION, THE OUTCOME OF WHICH IS UNCERTAIN. ANY UNFAVORABLE OUTCOME OF SUCH LITIGATION COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE.

 

Companies that produce brand pharmaceutical products routinely bring litigation against ANDA applicants that seek FDA approval to manufacture and market generic forms of their branded products. These companies allege patent infringement or other violations of intellectual property rights as the basis for filing suit against an ANDA applicant. Likewise, patent holders may bring patent infringement suits against companies that are currently marketing and selling their approved generic products. Litigation often involves significant expense and can delay or prevent introduction or sale of our generic products.

 

There may also be situations where the Company uses its business judgment and decides to market and sell products, notwithstanding the fact that allegations of patent infringement(s) have not been finally resolved by the courts. The risk involved in doing so can be substantial because the remedies available to the owner of a patent for infringement include, among other things, damages measured by the profits lost by the patent owner and not by the profits earned by the infringer. In the case of a willful infringement, the definition of which is subjective, such damages may be trebled. Moreover, because of the discount pricing typically involved with bioequivalent products, patented brand products generally realize a substantially higher profit margin than bioequivalent products. An adverse decision in a case such as this or in other similar litigation could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline.

 

WE MAY EXPERIENCE REDUCTIONS IN THE LEVELS OF REIMBURSEMENT FOR PHARMACEUTICAL PRODUCTS BY GOVERNMENTAL AUTHORITIES, HMOs OR OTHER THIRD-PARTY PAYERS. ANY SUCH REDUCTIONS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE.

 

Various governmental authorities and private health insurers and other organizations, such as HMOs, provide reimbursement to consumers for the cost of certain pharmaceutical products. Demand for our products depends in

part on the extent to which such reimbursement is available. Third-party payers increasingly challenge the pricing of pharmaceutical products. This trend and other trends toward the growth of HMOs, managed health care and legislative health care reform create significant uncertainties regarding the future levels of reimbursement for pharmaceutical products. Further, any reimbursement may be reduced in the future, perhaps to the point that market demand for our products declines. Such a decline could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline.

 

LEGISLATIVE OR REGULATORY PROGRAMS THAT MAY INFLUENCE PRICES OF PRESCRIPTION DRUGS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE.

 

Current or future federal or state laws and regulations may influence the prices of drugs and, therefore, could adversely affect the prices that we receive for our products. Programs in existence in certain states seek to set prices of all drugs sold within those states through the regulation and administration of the sale of prescription drugs. Expansion of these programs, in particular, state Medicaid programs, or changes required in the way in which Medicaid rebates are calculated under such programs, could adversely affect the price we receive for our products and could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline.

 

WE ARE INVOLVED IN VARIOUS LEGAL PROCEEDINGS AND CERTAIN GOVERNMENT INQUIRIES AND MAY EXPERIENCE UNFAVORABLE OUTCOMES OF SUCH PROCEEDINGS OR INQUIRIES, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE.

 

We are involved in various legal proceedings and certain government inquiries, including, but not limited to, patent infringement, product liability, breach of contract and claims involving Medicaid and Medicare reimbursements, some of which are described in our periodic reports and involve claims for, or the possibility of fines and penalties involving, substantial amounts of money or for other relief. If any of these legal proceedings or inquiries were to result in an adverse outcome, the impact could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline.

 

With respect to product liability, the Company maintains commercial insurance to protect against and manage a portion of the risks involved in conducting its business. Although we carry insurance, we believe that no reasonable amount of insurance can fully protect against all such risks because of the potential liability inherent in the business of producing pharmaceuticals for human consumption. To the extent that a loss occurs, depending on the nature of the loss and the level of insurance coverage maintained, it could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline.

 

WE ENTER INTO VARIOUS AGREEMENTS IN THE NORMAL COURSE OF BUSINESS WHICH PERIODICALLY INCORPORATE PROVISIONS WHEREBY WE INDEMNIFY THE OTHER PARTY TO THE AGREEMENT. IN THE EVENT THAT WE WOULD HAVE TO PERFORM UNDER THESE INDEMNIFICATION PROVISIONS, IT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE.

 

In the normal course of business, we periodically enter into employment, legal settlement, and other agreements which incorporate indemnification provisions. We maintain insurance coverage which we believe will effectively mitigate our obligations under certain of these indemnification provisions. However, should our obligation under an indemnification provision exceed our coverage or should coverage be denied, our business, financial position and results of operations could be materially affected and the market value of our common stock could decline.

OUR ANNOUNCED (BUT NOT COMPLETED) ACQUISITION OF A CONTROLLING INTEREST IN MATRIX LABORATORIES INVOLVES A NUMBER OF INHERENT RISKS, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE.

 

On August 28, 2006, we entered into an agreement to acquire up to 71.5% of Matrix’s shares outstanding for 306 rupees per Matrix share (or approximately $6.58 per share at the August 28, 2006, exchange rate). The consummation of the acquisition requires the satisfaction of certain conditions that are beyond our control. Should the acquisition occur, the anticipated synergies and other benefits from the acquisition may not be achieved, and the strategic collaboration of the two businesses will involve challenges and costs, including ensuring compliance with Section 404 of the Sarbanes-Oxley Act of 2002, all of which could result in the costs of the acquisition exceeding its realized benefits. Furthermore, we cannot predict, among other things: the effect of any changes in customer and supplier relationships and customer purchasing patterns; changes in foreign currency exchange rates which could affect the fair value of our foreign exchange forward contract and the net assets to be acquired, the impact and effects of legal or regulatory proceedings, actions or changes; general market perception of the transaction; exposure to lawsuits and contingencies associated with the acquisition; our ability to retain key employees; and other uncertainties and matters beyond our control. We are also responsible for financial advisory, legal, accounting and other fees which must be paid even if the acquisition is not completed. Certain of the above factors could have a material adverse effect on our business, financial position and results of operations and could cause a decline in the market value of our common stock.

 

OUR ACQUISITION STRATEGIES IN GENERAL INVOLVE A NUMBER OF INHERENT RISKS. THESE RISKS COULD CAUSE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE.

 

We continually seek to expand our product line through complementary or strategic acquisitions of other companies, products and assets, and through joint ventures, licensing agreements or other arrangements. Acquisitions, joint ventures and other business combinations involve various inherent risks, such as assessing accurately the values, strengths, weaknesses, contingent and other liabilities, regulatory compliance and potential profitability of acquisition or other transaction candidates. Other inherent risks include the potential loss of key personnel of an acquired business, our inability to achieve identified financial and operating synergies anticipated to result from an acquisition or other transaction and unanticipated changes in business and economic conditions affecting an acquisition or other transaction. International acquisitions, and other transactions, could also be affected by export controls, exchange rate fluctuations, domestic and foreign political conditions and the deterioration in domestic and foreign economic conditions.

 

We may be unable to realize synergies or other benefits expected to result from acquisitions, joint ventures and other transactions or investments we may undertake, or be unable to generate additional revenue to offset any unanticipated inability to realize these expected synergies or benefits. Realization of the anticipated benefits of acquisitions or other transactions could take longer than expected, and implementation difficulties, market factors and the deterioration in domestic and global economic conditions could alter the anticipated benefits of any such transactions. These factors could cause a material adverse effect on our business, financial position and results of operations and could cause a decline in the market value of our common stock.

 

OUR FUTURE SUCCESS IS HIGHLY DEPENDENT ON OUR CONTINUED ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL. ANY FAILURE TO ATTRACT AND RETAIN KEY PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE.

 

Because our success is largely dependent on the scientific nature of our business, it is imperative that we attract and retain qualified personnel in order to develop new products and compete effectively. If we fail to attract and retain key scientific, technical or management personnel, our business could be affected adversely. Additionally,

while we have employment agreements with certain key employees in place, their employment for the duration of the agreement is not guaranteed. If we are unsuccessful in retaining all of our key employees, it could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline.

 

RECENT DECISIONS BY THE FDA, CURRENT BRAND TACTICS AND OTHER FACTORS BEYOND OUR CONTROL HAVE PLACED OUR BUSINESS UNDER INCREASING PRESSURE, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE.

