<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO ____
COMMISSION FILE NUMBER 000-23267
DEPOMED, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-3229046
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1360 O'BRIEN DRIVE
MENLO PARK, CALIFORNIA 94025
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(650) 462-5900
(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 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days.
YES [X] NO [ ]
The number of issued and outstanding shares of the Registrant's Common
Stock, no par value, as of October 31, 2000, was 7,189,363.
<PAGE>
DEPOMED, INC.
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements: PAGE
----
<S> <C>
Balance Sheets at September 30, 2000 and December 31, 1999 ................................. 3
Statements of Operations for the three-month and nine-month periods ended
September 30, 2000 and 1999, and for the period from inception (August 7, 1995)
to September 30, 2000 .................................................................. 4
Statements of Cash Flows for the nine-month periods ended September 30,
2000 and 1999, and for the period from inception (August 7, 1995)
to September 30, 2000 .................................................................. 5
Notes to Financial Statements .............................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations .......................................................................... 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ........................................................ 20
Signature ....................................................................................... 21
</TABLE>
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DEPOMED, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ ------------------
(UNAUDITED) (SEE NOTE 1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 2,976,761 $ 934,317
Marketable securities ................................................. 1,500,540 3,532,065
Receivable for capital stock .......................................... -- 17,015,000
Accounts receivable ................................................... 21,775 --
Receivable from joint venture ......................................... 360,151 --
Prepaid and other current assets....................................... 57,747 169,385
------------------ ------------------
Total current assets .......................................... 4,916,974 21,650,767
Property and equipment, net ................................................. 984,666 779,631
Other assets ................................................................ 293,756 4,467
------------------ ------------------
$ 6,195,396 $ 22,434,865
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................... $ 631,389 $ 219,675
Accrued compensation .................................................. 249,815 275,047
Other accrued liabilities ............................................. 146,917 131,889
Payable to joint venture .............................................. 513,293 12,015,000
Capital lease obligation, current portion ............................. 35,743 41,131
Long-term debt, current portion ....................................... 134,958 123,042
------------------ ------------------
Total current liabilities ..................................... 1,712,115 12,805,784
Capital lease obligation, non-current portion ............................... 26,736 53,952
Long-term debt, non-current portion ......................................... 253,887 356,649
Promissory note from related party, non-current portion ..................... 993,668 --
Commitments
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized; Series A
convertible exchangeable preferred stock; 25,000 shares designated,
12,015 and no shares issued and outstanding
at September 30, 2000 and December 31, 1999, respectively ......... 12,603,000 --
Common stock, no par value, 25,000,000 shares authorized;
7,189,363 and 6,475,077 shares issued and outstanding
at September 30, 2000 and December 31, 1999, respectively ......... 19,780,864 14,797,072
Capital stock issuable ................................................ -- 17,015,000
Deferred compensation ................................................. (80,512) (282,184)
Deficit accumulated during the development stage ...................... (29,091,954) (22,298,416)
Accumulated other comprehensive loss .................................. (2,408) (12,992)
------------------ ------------------
Total shareholders' equity .................................... 3,208,990 9,218,480
------------------ ------------------
$ 6,195,396 $ 22,434,865
================== ==================
</TABLE>
See accompanying notes to Financial Statements.