 

We believe that certain recent FDA rulings are contrary to multiple sections of the Federal Food, Drug, and Cosmetic Act and the Administrative Procedures Act, the FDA’s published regulations and the legal precedent on point. These decisions call into question the rules of engagement in our industry and have added a level of unpredictability that may materially adversely affect our business and the generic industry as a whole. While we continue to challenge these recent decisions as well as current brand tactics that undermine congressional intent, we cannot guarantee that we will prevail or predict when or if these matters will be rectified. If they are not, our business, financial position and results of operations could suffer and the market value of our common stock could decline.

 

WE HAVE BEGUN THE IMPLEMENTATION OF AN ENTERPRISE RESOURCE PLANNING SYSTEM. AS WITH ANY IMPLEMENTATION OF A SIGNIFICANT NEW SYSTEM, DIFFICULTIES ENCOUNTERED COULD RESULT IN BUSINESS INTERRUPTIONS, AND COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE.

 

We have begun the implementation of an enterprise resource planning (“ERP”) system to enhance operating efficiencies and provide more effective management of our business operations. Implementations of ERP systems and related software carry risks such as cost overruns, project delays and business interruptions and delays. If we experience a material business interruption as a result of our ERP implementation, it could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline.

 

WE MUST MAINTAIN ADEQUATE INTERNAL CONTROLS AND BE ABLE, ON AN ANNUAL BASIS, TO PROVIDE AN ASSERTION AS TO THE EFFECTIVENESS OF SUCH CONTROLS. FAILURE TO MAINTAIN ADEQUATE INTERNAL CONTROLS OR TO IMPLEMENT NEW OR IMPROVED CONTROLS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE.

 

Effective internal controls are necessary for the Company to provide reasonable assurance with respect to its financial reports. We are spending a substantial amount of management time and resources to comply with changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and the New York Stock Exchange rules. In particular, Section 404 of the Sarbanes-Oxley Act of 2002 requires management’s annual review and evaluation of our internal control systems, and attestations as to the effectiveness of these systems by our independent registered public accounting firm. If we fail to maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting. Additionally, internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. In addition, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that the control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. If the Company fails to maintain the adequacy of its internal controls, including any failure to implement required new or improved controls, this could have a material adverse effect on our business, financial position and results of operations, and the market value of our common stock could decline.

THERE ARE INHERENT UNCERTAINTIES INVOLVED IN ESTIMATES, JUDGMENTS AND ASSUMPTIONS USED IN THE PREPARATION OF FINANCIAL STATEMENTS IN ACCORDANCE WITH GAAP. ANY FUTURE CHANGES IN ESTIMATES, JUDGMENTS AND ASSUMPTIONS USED OR NECESSARY REVISIONS TO PRIOR ESTIMATES, JUDGMENTS OR ASSUMPTIONS COULD LEAD TO A RESTATEMENT WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE.

 

The consolidated and condensed consolidated financial statements included in the periodic reports we file with the SEC are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements in accordance with GAAP involves making estimates, judgments and assumptions that affect reported amounts of assets (including intangible assets), liabilities, revenues, expenses and income. Estimates, judgments and assumptions are inherently subject to change in the future and any necessary revisions to prior estimates, judgments or assumptions could lead to a restatement. Any such changes could result in corresponding changes to the amounts of assets (including goodwill and other intangible assets), liabilities, revenues, expenses and income. Any such changes could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline.

 

The following provides a summary of votes cast for the proposals on which our shareholders voted at our Annual Meeting of Shareholders held on July 28, 2006.

 

Proposal No. 1 — Election of Nine Directors.

 

 

Proposal No. 2 — Approval of an Amendment to the Company’s 2003 Long-Term Incentive Plan.

 

 

Proposal No. 3 — Ratification of the selection of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for the fiscal year ending March 31, 2007.

 

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report on Form 10-Q for the quarterly period ended September 30, 2006, to be signed on its behalf by the undersigned thereunto duly authorized.

 

Mylan Laboratories Inc.
(Registrant)

 

Robert J. Coury

Vice Chairman and Chief Executive Officer

 

November 3, 2006

 

Edward J. Borkowski

Chief Financial Officer

(Principal financial officer)

 

November 3, 2006

 

Daniel C. Rizzo, Jr.

Vice President, Corporate Controller

(Principal accounting officer)

 

November 3, 2006

EXHIBIT INDEX

 

Exhibit 10.2

EXECUTION COPY

SHARE PURCHASE AGREEMENT

BY AND AMONG

MYLAN LABORATORIES INC.,

MP LABORATORIES (MAURITIUS) LTD.,

PRASAD NIMMAGADDA,

PRASAD NIMMAGADDA -HUF,

G2 CORPORATE SERVICES LIMITED,

INDIA NEWBRIDGE INVESTMENTS LIMITED,

INDIA NEWBRIDGE PARTNERS FDI LIMITED,

INDIA NEWBRIDGE COINVESTMENT LIMITED,

MAXWELL (MAURITIUS) PTE. LIMITED

AND

SPANDANA FOUNDATION

DATED AS OF AUGUST 28, 2006

TABLE OF CONTENTS

		Page
ARTICLE I DEFINITIONS			2
Section 1.1 Definitions			2
ARTICLE II PURCHASE AND SALE OF THE SHARES; RELATED TRANSACTIONS			13
Section 2.1 Purchase and Sale			13
Section 2.2 Sale Consideration			14
Section 2.3 The Closing			14
Section 2.4 Deliveries by Sellers			14
Section 2.5 Deliveries by Purchaser			15
Section 2.6 Registration of Transfer			16
Section 2.7 Board Meeting			17
Section 2.8 Filing of Form No. 32			17
ARTICLE III CONDITIONS PRECEDENT			17
Section 3.1 Conditions to Obligations of Purchaser			17
Section 3.2 Conditions to Obligations of Sellers			19
ARTICLE IV COVENANTS			21
Section 4.1 Conduct of Business			21
Section 4.2 Extraordinary General Shareholders’ Meeting			24
Section 4.3 Completion of the U.S. GAAP Financial Statements; Internal Controls; Disclosure Controls			25
Section 4.4 Regulatory Approvals; Filings and Authorizations			25
Section 4.5 Performance Obligations			25
Section 4.6 Non-Solicitation			25
Section 4.7 Non-Competition			26
Section 4.8 Antitrust Filings; Reasonable Best Efforts			27
Section 4.9 Access to Information; Confidentiality			28
Section 4.10 No Solicitation, Resignations			29
Section 4.11 Release of Company Obligations			29
Section 4.12 Cooperation; Notification of Certain Matters			29
Section 4.13 Further Assurances			29
Section 4.14 Fees and Expenses			30
Section 4.15 Compliance			30
Section 4.16 Directors Indemnification; Insurance			30
Section 4.17 Ancillary Agreements			31
Section 4.18 Existing Shareholders Agreements			31
Section 4.19 Certain Company Action			32

		Page
ARTICLE V SELLER REPRESENTATIONS AND WARRANTIES			32
Section 5.1 Authority			32
Section 5.2 Capital Stock; Ownership; No Liens; No Claims			32
Section 5.3 No Conflict or Violation			33
Section 5.4 Outstanding Obligations			33
Section 5.5 Legal Proceedings			33
Section 5.6 Brokers’ Fees			33
Section 5.7 Absence of Certain Interests of Related Parties			34
Section 5.8 Company Representations and Warranties			34
Section 5.9 Compliance with Laws			34
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER			34
Section 6.1 Organization			34
Section 6.2 Authority			34
Section 6.3 Regulatory Approvals			35
Section 6.4 Consents and Approvals; No Violations			35
Section 6.5 Legal Proceedings			35
Section 6.6 Financial Advisors and Brokers			35
Section 6.7 Financing			36
Section 6.8 Ownership of Purchaser			36
Section 6.9 Investments in India			36
Section 6.10 Compliance with the Law			36
ARTICLE VII TERMINATION			36
Section 7.1 Termination			36
Section 7.2 Effect of Termination			37
ARTICLE VIII MISCELLANEOUS			37
Section 8.1 Non-Survival of Representations and Warranties			37
Section 8.2 Notices			38
Section 8.3 Interpretation			39
Section 8.4 Publicity			40
Section 8.5 Amendment; Waiver			41
Section 8.6 Binding Effect; Assignment			41
Section 8.7 Severability			41
Section 8.8 Counterparts			41
Section 8.9 Governing Law			41
Section 8.10 Specific Performance			42
Section 8.11 Arbitration			42
Section 8.12 Sellers’ Agent			43
Section 8.13 Entire Agreement			44
Section 8.14 No Joint and Several Liability			44

Schedule I		–		List of Sellers
Exhibit A		–		Form of Opinion of Indian Counsel of the Company

SHARE PURCHASE AGREEMENT

          THIS SHARE PURCHASE AGREEMENT is made and entered into as of August 28, 2006, by and among each of the sellers named on Schedule I hereto (each a “Seller” and, collectively, the “Sellers”), Mylan Laboratories Inc., a Pennsylvania corporation (“Parent”), and MP Laboratories (Mauritius) Ltd., a Mauritius private company limited by shares and a wholly owned subsidiary of Parent (“Purchaser”). Sellers, Parent and Purchaser are hereinafter collectively referred to as the “Parties” and individually as a “Party.”

          WHEREAS, as of the date hereof, the issued and outstanding share capital of Matrix Laboratories Limited, a publicly listed company incorporated under the Companies Act, 1956, of India (the “Company”), is 153,778,825 equity shares, of which 153,755,325 equity shares of Rs. 2 each are fully paid-up (the “Shares”);

          WHEREAS, Sellers collectively hold 79,187,972 Shares, constituting 51.49% of the issued and paid-up share capital of the Company (the “Sale Shares”);

          WHEREAS, Sellers, Parent and Purchaser have determined to enter into this Agreement pursuant to which Purchaser has agreed to (and Parent has agreed to cause Purchaser to) purchase from Sellers, and each Seller has agreed, severally and not jointly, to sell to Purchaser, that number of Sale Shares set forth opposite such Seller’s name on Schedule I hereto;

          WHEREAS, in connection with the execution of this Agreement: (i) the Company, Sellers and certain other parties have entered into the Termination Agreements (as hereinafter defined), and (ii) India Newbridge Investments Limited, India Newbridge Partners FDI Limited, India Newbridge Coinvestment Limited, Maxwell (Mauritius) Pte. Ltd., Prasad Nimmagadda and Parent have entered into their respective Parent Share Purchase Agreements (as hereinafter defined);

          WHEREAS, Sellers, Parent and Purchaser have agreed to make certain representations, warranties, covenants and agreements in connection with the transactions contemplated by this Agreement; and

          WHEREAS, in connection with the execution of this Agreement, Purchaser will conduct an “open offer” to the shareholders of the Company (other than Sellers) to acquire up to 20% or more of the Shares, as will be specified by Purchaser prior to the commencement of the “open offer,” in accordance with the provisions of the Takeover Code (as hereinafter defined) (the “Open Offer”).

          NOW, THEREFORE, in consideration of the representations, warranties, covenants and agreements set forth in this Agreement, and other good and valuable consideration, the adequacy and receipt of which are hereby acknowledged, the Parties intending to be legally bound hereby agree as follows:

ARTICLE I

DEFINITIONS

          Section 1.1 Definitions. For purposes of this Agreement, the following terms, when used in this Agreement, shall have the meanings assigned to them in this Section 1.1.

          “Action” means any action, claim, complaint, investigation, petition, suit, arbitration or other proceeding, whether civil, administrative or criminal, at Law or in equity by or before any arbitral body of competent jurisdiction or Governmental Authority.

          “Affiliate” means with respect to any Person, any other Person that directly or indirectly Controls or is Controlled by or is under common Control with the specified Person.

          “Agreement” means this Share Purchase Agreement, as the same may be amended or supplemented, together with all Exhibits and Schedules attached hereto.

          “Amended Articles of Association” means the articles of association of the Company to be amended after the Closing which will incorporate the relevant provisions of the Shareholders Agreement.

          “Articles of Association” means the articles of association of the Company, as amended from time to time.

          “Assets” means, with respect to any Person, all properties and assets, real and personal, tangible and intangible, of every type and description, whether owned or leased or otherwise possessed, used or held for use in such Person’s business and Intangible Property.

          “Board of Directors” means the board of directors of the Company.

          “Business Combination” means (i) merger, consolidation, amalgamation, share exchange, recapitalization, restructuring, spin-off or similar transaction involving the Company or a material Subsidiary of the Company, (ii) any sale, distribution or other disposition of all or a substantial portion of the Assets of any Company Party, (iii) an acquisition by any Company Party of Control of any other entity, or (iv) an acquisition of or by any Company Party of all or a substantial portion of the Assets or share capital of any other entity.

          “Business Day” means any day on which commercial banks are open for business except for Saturday, Sunday and national or public holidays in New York, New York; Hyderabad, India; and Mauritius.

          “Charter Documents” means the documents by which any Person (other than an individual) establishes its legal existence or which govern its internal affairs (including, but not limited to, certificate of incorporation, certificate of formation, memorandum of association, articles of association, partnership agreements, constitutional documents, by-laws or operating agreements).

          “Circular No. 16” shall have the meaning set forth in Section 2.4(h).

          “Claim” shall have the meaning set forth in Section 4.18.

          “Closing” shall have the meaning set forth in Section 2.3.

          “Closing Account” means, in respect of each Seller, the bank account established by such Seller for the purposes of this Agreement.

          “Closing Date” means the date of the Closing.

          “Company” shall have the meaning set forth in the recitals.

          “Company Contracts” means any material Contract to which any Company Party is a party, or by which any Company Party or any of their Assets are bound including:

               (i) Contracts (other than purchase orders for raw material placed by any Company Party in the ordinary course of its business) that individually involve or are reasonably expected to involve aggregate payments of more than Rs. 50,000,000 (or the equivalent in another currency);

               (ii) Purchase orders for raw materials placed by any Company Party in the ordinary course of its business that individually involve or are reasonably expected to involve aggregate payments of more than Rs. 100,000,000 (or the equivalent in another currency);

               (iii) Contracts that restrict or limit in any way the ability of any Company Party, or Contracts that will after the Closing restrict or limit in any way the ability of Purchaser, to conduct its business, to engage in certain businesses, to compete in any manner generally or in any specific geographic area, or oblige any Company Party, or Purchaser after the Closing, to present any business or other opportunity to any other Person;

               (iv) Contracts which would be required to be reported in the Company’s financial statements pursuant to the Statement of Accounting Standards (AS18) issued by the Council of the Institute of Chartered Accountants of India (other than employment Contracts and terms of employment of key management personnel who are not Sellers or Relatives (as defined by AS18) of Sellers and Contracts between or among any Company Parties);

               (v) Contracts that evidence individually Indebtedness of any Company Party, including any loan, credit agreement, bond, note, debenture, letter of credit agreement, or similar instrument or agreement, in an amount exceeding Rs. 250,000,000 (or the equivalent in another currency) individually;

               (vi) Contracts with any labor union or labor representative;

               (vii) bonus, pension, profit-sharing, management, retirement, stock purchase, stock option or other deferred or incentive

compensation, death benefit, disability, severance, benefit plan, or similar plan, program or employee Contract for general manager level or above;

               (viii) Contracts pursuant to which any Person has any right of first offer, right of first refusal, tag-along, drag-along or similar right with respect to any disposition or proposed disposition of any equity interests in any Company Party;

               (ix) registration rights agreements (or similar agreements) entered into by any Company Party in favor of any Person;

               (x) guarantees by any Company Party of the obligations, Indebtedness or Liabilities of any other Person (other than guarantees to any Company Party), in an amount exceeding Rs. 50,000,000 (or the equivalent in another currency) individually;

               (xi) any Contract that restricts or limits the ability of any Company Party to pay any dividends or make any other distributions on, or to purchase, redeem or otherwise acquire any of its securities or that requires or may require the Company to take any such action;

               (xii) any Contract under which the consequences of a default, termination or failure to obtain consent in respect of, would have a Material Adverse Effect;

               (xiii) any Contract in respect of any actual or potential (A) (i) direct or indirect offer for sale of any equity securities or Rights of any Company Party, (ii) Business Combination or any liquidation, dissolution or similar transaction involving any Company Party, or (iii) other transaction by any Company Party the consummation of which would prevent or materially delay the Transactions or restrict or adversely impact Purchaser’s rights in connection with holding the Sale Shares, or (B) direct or indirect acquisition or purchase of any equity securities or Rights of any Company Party or any tender offer or exchange offer for any equity securities or Rights of any Company Party by any Person or Persons;