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<PAGE>
DEPOMED, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUGUST 7, 1995)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, TO
---------------------------------- --------------------------------- SEPTEMBER 30,
2000 1999 2000 1999 2000
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Collaborative agreements ............... $ 21,775 -- 21,775 $ 115,327 $ 1,823,087
Contract revenue from joint venture .... 360,151 -- 1,322,131 -- 1,322,131
------------ ------------ ------------ ------------ ------------
Total revenue .......................... 381,926 -- 1,343,906 115,327 3,145,218
Operating expenses:
Research and development ......... 1,830,000 1,094,665 4,818,377 2,587,746 11,996,992
General and administrative ....... 437,829 430,393 1,434,905 1,398,365 6,781,851
Purchase of in-process
research and development ...... -- -- -- -- 298,154
------------ ------------ ------------ ------------ ------------
Total operating expenses ............... 2,267,829 1,525,058 6,253,282 3,986,111 19,076,997
------------ ------------ ------------ ------------ ------------
Loss from operations ................... (1,885,903) (1,525,058) (4,909,376) (3,870,784) (15,931,779)
Other income (expenses):
Equity in loss from joint venture ...... (513,293) -- (1,503,299) -- (13,518,299)
Interest income, net ................... 20,324 66,362 207,137 241,043 946,124
------------ ------------ ------------ ------------ ------------
Total other income (expenses) .......... (492,969) 66,362 (1,296,162) 241,043 (12,572,175)
------------ ------------ ------------ ------------ ------------
Net loss ............................... (2,378,872) (1,458,696) (6,205,538) (3,629,741) (28,503,954)
Accretion of dividend on
preferred stock .................. (217,000) -- (588,000) -- (588,000)
------------ ------------ ------------ ------------ ------------
Net loss applicable to common
shareholders ..................... $ (2,595,872) $ (1,458,696) $ (6,793,538) $ (3,629,741) $(29,091,954)
============ ============ ============ ============ ============
Basic and diluted net loss per
common share ..................... $ (0.36) $ (0.23) $ (0.95) $ (0.56)
============ ============ ============ ============
Shares used in computing basic and
diluted net loss per
common share ..................... 7,189,363 6,475,077 7,137,225 6,474,357
============ ============ ============ ============
</TABLE>
See accompanying notes to Financial Statements.
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<PAGE>
DEPOMED, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
NINE MONTHS ENDED SEPTEMBER 30, INCEPTION
-------------------------------- (AUGUST 7, 1995) TO
2000 1999 SEPTEMBER 30, 2000
------------- -------------- ------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss .............................................................. $ (6,205,538) $ (3,629,741) $ (28,503,954)
Adjustments to reconcile net loss to net
cash used in operating activities:
Equity in loss of joint venture ................................... 1,503,299 -- 13,518,299
Depreciation and amortization ..................................... 267,254 306,772 981,580
Accrued interest expense on notes ................................. 3,662 -- 17,280
Amortization of deferred compensation ............................. 201,672 204,498 866,738
Value of stock options issued for services ........................ 68,608 -- 94,658
Purchase of in-process research and development ................... -- -- 298,154
Changes in assets and liabilities:
Accounts receivable ........................................... (21,775) 306,148 (21,775)
Accounts receivable from joint venture ........................ (360,151) -- (360,151)
Other current assets .......................................... 111,638 2,002 (57,747)
Other assets .................................................. (289,289) 54,698 (293,914)
Accounts payable and other accrued liabilities ................ 426,742 197,500 778,306
Accrued compensation .......................................... (25,232) 51,195 182,339
------------- -------------- ------------------
Net cash used in operating activities .................... (4,319,110) (2,506,928) (12,500,187)
------------- -------------- ------------------
INVESTING ACTIVITIES
Investment in joint venture ........................................... (990,006) -- (990,006)
Expenditures for property and equipment ............................... (466,170) (95,749) (1,596,011)
Purchases of marketable securities .................................... (1,487,620) (1,576,830) (8,455,459)
Maturities of marketable securities ................................... 3,523,610 2,098,823 6,890,572
------------- -------------- ------------------
Net cash provided by (used in) investing activities ...... 579,814 426,244 (4,150,904)
------------- -------------- ------------------
FINANCING ACTIVITIES
Payments on capital lease obligations ................................. (32,604) (43,608) (245,717)
Proceeds on equipment loan ............................................ -- 105,734 599,867
Payments on equipment loan ............................................ (90,846) (91,713) (211,022)
Proceeds from issuance of notes ....................................... 990,006 -- 2,040,006
Payments on notes ..................................................... -- -- (1,000,000)
Payments on shareholder loans ......................................... -- -- (294,238)
Proceeds on issuance of common stock .................................. 4,915,184 4,998 18,738,956
------------- -------------- ------------------
Net cash provided by (used in) financing activities ...... 5,781,740 (24,589) 19,627,852
------------- -------------- ------------------
Net increase (decrease) in cash and cash equivalents .................. 2,042,444 (2,105,273) 2,976,761
Cash and cash equivalents at beginning of period ...................... 934,317 4,058,716 --
------------- -------------- ------------------
Cash and cash equivalents at end of period ............................ $ 2,976,761 $ 1,953,443 $ 2,976,761
============= ============== ==================
Supplemental schedule of noncash investing
and financing activities:
Preferred stock issuance in exchange for
interest in joint venture ........................................... $ 12,015,000 $ -- $ 12,015,000
============= ============== ==================
Payable to joint venture ............................................ $ 513,293 $ -- $ 12,528,293
============= ============== ==================
</TABLE>
See accompanying notes to Financial Statements.