               (xiv) any Contracts (A) granting or obtaining any right to use any Intellectual Property (other than Contracts granting rights to use readily available commercial Software that is generally available on nondiscriminatory pricing terms) or (B) restricting any Company Party’s rights, or permitting other Persons, to use or register any Intellectual Property;

               (xv) any Contract pursuant to which any Company Party is required to, or obtains any rights to, undertake the development or commercialization of any pharmaceutical product, involving payments in excess of Rs. 50,000,000 (or the equivalent in another currency) individually;

               (xvi) any Contract pursuant to which any Company Party has entered into a partnership or joint venture with any other Person (other than any Company Party);

               (xvii) any Contract under which any Company Party is (A) a lessee of real property, (B) a lessee of, or holds or uses, any machinery, equipment, vehicle or other tangible personal property owned by a third Person, (C) a lessor of real property, or (D) a lessor of any tangible personal property owned by any Company Party, in each case involving payments in excess of Rs. 5,000,000 (or the equivalent in another currency) per annum individually;

               (xviii) any Contract which requires payments by any Company Party in excess of Rs. 50,000,000 (or the equivalent in another currency) per annum containing “change of control” or similar provisions;

               (xix) any Contract requiring aggregate future payments or expenditures in excess of Rs. 50,000,000 (or the equivalent in another currency) and relating to cleanup, abatement, remediation or similar actions in connection with environmental Liabilities; and

               (xx) any Contract containing covenants of any Company Party to indemnify or hold harmless another Person (other than another Company Party), unless such indemnification or hold harmless obligation to such Person, or group of Persons, as the case may be, is less than Rs. 50,000,000 (or the equivalent in another currency).

          “Company Disclosure Schedule” means the disclosure schedule of the Company referred to in, and delivered to Purchaser pursuant to, this Agreement and the Company Letter Agreement.

          “Company Letter Agreement” means the letter agreement containing certain representations and warranties and covenants of the Company as qualified by the Company Disclosure Schedule, which letter agreement and Company Disclosure Schedule shall be deemed to form a part of this Agreement.

          “Company Parties” means the Company and its Subsidiaries and “Company Party” means any one of them.

          “Contract” means any binding contract, agreement, commitment, franchise, indenture, lease, purchase order, license, note, bond, mortgage, security, letter of intent, undertaking, promise, covenant or arrangement, whether oral or in writing.

          “Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the affairs or management or policies of a Person (whether through the ownership of securities, partnership or other ownership interests) by contract or otherwise, including, without limitation, having the power to elect a majority of the board of directors or other governing body of such Person. “Controlling” and “Controlled” have correlative meanings.

          “Copyrights” shall have the meaning set forth in the definition of “Intellectual Property.”

          “Docpharma” means Docpharma N.V., a private limited liability company organized under the laws of the Kingdom of Belgium and an indirect wholly owned subsidiary of the Company.

          “Employee Benefit Plan” means any executive compensation, incentive bonus or other bonus, employee pension, profit-sharing, provident fund, gratuity payment, deferred compensation, savings, retirement, stock option, stock purchase, stock appreciation rights, employment, consulting, change in Control, severance, vacation pay, scholarships or reimbursements, sick leave, life, health, disability or accident insurance plan, corporate-owned or key-man life insurance, or other employee or retiree benefit or perquisite plan, program, arrangement, understanding, agreement or commitment, whether written or unwritten, formally established or established by custom or practice, including any multi-employer benefit plan or any employee benefit plan that any of the Company Parties maintains or contributes to, or has established (whether formally or by custom or practice) or has any obligation to contribute to, or has or may have any Liability (including any Liability arising out of an indemnification, hold harmless or similar agreement) for the benefit of any current or former director, officer, or employee of any Company Party.

          “Environmental, Health, and Safety Laws” means any Laws, statutes, regulations, ordinances, Judgments or binding agreements with any Governmental Authority concerning pollution or protection of the environment, natural resources, public health and safety, or employee health and safety, including Laws relating to emissions, discharges, migration, releases, or threatened releases of Hazardous Materials into or through ambient air, surface water, ground water, or lands or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of Hazardous Materials.

          “Exchange Act” shall have the meaning set forth in Section 4.3(a).

          “Exclusivity Period” shall have the meaning set forth in Section 4.6(b).

          “Existing Shareholders Agreements” means the Shareholders Agreement by and among Matrix Laboratories Limited, India Newbridge Investments Limited, Prasad Nimmagadda, Prasad Nimmagadda-HUF, G2 Corporate Services Limited, All Time Formulations Limited, Mula Ravinder, Chava Satyanarayana and Chava Satyanarayana-HUF, dated April 15, 2004 and the Shareholders Agreement by and among Matrix Laboratories Limited, Maxwell Mauritius (Pte.) Limited, Prasad Nimmagadda, Prasad Nimmagadda-HUF, G2 Corporate Services Limited, All Time Formulations Limited, Mula Ravinder, Chava Satyanarayana and Chava Satyanarayana-HUF, dated April 15, 2004.

          “Extraordinary General Shareholders’ Meeting” means the extraordinary general meeting of the shareholders of the Company, which shall be held as promptly as practicable following the Closing for the purpose of approving the Amended Articles of Association.

          “Financial Statements” means the audited consolidated financial statements of the Company as of and for the year ended March 31, 2006 and the unaudited consolidated

6

financial statements of the Company for the quarter ended June 30, 2006 and all other quarters completed more than 30 days prior to Closing (including the notes thereto), prepared in accordance with Indian GAAP, applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto).

          “GAAP” means, with respect to any jurisdiction, generally accepted accounting principles as in effect from time to time in such jurisdiction, applied on a consistent basis over the relevant periods.

          “Governmental Authority” means any multinational, national, federal, state, regional, community, provincial, county, municipal or local government, or any political subdivision of any of the foregoing, or any entity, authority, agency, ministry, commission, tribunal, arbitral body, court or other similar body exercising executive, legislative, judicial, regulatory or administrative authority or functions of or pertaining to government, including any authority or quasi-governmental entity established to perform any of these functions.

          “Hazardous Materials” means any chemical substance, including any pollutant, contaminant; chemical; raw material; intermediate, product or by-product; industrial, solid, toxic or hazardous substance, material or waste; petroleum or any fraction thereof; asbestos or asbestos-containing-material; nuclear or radioactive material; and polychlorinated biphenyls; including all substances, materials or wastes; which are now regulated, classified or considered to be hazardous, dangerous or toxic under any applicable Environmental, Health and Safety Law of any Governmental Authority with authority over any Company Party or their respective businesses, now or hereafter enacted, promulgated, or amended.

          “HSR Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

          “ICC” shall have the meaning set forth in Section 8.11(a).

          “Indebtedness” means, with respect to any Person, whether recourse is to all or a portion of the Assets of such Person, and whether contingent or fixed (i) all indebtedness of such Person for borrowed money, (ii) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments, (iii) all obligations, issued or assumed for deferred purchase price (whether created or arising under any conditional sale or other title retention agreement or otherwise), with respect to property, Assets or services acquired by such Person, (iv) all obligations of such Person as lessee under leases that have been or should be, in accordance with GAAP applicable to such Person, recorded as capital leases, (v) all obligations of such Person under banker’s acceptances, letters of credit, “documents against acceptance” or similar facilities, (vi) all obligations of such Person to purchase, redeem, retire, defease or otherwise acquire for value any capital stock of such Person, valued, in the case of redeemable preferred stock, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends, (vii) all interest rate swap agreements, or foreign currency exchange or other hedging agreements and (viii) direct or indirect guarantees of obligations of another Person with respect to any of the foregoing in any manner by such Person.

          “Indemnified Party” shall have the meaning set forth in Section 4.18.

          “Indian Resident Sellers” shall have the meaning set forth in Section 2.6(a).