-5-
<PAGE>
DEPOMED, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
These unaudited condensed financial statements and the related footnote
information of DepoMed, Inc. (the "Company") have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
the Company's management, the accompanying interim unaudited condensed financial
statements include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the information for the
periods presented. The results for the interim period ended September 30, 2000
are not necessarily indicative of results to be expected for the entire year
ending December 31, 2000 or future operating periods.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the financial statements
and footnotes thereto included in the Company's annual report on Form 10-KSB for
the year ended December 31, 1999.
As of September 30, 2000 the Company had approximately $4,500,000 in cash,
cash equivalents and marketable securities, working capital of $3,200,000 and
accumulated losses of $28,504,000. In the course of its development activities,
the Company expects such losses to continue over the next several years.
Management plans to continue to finance the operations with a combination of
stock sales and revenue from corporate alliances and technology licenses. If
adequate funds are not available, the Company may be required to delay, reduce
the scope of, or eliminate one or more of its development programs. The Company
expects its existing capital resources will permit it to meet its capital and
operational requirements through the first quarter of 2001. On November 2, 2000
the Company signed a private placement financing agreement that will provide the
Company will proceeds of $5,000,000. The Company expects the additional funds to
extend operations through the end of 2001 (See Note 9 "Subsequent Events").
2. REVENUE RECOGNITION
Revenue related to collaborative research agreements with corporate
partners and our joint venture is recognized as the expenses are incurred for
each contract. The Company is required to perform research activities as
specified in each respective agreement on a best efforts basis, and the Company
is reimbursed based on the costs associated with the work on each specific
contract. Nonrefundable milestone payments are recognized pursuant to
collaborative agreements upon the achievement of specified milestones where no
further obligation to perform exists under that provision of the arrangement.
-6-
<PAGE>
DEPOMED, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company considers all highly liquid investments with an original
maturity (at date of purchase) of three months or less to be cash equivalents.
Cash and cash equivalents consist of cash on deposit with banks, money market
instruments and commercial paper. The Company places its cash, cash equivalents
and marketable securities with high quality, U.S. financial institutions and, to
date, has not experienced losses on any of its balances. The Company records
cash and cash equivalents at amortized cost, which approximates the fair value.
The remaining contractual period until maturity of marketable securities ranges
from 1 to 24 months. All marketable securities are classified as
available-for-sale. These securities are carried at market value with unrealized
gains and losses included in accumulated other comprehensive income (loss) in
shareholders' equity.
4. NET LOSS PER COMMON SHARE
Net loss per common share is computed using the weighted-average number of
shares of common stock outstanding. Common stock equivalent shares from
outstanding stock options and warrants are not included as their effect is
antidilutive.
5. COMPREHENSIVE LOSS
Total comprehensive loss for the three and nine months ended September 30,
2000 and 1999, approximates net loss and includes unrealized gains and losses on
marketable securities.
6. RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1999, the SEC staff released Staff Accounting Bulletin No. 101
("SAB 101"), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. The Company will adopt SAB 101,
as required, in the fourth quarter of 2000. The impact of the bulletin on the
Company's financial position and results of operations is not expected to be
material.