          “Intangible Property” means, with respect to any Person, all certificates of deposit, bank accounts, securities, partnership or other ownership interests, rights to receive money or property by assignment, future interests, claims and rights against third parties, accounts and notes receivables owned or held directly or beneficially by or on behalf of the account of such Person or any of its Subsidiaries, Licenses, Intellectual Property and any other intangible property of any nature of such Person or any of its Subsidiaries.

          “Intellectual Property” shall mean all intellectual property and industrial property rights of any kind or nature, including all (i) U.S. and foreign patents, patent disclosures, including divisions, continuations, continuations-in-part, reissues, reexaminations, substitutions, and any extensions thereof (the “Patents”), (ii) U.S. and foreign trademarks, service marks, trade names, Internet domain names, logos, slogans, trade dress and other identifiers of the source of goods or services, together with the goodwill symbolized by any of the foregoing and all registrations and applications relating to the foregoing (the “Trademarks”), (iii) U.S. and foreign copyrights (the “Copyrights”), (iv) intellectual property rights in computer programs (whether in source code, object code, or other form), algorithms, databases, compilations and data, technology supporting the foregoing, and all documentation, including user manuals and training materials, related to any of the foregoing (the “Software”), and (v) confidential information, including such rights in inventions (whether or not reduced to practice), know how, customer lists, personal information, technical information, proprietary information, technologies, processes and formulae, and data, whether tangible or intangible, and whether stored, compiled, or memorialized physically, electronically, photographically, or otherwise (the “Trade Secrets”), and all applications and registrations for the foregoing.

          “Judgment” means any judgment, writ, order, decree, award or injunction of or by any arbitrator, court, judge, justice or magistrate, including any bankruptcy court or judge and any order, ruling or action of or by any Governmental Authority.

          “Key Employees” means the persons identified in Section 1.22 of the Company Disclosure Schedule.

          “Law” means any law (including common law), treaty, statute, ordinance, code, rule, regulation, Judgment, injunction or determination of any Governmental Authority.

          “Liabilities” means all Indebtedness and other liabilities (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether fixed or unliquidated, and whether due or to become due), including any such liability under Environmental, Health and Safety Laws and for Taxes.

          “Lien” means any (i) mortgage, pledge, lien (statutory or other), encumbrance, hypothecation, charge, security interest, claim, option, right to acquire, adverse interest, infringement, assignment, deposit arrangement, deed of trust, easement, assessment, lease, adverse claim, levy, restriction, or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including any conditional sale or other title retention agreement, any financing lease involving substantially the same economic effect as any

of the foregoing and the filing of any charge under Section 125 of the Companies Act, 1956 of India or comparable Law of any applicable jurisdiction), or (ii) preemptive right, option right, warrant, voting agreement, proxy, trust agreement, buy-sell agreement, drag-along agreement, right of first offer or first refusal or other Transfer restriction, redemption agreement, or similar right of third parties or a Contract to give or refrain from giving any of the foregoing, including any restriction on the transferability of the Sale Shares, imposed under Contract or under applicable Law.

          “Material Adverse Effect” means any event, fact, circumstance or occurrence that, individually or in the aggregate with any other events, facts, circumstances or occurrences, results or could reasonably be expected to result in a material adverse change in or a material adverse effect on any of (i) the financial condition, Assets, Liabilities, results of operation or business of the Company Parties taken as a whole, or (ii) the ability of any of the Sellers or the Company Parties to perform their material obligations under any Transaction Document, provided, that Material Adverse Effect shall not include events, developments, circumstances, conditions, facts or occurrences, individually or in combination, resulting from (a) U.S., Asian or European general economic conditions, except to the extent the Company is disproportionately affected, (b) acts of war or terrorism generally affecting the economy, except to the extent the Company is disproportionately affected, (c) changes, after the date hereof, in GAAP or regulatory accounting requirements applicable to any Company Party, (d) any decline, but not the underlying reason for the decline, in the stock price or trading volume of the Shares, (e) general economic conditions affecting the Pharmaceutical Industry, except to the extent the Company is disproportionately affected or (f) the Company’s relationship with its customers directly related to the announcement of the Transaction.

          “MChem Group” means Xiamen MChem Pharma Group Limited, Xiamen MChem Laboratories Limited, Dafeng MChem Pharmaceutical Chemical Company Limited, MChem Research and Development Company Limited and Shanghai Fine Source Company Limited.

          “Merchant Banker Certificate” means the certificate of the merchant banker certifying, as required by Regulation 23(6) of the Takeover Code, that Purchaser has fulfilled all of its obligations in respect of the Open Offer.

          “MX” means Maxwell (Mauritius) Pte. Limited.

          “NB Agent” shall have the meaning set forth in Section 8.12.

          “NB Parties” means India Newbridge Investments Limited, India Newbridge Partners FDI Limited and India Newbridge Coinvestment Limited.

          “Non-Resident Sellers” shall have the meaning set forth in Section 2.6(b).

          “Open Offer” shall have the meaning set forth in the recitals.

          “Open Offer Documents” shall mean all documents prepared in connection with the Open Offer.

          “Open Offer Closing Date” means the last date on which shares of the Company may be tendered in the Open Offer.

          “Outside Date” shall have the meaning set forth in Section 7.1(d).

          “Parent” shall have the meaning set forth in the preamble.

          “Parent Share Purchase Agreements” means the Parent Share Purchase Agreement by and between Parent and each of India Newbridge Investments Limited, India Newbridge Partners FDI, India Newbridge Coinvestment Limited, Maxwell (Mauritius) Pte. Limited and Prasad Nimmagadda, entered into concurrently with the date of this Agreement.

          “Parties” and “Party” shall have the meaning set forth in the preamble.

          “Patents” shall have the meaning set forth in the definition of “Intellectual Property.”

          “Per Share Price” shall have the meaning set forth in Section 2.2.

          “Permits” means all permits, licenses, certificates of authority, orders and approvals of, and all filings, applications and registrations with, Governmental Authorities necessary for the conduct of the respective business operations of the Company Parties as presently conducted.

          “Person” means any natural person, limited or unlimited liability company, corporation, partnership (whether limited or unlimited), proprietorship, Hindu undivided family, trust, union, association, Governmental Authority or any other entity that may be treated as a legal person established or existing under applicable Law.

          “Pharmaceutical Business” means research, development, manufacturing, distribution, sales and marketing of branded and generic pharmaceutical products, including active pharmaceutical ingredients, as conducted by the Company Parties on the date hereof and the activities relating to biogenerics, antiretrovirals and finished dosage form products, as contemplated to be conducted by the Company Parties as of the date hereof.

          “PN Agent” shall have the meaning set forth in Section 8.12.

          “PN Parties” means Prasad Nimmagadda, Prasad Nimmagadda-HUF, G2 Corporate Services Limited, and Spandana Foundation.

          “Purchaser” shall have the meaning set forth in the preamble.

          “Purchaser Disclosure Schedule” means the disclosure schedule of Purchaser referred to in, and delivered to the Sellers pursuant to, this Agreement.

          “RBI” means the Reserve Bank of India.

          “Regulatory Approvals” means any and all certificates, permits, licenses, franchises, concessions, grants, consents, approvals, orders, registrations, authorizations, waivers, variances or clearances from, or filings or registrations with, any Governmental Authority.

          “Relative,” as to any natural Person, means any of such Person’s parents, children, siblings, spouse, the parents and children of such Person’s spouse, and the spouses of such Person’s children.

          “Representative” means, with respect to any Person, any officers, directors, limited or general partners or members, joint venture partners, employees, agents, attorneys, accountants, consultants, equity financing partners or financial advisors of such Person (or of such Person’s successors or assigns) or other Person associated with, or acting on behalf of, such Person (or such Person’s successors and assigns).

          “Required Regulatory Approvals” shall have the meaning set forth in the Company Letter Agreement.

          “Requirement of Law” means, as to any Person, the Charter Documents of such Person, and all Laws, Judgments or other determinations of an arbitrator, court or other Governmental Authority, applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.

          “Rights” means, with respect to any Person, any subscription right, option, warrant, convertible or exchangeable security or other right, however denominated, to subscribe for, purchase or otherwise acquire any capital stock, other equity interest or other security of any class or series and of any issuer, with or without payment of additional consideration in cash or property, either immediately or upon the occurrence of a specified date or a specified event or the satisfaction or happening of any other condition or contingency.