On March 31, 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" ("FIN 44"), which provides guidance on several implementation
issues related to Accounting Principles Board Opinion No. 25 ("APB 25"). The
most significant topics discussed in FIN 44 are the clarification of the
definition of employee for purposes of applying APB 25 and the accounting for
stock options that have been repriced. FIN 44 is effective for the most
significant topics discussed beginning July 15, 2000. The impact of the adoption
of FIN 44 on the Company's financial position and results of operations was not
material.
In July 1999, the FASB announced the delay of the effective date of
Statement of Financial Reporting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SAFS 133"), also, in June 2000, the FASB
issued Statement of Financial Reporting Standards No. 138, an amendment to SFAS
133. SFAS 133, as amended, requires that all derivative instruments be recorded
-7-
<PAGE>
DEPOMED, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
on the balance sheet at their fair value. Change in the fair value of
derivatives is recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designed as part of a hedge
transaction, and, if so, the type of hedge transaction. The Company must adopt
SFAS 133, as amended, on January 1, 2001. Management does not currently expect
that adoption of SFAS 133, as amended, will have a material impact on the
Company's financial position or results of operations.
7. COLLABORATIVE AGREEMENTS
In November 1999, the Company entered into a joint venture agreement with
Elan Corporation, plc, Elan Pharma International, Ltd. and Elan International
Services, Ltd. (together "Elan") to develop products using drug delivery
technologies and expertise of both companies. This joint venture, DepoMed
Development, Ltd. ("DDL"), a Bermuda limited liability company, is initially
owned 80.1% by DepoMed and 19.9% by Elan. DDL funds its research through capital
contributions from its partners based on the partners' ownership percentage. DDL
subcontracts research and development efforts to DepoMed, Elan and others.
DepoMed began subcontract development work for DDL in January 2000.
While the Company owns 80.1% of the outstanding common stock of DDL, Elan
and its subsidiaries have retained significant minority investor rights that are
considered "participating rights" as defined in the Emerging Issues Task Force
Consensus No. 96-16. Accordingly, DepoMed does not consolidate the financial
statements of DDL, but instead accounts for its investment in DDL under the
equity method of accounting.
For the three and nine months ended September 30, 2000, and for the period
from inception (November 30, 1999) to September 30, 2000, DDL recognized a net
loss of approximately $614,000, $1,877,000 and $16,877,000, respectively. The
net loss from inception to September 30, 2000 includes a $15,000,000 payment to
Elan for a technology license fee. DepoMed recognized 80.1% of the DDL net loss,
or approximately $513,000, $1,503,000 and $13,518,000 for the three and nine
months ended September 30, 2000, and for the period from inception to September
30, 2000, respectively. To date, DDL has not recognized any revenue.
Elan has made a loan facility available to the Company for approximately
$8,000,000 to support the Company's share of the joint venture's research and
development costs pursuant to a convertible promissory note issued by the
Company to Elan. Funds issued under the terms of the note accrue interest at a
rate of 9% per annum and compound semi-annually. Elan has the right, at any
time, to convert all or any principal and interest amounts into DepoMed common
stock at a price of $10.00 per share. During the third quarter of 2000, the
Company utilized approximately $990,000 of the loan facility. At September 30,
2000, the Company accrued approximately $4,000 related to interest on the loan
facility.
-8-
<PAGE>
DEPOMED, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. SHAREHOLDERS' EQUITY
On January 21, 2000, 717,286 shares of common stock and 12,015 shares of
Series A convertible exchangeable preferred stock ("Series A Preferred Stock")
were issued to Elan Corporation, plc ("Elan") for consideration of $5,000,000
and $12,015,000, respectively. Proceeds from the sale of the Series A Preferred
Stock were used to fund the Company's 80.1% share of DDL, a joint venture with
Elan (See Note 7 "Collaborative Agreements").
The Series A Preferred Stock accrues a dividend of 7% per annum, compounded
semi-annually and payable in shares of Series A Preferred Stock. The Series A
Preferred Stock is convertible at anytime after January 2002, at Elan's option,
into the Company's common stock at a price of $12.00 per share. For the quarter
ended September 30, 2000, the Company accrued $217,000 as a dividend on the
Series A Preferred Stock. To date, the Company has accrued a total of $588,000
related to the dividend on the Series A Preferred Stock.