          “Rupee” and “Rs” means Rupee, the lawful currency of India.

          “Sale Consideration” shall have the meaning set forth in Section 2.2.

          “Sale Shares” shall have the meaning set forth in the recitals.

          “SEBI” means the Securities and Exchange Board of India.

          “Seller Consideration” shall have the meaning set forth in Section 2.2.

          “Seller Employment Agreements” means, collectively, the (i) employment agreements to be amended and restated, or entered into at or prior to Closing, and effective as of the Closing Date, by and between the Company and each of Rajiv Malik, S. Srinivasan, Dr. Hari Babu, Sanjeev Sethi, and C. S. Muralidharan (ii) employment agreement to be entered into at or prior to Closing and effective as of the Closing Date, by Parent and Prasad Nimmagadda, and (iii) employment agreements to be entered into at or prior to Closing and effective as of the Closing Date by and between Docpharma and each of Stijn Van Rompay and Koen Fuertes.

          “Seller Share Number” means, with respect to a Seller, the number of Sale Shares proposed to be sold by such Seller as set forth in Schedule I.

          “Sellers” shall have the meaning set forth in the preamble.

          “Sellers Disclosure Schedule” means the disclosure schedule of the Sellers referred to in, and delivered to Purchaser pursuant to, this Agreement.

          “Sellers’ Agents” shall have the meaning set forth in Section 8.12.

          “Shareholders Agreement” means the agreement among PN, G2, Parent and Purchaser relating to the voting and Transfer of the Sale Shares and certain corporate governance matters of the Company effective as of the Closing Date, in substantially the form exchanged by the parties on the date hereto.

          “Shares” shall have the meaning set forth in the recitals.

          “Software” shall have the meaning set forth in the definition of “Intellectual Property.”

          “Subsidiary” means, when used with respect to any Person as of any time, any other Person that is, directly or indirectly through one or more intermediaries, Controlled by such first Person and where such first Person is the Company, shall mean the MChem Group and Concord Biotech Limited and any other entity of which more than 50% of the equity interests are owned by the Company and Astrix Laboratories Limited, but shall not include Fine Chemicals Corporation and its direct or indirect subsidiaries, Explora Laboratories, Matrix LifeSciences AG, Switzerland or any 50% or less owned direct or indirect subsidiary of the Company.

          “Supply Agreement” means a supply agreement, to be entered by and among Parent, the Company and Docpharma in accordance with Section 4.17.

          “SWIFT” means Society for World-wide Interbank Financial Telecommunications.

          “Takeover Code” means the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

          “Tax” means all taxes, fees, “cess” and other assessments of a similar nature, however denominated, including any interest, additions to tax or penalties that may become payable in respect thereof, imposed by any national, state, provincial, local or foreign government or any agency or political subdivision of any such government, which taxes shall include, without limiting the generality of the foregoing, all income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental, customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, worker’s compensation, real property, personal property, sales, use, Transfer, registration, value added, alternative or add-on minimum, estimated, or other tax or any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not.

          “Tax Return” means any return, report or similar statement (including the attached schedules) required to be filed with respect to Taxes, including any information return, claim for refund, amended return, or declaration of estimated Taxes.

          “Termination Agreements” means the agreements pursuant to which the Existing Shareholders Arrangements are terminated, entered into concurrently with the date of this Agreement, effective as of the Closing Date.

          “Trade Secrets” shall have the meaning set forth in the definition of “Intellectual Property.”

          “Trademarks” shall have the meaning set forth in the definition of “Intellectual Property.”

          “Transaction Documents” means, as of the date hereof, this Agreement, the Company Letter Agreement, the Company Disclosure Schedule, the Shareholders Agreement, the Parent Share Purchase Agreements, the Parent Shareholders Agreement, the Termination Agreements and the Sellers Disclosure Schedule and, as of the Closing Date, means all of the foregoing and the Amended Articles of Association, the Seller Employment Agreements, the Supply Agreement, and each of the certificates delivered pursuant to Sections 2.4 and 2.5.

          “Transactions” means any and all of the transactions contemplated by this Agreement or any of the other Transaction Documents.

          “Transfer” means, any transfer, sale, assignment, exchange, pledge, hypothecation gift, issuance, distribution, foreclosure or other disposition of any kind, whether voluntary or by operation of Law or other involuntary means, directly or indirectly, for or without consideration.

          “Tribunal” shall have the meaning set forth in Section 8.11(a).

          “U.S. GAAP Financial Statements” means the audited consolidated financial statements of the Company and its Subsidiaries as of and for the years ended March 31, 2006 and March 31, 2005, respectively (including the notes thereto), prepared in accordance with U.S. GAAP, applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and the unaudited consolidated financial statements of the Company and its Subsidiaries for the quarter ended June 30, 2006 and, to the extent available, any subsequent quarters ending more than 45 days prior to the Closing Date.

ARTICLE II

PURCHASE AND SALE OF THE SHARES; RELATED TRANSACTIONS

          Section 2.1 Purchase and Sale. Upon the terms and conditions of this Agreement, at the Closing each Seller, severally and not jointly, shall sell, convey, assign, transfer and deliver to Purchaser, and Purchaser shall purchase,

acquire and accept from each Seller, a number of Sale Shares equal to the Seller Share Number, free and clear of all Liens, and together with all right, title and interest as of the Closing Date.

          Section 2.2 Sale Consideration. The consideration (the “Sale Consideration”) for the purchase of each Sale Share from each Seller shall be an amount of Rs. 306 (Rupees three hundred and six) per Share in the case of the PN Parties and an amount in U.S. dollars per Share equal to the U.S. dollar equivalent of Rs. 306 per share based on the Rupee/U.S. Dollar reference rate, expressed as the amount of Rupee per one U.S. Dollar, for settlement on the Closing Date reported by the Reserve Bank of India which appears on the Reuters Screen RBIB Page at 2:30 p.m., Mumbai time, on the Closing Date in the case of the NB Parties and MX (the “Per Share Price”). The Sale Consideration shall be paid by Purchaser to Sellers in the respective amounts owing thereto by multiplying the Per Share Price by the Seller Share Number applicable to such Seller, as set forth in Schedule I hereto (in respect of each Seller, its “Seller Consideration”), without any set-off or deduction whatsoever, and in the manner set forth in Section 2.5 below.

          Section 2.3 The Closing. The closing of the transactions contemplated by this Agreement (the “Closing”) shall take place at the offices of the Company in Hyderabad, India or at such other location as the Parties may mutually agree, at 10:00 a.m., Indian standard time, following the satisfaction or waiver, if permissible, of the conditions to Closing set forth in Article III (other than conditions which by their nature can be satisfied only at Closing), on such date as the Parties mutually agree, which shall be no earlier than the seventh day and no later than tenth day, or if such day is not a Business Day, the next following Business Day, after satisfaction or waiver, if permissible, of the conditions to Closing set forth in Article III (other than conditions which by their nature can be satisfied only at Closing), unless another date is agreed to in writing by the Parties.

          Section 2.4 Deliveries by Sellers. At the Closing and subject to the terms and conditions hereof, Sellers shall deliver the following to Purchaser:

               (a) the certificate provided in Section 3.1(a)(ii);

               (b) a certificate duly executed by an authorized signatory of each Seller, attaching certified copies of the resolutions of the competent corporate body of such Seller, if applicable, approving the Transaction Documents to which it is a party, authorizing and approving the execution, delivery and performance (which performance shall be subject to any Required Regulatory Approvals or any corporate consents that are required to be obtained before the Closing Date, and any changes in Law following the Closing Date) of the Transaction Documents to which it is a party and the consummation of the Transactions which are required to be consummated by such Seller prior to the Closing Date;

               (c) the U.S. GAAP Financial Statements, certified by the Chief Executive Officer and Chief Financial Officer of the Company;

               (d) opinion of the Indian Counsel of the Company, in the form and substance satisfactory to Purchaser and covering the items set forth in Exhibit B;

               (e) a letter from the Company confirming that (i) the representations and warranties of the Company contained in the Company Letter Agreement, made as if none of such representations or warranties contained any qualification or limitation as to “materiality” or “Material Adverse Effect,” shall have been true and correct on the date of this Agreement, and on and as of the Closing Date as if made on and as of the Closing Date (except where such representation or warranty speaks by its terms to a different date, in which case it shall be true and correct as of such date), except where the failure of such representations and warranties to be true and correct as so made does not have and is not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect, and that (ii) the Company shall have performed and complied, in all material respects, with the covenents contained in the Company Letter Agreement;

               (f) a certified copy of the resolutions of the Board of Directors passed pursuant to Section 2.7 hereof;

               (g) a general release and discharge from each Seller, in mutually agreed form, entered into pursuant to Section 4.11 hereof;

               (h) as regards the Indian Resident Sellers (as defined below), such documents and writings as are required to be given by the Indian Resident Sellers to the Purchaser for enclosing with Form FC-TRS as provided by RBI’s Circular No. A.P. (DIR Series) Circular No. 16 dated 4 October 2004 (“Circular No. 16”); and

               (i) all other documents, instruments, certificates and writings reasonably requested to be delivered by Sellers and mutually agreed between the Parties prior to the Closing, pursuant to this Agreement and the other Transaction Documents.