9. SUBSEQUENT EVENTS
On November 2, 2000, the Company signed a Subscription Agreement for a
private placement of 1,428,571 shares of common stock at a price of $3.50 per
share. The agreement also includes 357,142 redeemable warrants. Each warrant
allows the purchase of one share of the Company's common stock at an exercise
price of $5.50 per share. The warrants are exercisable over a four-year
period ending November 2004. Proceeds of $5,000,000 are to be received by
November 16, 2000.
-9-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING INFORMATION
The following discussion and analysis should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations included with the company's Annual Report on Form 10-KSB for the year
ended December 31, 1999 and the company's Financial Statements and related notes
thereto appearing elsewhere in this quarterly report. Statements made in this
quarterly report that are not statements of historical fact are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). A number of risks and uncertainties,
including those discussed under the caption "FACTORS THAT MAY AFFECT FUTURE
RESULTS" below and elsewhere in this quarterly report on Form 10-Q, could affect
such forward-looking statements and could cause actual results to differ
materially from the statements made. The company expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any changes in the
company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statements are based.
ABOUT THE COMPANY
We are a development stage company engaged in the development of new and
proprietary oral drug delivery technologies. We have developed two types of oral
drug delivery systems, the Gastric Retention System (the "GR System") and the
Reduced Irritation System (the "RI System" and together, the "DepoMed Systems").
The GR System is designed to be retained in the stomach for an extended period
of time while it delivers the incorporated drug or drugs, and the RI System is
designed to reduce the gastrointestinal irritation that is a side effect of many
orally administered drugs. In addition, the DepoMed Systems are designed to
provide continuous, controlled delivery of an incorporated drug.
In this "Management's Discussion and Analysis of Financial Condition and
Results of Operations", the "company," "DepoMed," "we," "us," and "our," refer
to DepoMed, Inc.
Since the company's inception in August 1995, we have devoted substantially
all our efforts to research and development conducted on our own behalf and
through collaborations with pharmaceutical partners in connection with the
DepoMed Systems. Our primary activities since inception (August 7, 1995) have
been, in addition to research and development, establishing our offices and
research facilities, recruiting personnel, filing patent applications,
developing a business strategy and raising capital. We have also been involved
in revenue generating research and development projects for clients, including
R.W. Johnson Pharmaceutical Research Institute ("PRI"). To date, we have
received only limited revenue, all of which has been from these collaborative
research and feasibility arrangements.
In November 1999, we entered into a joint venture with Elan Corporation,
plc, Elan Pharma International, Ltd. and Elan International Services, Ltd.
(together "Elan") to develop products using drug delivery technologies and
expertise of both companies. This joint venture, DepoMed Development, Ltd.
("DDL"), a Bermuda limited liability company, is initially owned 80.1% by
DepoMed and 19.9% by Elan. DDL funds its research through capital contributions
from its partners based on the partners' ownership percentage. DDL subcontracts
research and development efforts to DepoMed, Elan and others. DepoMed began
subcontract development work for DDL in January 2000.
-10-
<PAGE>
We also have in development Metformin GR-TM-, a potential once-daily
metformin product for the treatment of Type II diabetes. In July 2000, we
completed a second Phase I clinical trial of Metformin GR. Both trials showed
positive results, and in the third quarter of 2000 we initiated a Phase II
clinical trial. In June 2000, we announced the initiation of a collaboration
with AVI Biopharma, Inc. ("AVI") to investigate the feasibility of controlled
oral delivery of AVI's proprietary NEUGENE antisense agents. We are also
developing certain other product candidates expected to benefit from
incorporation into the DepoMed Systems. We have in development a GR System
formulation of an undisclosed antibiotic and an undisclosed cardiovascular drug.
The antibiotic product is scheduled to enter Phase I clinical trials in the
fourth quarter of 2000. We will ultimately seek marketing partners to
commercialize both of these products.
DepoMed has generated a cumulative net loss of approximately $28,504,000
for the period from inception through September 30, 2000. $13,518,000 of this
loss is attributable to our share of the loss in DDL.