          Section 2.5 Deliveries by Purchaser. At the Closing and subject to the terms and conditions hereof, Purchaser shall:

               (a) make payment to each Seller of its Seller Consideration in immediately available funds by way of SWIFT Transfers or wire transfers in same-day funds to each such Seller’s Closing Account, without set-off or deduction of any kind, which Seller Consideration shall be held by each Seller in trust for the Purchaser until the Sale Shares agreed to be sold by it to the Purchaser have been transferred to the Purchaser’s depositary account as provided in Section 2.6;

               (b) deliver to the Sellers’ Agents the certificate provided for in Section 3.2(a)(ii);

               (c) deliver to the Sellers’ Agents a certificate duly executed by each of an officer of Parent and Purchaser attaching copies, certified by authorized officers as true and complete, of the resolutions of the board of directors of Parent and Purchaser approving the Transaction Documents to which they are a party, authorizing and approving the execution,

delivery and performance (which performance shall be subject to any Required Regulatory Approvals or corporate consents that are required to be obtained before the Closing Date, and any changes in Law following the Closing Date) of the Transaction Documents to which they are a party and the consummation of the Transactions which are required to be consummated by Parent and Purchaser prior to the Closing Date;

               (d) deliver to the Sellers’ Agents a copy of the Merchant Banker Certificate confirming that Purchaser has complied with all the conditions of the Open Offer; and

               (e) deliver to the Sellers’ Agents all other documents, instruments, certificates and writings reasonably requested to be delivered by Purchaser and mutually agreed between the Parties prior to the Closing, pursuant to this Agreement and the other Transaction Documents.

          Section 2.6 Registration of Transfer.

               (a) Closing of Sale Shares being sold by Prasad Nimmagadda, Prasad Nimmagadda-HUF, G2 Corporate Services Limited and Spandana Foundation (the “Indian Resident Sellers”):

          At Closing:

                    (i) immediately upon Purchaser making payment of the Seller Consideration to each of the Indian Resident Sellers as provided in Section 2.5(a), the Purchaser shall, and each Seller shall assist the Purchaser to, expeditiously obtain each Indian Resident Seller’s Authorized Dealer certification on Form FC-TRS as provided by Circular No. 16;

                    (ii) immediately upon obtaining such certification the Purchaser shall deliver the relevant certified Form FC-TRS to the Company and shall deliver to Wadia Ghandy & Co., Advocates & Solicitors of the Indian Resident Sellers, a certified true copy of the certified form FC-TRS along with a written confirmation that the Purchaser has paid the full Seller Consideration to each Indian Resident Seller;

                    (iii) immediately upon Wadia Ghandy & Co. receiving the confirmation and copy of the certified Form FC-TRS from the Purchaser, Wadia Ghandy & Co. shall deliver to the India Resident Sellers’ depositary participants the delivery instruction slips delivered to Wadia Ghandy & Co. pursuant to Section 3.1(a)(xiii); and each Indian Resident Seller shall do such further acts, if any required, to cause its depository participant to transfer the relevant Sale Shares to Purchaser’s depository account (details of which shall have been given by Purchaser to Sellers at least five Business Days prior to the Closing Date); and

                    (iv) upon confirmation by Purchaser’s depository participant of the Transfer of the Sale Shares to Purchaser’s account (which confirmation Purchaser shall endeavor to expeditiously obtain), Purchaser shall promptly inform the PN Agent that it has received such confirmation.

               (b) Closing of Sale Shares being sold by India Newbridge Investments Limited, India Newbridge Partners FDI Limited, India Newbridge Coinvestment Limited and Maxwell (Mauritius) Pte. Limited (the “Non-Resident Sellers”):

          At Closing:

                         (i) simultaneously with Purchaser making payment of the Seller Consideration to each of the Non- Resident Sellers as provided in Section 2.5(a), each Non-Resident Seller shall cause its depository participant to transfer the relevant Sale Shares to Purchaser’s depository account (details of which shall have been given by Purchaser to Sellers at least five Business Days prior to the Closing Date); and

                         (ii) upon confirmation by Purchaser’s depository participant of the Transfer of the Sale Shares to Purchaser’s account (which Purchaser shall endeavor to expeditiously obtain), Purchaser shall promptly inform the relevant Seller’s Agent that it has received such confirmation.

          Section 2.7 Board Meeting. On the Closing Date Sellers shall cause the Company to hold meetings of the Board of Directors and pass resolutions approving:

                         (i) the appointment of up to 12 persons nominated by Purchaser at least five Business Day prior to the Closing, as additional directors on the Board of the Company in accordance with Law and the Articles of Association;

                         (ii) the resignations of all the directors of the Company; and

                         (iii) the appointment of Robert J. Coury, or such other person designated by Parent if Mr. Coury is unable to serve, as the Non-Executive Chairman and Prasad Nimmagadda as the Non-Executive Vice-Chairman of the Board.

          Section 2.8 Filing of Form No. 32. The Purchaser shall cause the Company to file a certified copy of Form No. 32 of the Companies (Central Government’s) General Rules and Forms with the Registrar of Companies with respect to the appointment of the Purchaser Nominee Directors and the resignation of the existing directors of the Company pursuant to Section 2.7 hereof.

ARTICLE III

CONDITIONS PRECEDENT

          Section 3.1 Conditions to Obligations of Purchaser

               (a) The obligations of Purchaser to purchase and pay for the Sale Shares on the Closing Date and to consummate the other Transactions on the Closing Date are subject to

the satisfaction, or waiver in writing by Purchaser in its sole discretion, at or prior to the Closing, of the following conditions:

                         (i) the representations and warranties of the Sellers contained in this Agreement, made as if none of such representations or warranties contained any qualification or limitation as to “materiality” or “Material Adverse Effect,” shall have been true and correct on the date of this Agreement, and on and as of the Closing Date as if made on and as of the Closing Date (except where such representation or warranty speaks by its terms to a different date, in which case it shall be true and correct as of such date), except where the failure of such representations and warranties to be true and correct as so made does not have and is not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect; each Seller shall have performed and complied, in all material respects, with all and shall not be in material breach or default under any, agreements, covenants, conditions or obligations contained in this Agreement that are required to be performed or complied with on or prior to the Closing Date;

                         (ii) each Seller shall have delivered to Purchaser a certificate of such Seller, dated the Closing Date, to the effect of the foregoing clause (i) above, with respect to itself only;

                         (iii) (A) no order or injunction shall have been issued by a Governmental Authority that restrains, restricts, enjoins, prevents, prohibits, or otherwise makes illegal the consummation of any of the transactions contemplated by this Agreement or that materially adversely affects Purchaser’s ownership of the Sale Shares following the Closing; (B) no material action, suit, proceeding or investigation relating to this Transaction shall have been instituted by a Governmental Authority that Purchaser reasonably determines is likely to restrain, restrict, enjoin, prevent or prohibit, or otherwise make illegal any of the transactions contemplated by this Agreement or that is likely to materially adversely affect either Parent, Purchaser or the Company, or Purchaser’s ownership of the Sale Shares following the Closing, provided, however, that the reasonable determination shall be that of both Parties if Sellers cause the Company Parties to provide the Purchaser with information within Sellers’ or the relevant Company Parties’ possession relating to such matter and reasonably co-operate with the Purchaser to obtain from the Governmental Authority such information as Purchaser shall reasonably request in order to determine whether such event is reasonably likely to occur; (C) no Law shall have been promulgated, adopted, enacted or entered into force or otherwise made effective by any Governmental Authority that has or would have such effect; and (D) no Law shall be reasonably likely to be promulgated, adopted, enacted or entered into force or otherwise be made effective by any Governmental Authority that would have such effect;

                         (iv) no Material Adverse Effect shall have occurred since the date of this Agreement and be continuing, or reasonably be likely to occur;

                         (v) the Required Regulatory Approvals set forth in Section 6.3 of the Purchaser Disclosure Schedule shall have been obtained;

                         (vi) Sellers shall have caused the Company to obtain the approvals, consents, waivers and releases set forth in Section 5.3 of the Company Disclosure Schedule, in each case in form and substance reasonably satisfactory to Purchaser, and no such approval, consent, waiver or release shall have been revoked;

                         (vii) the documents to be delivered under Section 2.4 shall have been delivered to Purchaser;

                         (viii) the U.S. GAAP Financial Statements and the unqualified audit reports of the independent auditors of the Company relating to the audited Financial Statements shall have been completed;

                         (ix) the Termination Agreements shall be in full force and effect;

                         (x) the Seller Employment Agreements with Prasad Nimmagadda, Rajiv Malik and Stijn Van Rompay and the Shareholders Agreement each shall have been executed and shall be in full force and effect;

                         (xi) all conditions to closing of each of the Parent Share Purchase Agreements (other than any Required Regulatory Approvals thereunder and other than conditions that by their nature can only be satisfied at the closing of such Transaction) shall have been satisfied;

                         (xii) the Merchant Banker Certificate confirming that Purchaser has complied with all the conditions of the Open Offer shall have been delivered to Purchaser; and

                         (xiii) each Indian Resident Seller shall deliver to Wadia Ghandy & Co., (with a copy being delivered to Luthra & Luthra Law Offices) completed and signed delivery instruction slips for transfer of the Indian Resident Seller’s Sale Shares to the Purchaser pursuant to Section 2.6(a)(iii).

               (b) Sellers agree that the conditions precedent set out in this Section 3.1 are for the benefit of Purchaser and Parent only, and may be waived in writing by Purchaser in its sole discretion.

          Section 3.2 Conditions to Obligations of Sellers.

               (a) The obligations of Sellers to sell the Sale Shares and to consummate the other Transactions on the Closing Date are subject to the satisfaction, or waiver in writing by the Sellers’ Agents in their sole discretion, on or prior to the Closing Date, of the following conditions:

                         (i) the representations and warranties of Parent and Purchaser contained in this Agreement, made as if none of such representations or warranties contained any qualification or limitation as to “materiality,” shall have been true and correct on the date of this Agreement, and on and as of the Closing Date as if made on and as of the Closing Date (except where such representation or warranty speaks by its terms to a different date, in which case it shall be true and correct as of such date), except where the failure of such representations and warranties to be true and correct as so made does not have and is not, individually or in the aggregate, reasonably likely to have a material adverse effect on the financial condition, Assets, Liabilities, results of operation or business of Parent and Purchaser taken as a whole or on the ability of Parent and Purchaser to perform their material obligations under any Transaction Document; Parent and Purchaser shall have performed and complied, in all material respects, with all and shall not be in material breach or default under any, agreements, covenants, conditions or obligations contained in this Agreement that are required to be performed or complied with on or prior to the Closing Date;

                         (ii) Parent and Purchaser shall have delivered to Sellers’ Agent a certificate of Parent and Purchaser, as applicable, dated the Closing Date, to the effect of the foregoing clause (i) above;

                         (iii) (A) no order or injunction shall have been issued by a Governmental Authority that restrains, restricts, enjoins, prevents, prohibits, imposes substantial damages, costs or penalties or otherwise makes illegal the consummation of any of the transactions contemplated by this Agreement or that adversely affect Purchaser’s ownership of the Sale Shares following the Closing; (B) no material action, suit, proceeding or investigation relating to this Transaction shall have been instituted by a Governmental Authority that the Parties reasonably determine is likely to restrain, restrict, enjoin, prevent or prohibit, or otherwise make illegal any of the transactions contemplated by this Agreement or that is likely to materially adversely affect Sellers; (C) no Law shall have been promulgated, adopted, enacted or entered into force or otherwise made effective by any Governmental Authority that has or would have such effect; and (D) no Law shall be reasonably likely to be promulgated, adopted, enacted or entered into force or otherwise be made effective by any Governmental Authority that would have such effect;

                         (iv) the Regulatory Approvals set forth in Section 6.3 of the Purchaser Disclosure Schedule shall have been obtained;

                         (v) Purchaser shall have obtained the approvals, waivers, consents and releases set forth in Section 6.4 of the Purchaser Disclosure Schedule, in each case in form and substance reasonably satisfactory to Sellers, and no such approval, consent, waiver or release shall have been revoked;

                         (vi) the documents to be delivered under Section 2.5 shall have been delivered to the Sellers; and

                         (vii) the Merchant Banker Certificate confirming that Purchaser has complied with all the conditions of the Open Offer shall have been delivered to Sellers.

                    (b) Purchaser agrees that the conditions precedent set out in this Section 3.2 are for the benefit of the Sellers only, and may be waived in writing by the Sellers’ Agents in their sole discretion.

ARTICLE IV

COVENANTS

          Section 4.1 Conduct of Business. Each Seller agrees that, during the period from the date of this Agreement until the earlier of the Closing or the termination of this Agreement in accordance with its terms, except (a) as expressly contemplated by this Agreement or the Transaction Documents, (b) as required by applicable Law, (c) as set forth in Section 4.1 of the Company Disclosure Schedule or (d) as consented to by Purchaser in writing (which consent shall not be unreasonably withheld, delayed or conditioned), each Seller shall use its reasonable best efforts to cause the Company to, and to cause the Company to cause each of its Subsidiaries to: (i) use its reasonable best efforts to maintain its existence in good standing under applicable Law, (ii) conduct its operations only in the ordinary and usual course of business consistent with past practice, (iii) use its reasonable best efforts to keep available the services of its current officers, material employees and management, (iv) use its reasonable best efforts to maintain and enforce all Company Intellectual Property (as such term is defined in the Company Letter Agreement), (v) use its reasonable best efforts to maintain its rights and franchises and preserve its current relationships with its customers, suppliers and others having business dealings with the Company to the end that its ongoing businesses shall not be impaired in any material respect at the Closing, (vi) use its reasonable best efforts to maintain its material real property and other material Assets in good repair, order and condition (subject to normal wear and tear) consistent with current needs, (vii) use its reasonable best efforts to replace in accordance with industry practices its inoperable, worn out or obsolete material Assets with Assets of similar quality consistent with past practices and current needs and (viii) pay all applicable material Taxes when due and payable unless such Taxes are being contested in good faith, and, subject to the foregoing, including the exceptions set forth in Section 4.1 of the Company Disclosure Schedule, shall use reasonable best efforts to procure that the Company shall not, and that the Company shall cause each of its Subsidiaries not to, directly or indirectly:

                    (a) amend or modify the Charter Documents of any Company Party (including the provisions of the Charter Documents relating to the composition or size of the Board of Directors, the rights granted to shareholders of the Company or the purposes of the Company);

                    (b) take any action or enter into any transactions that could reasonably be expected to result in a material change in the scope, nature and/or activities of the Company’s business;

                    (c) commence, terminate or change any line of business of any Company Party;

                    (d) appoint, replace, remove or support the removal of the independent auditor of the Company;

                    (e) (i) issue or authorize the issuance of any Rights, or grant any options, warrants, or other rights to purchase or obtain any of its Rights, except to any employees below the general manager level in the ordinary course of business consistent with past practice under the Company Stock Plans set forth in Section 1.5(b) of the Company Disclosure Schedule, (ii) redeem, purchase or otherwise acquire any of its Rights, (iii) sell, pledge, grant, encumber or otherwise dispose of any of its Rights or (iv) or split, combine or otherwise reclassify any of its Rights;