We intend to continue investing in the further development of our drug
delivery technologies and the DepoMed Systems. We also intend to internally
develop and find partners to commercialize products based on generic and
over-the-counter compounds. Depending upon a variety of factors, including
collaborative arrangements, available personnel and financial resources, we will
conduct or fund clinical trials on such products and will undertake the
associated regulatory activities. We will need to make additional capital
investments in laboratories and related facilities. As additional personnel are
hired in 2001 and beyond, expenses are expected to increase from their 2000
levels.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Revenue for the quarter ended September 30, 2000 was $382,000. There were
no revenues in the third quarter of 1999. Revenue for the nine-month period
ended September 30, 2000 was $1,344,000, compared to $115,000 in the same period
of 1999. The increase in 2000 revenue results primarily from research and
development work performed for DDL. In 1999, revenues consisted of amounts
earned under the feasibility arrangement with PRI. In the first quarter of 1999,
we completed the first phase of research and development under the March 1998
feasibility agreement with PRI. PRI has requested no further development work on
our part and we do not expect to receive any additional revenue from this
agreement.
Research and development expense increased to $1,830,000 and $4,818,000 for
the three and nine months ended September 30, 2000, respectively, compared to
$1,095,000 and $2,588,000 in the same periods in 1999. These increases were
primarily due to expenses for clinical trials with DepoMed proprietary products
which began in the third quarter of 1999. Consulting expense also increased in
the areas of clinical, regulatory and contract drug manufacturing as we sought
additional expertise to move our proprietary products through the development
process. Also contributing to the increase was the hiring of additional
employees and related expenses.
General and administrative expense for the third quarter of 2000 and 1999
was $438,000 and $430,000, respectively. General and administrative expense for
the nine months ended September 30, 2000 was $1,435,000 compared to $1,398,000
in the same period of 1999. In the three- and nine-month periods of 2000,
increased salaries and travel expense for business development purposes were
offset by decreased legal and accounting fees realized as we reduced our
reliance on outside professionals for some reporting services. Amortization of
leasehold improvements also decreased from 1999 levels but is expected to
increase through the year as we complete the build-out of our new facility.
-11-
<PAGE>
In the third quarter of 2000, we recognized a net loss of approximately
$513,000 as our share in the net loss of our joint venture with Elan. We expect
to record additional net losses in DDL in 2000 and 2001. DDL recorded research
and development expense of approximately $641,000 and no general and
administrative expense in the third quarter of 2000.
Elan has made a loan facility available to us for approximately $8,000,000
to support DepoMed's share of the joint venture's research and development costs
pursuant to a convertible promissory note issued by DepoMed to Elan. Funds
issued under the terms of the note accrue interest at a rate of 9% per annum and
compound semi-annually. Elan has the right, at any time, to convert all or any
principal and interest amounts into DepoMed common stock at a price of $10.00
per share. There was approximately $990,000 outstanding on the loan at September
30, 2000. At the end of the third quarter, we accrued approximately $4,000
related to interest on the loan facility.
Net interest income was approximately $20,000 for the three months ended
September 30, 2000, compared to approximately $66,000 during the three months
ended September 30, 1999. In the nine months ended September 30, 2000 and 1999,
net interest income was $207,000 and $241,000. The decrease was due to lower
cash and investment balances. Net interest income also includes immaterial gains
realized on the sale of marketable securities.
In January 2000, we issued 12,015 shares of Series A convertible
exchangeable preferred stock ("Series A Preferred Stock") at a price of $1,000
per share to fund our 80.1% share of the initial capitalization of DDL. The
Series A Preferred Stock accrues a dividend of 7% per annum, compounded
semi-annually and payable in shares of Series A Preferred Stock. The Series A
Preferred Stock is convertible at anytime after January 2002, at Elan's option,
into DepoMed's common stock at a price of $12.00 per share. For the quarter
ended September 30, 2000, we accrued a dividend on the Series A Preferred Stock
of $217,000. To date, we have accrued a total of $588,000 related to the
dividend on the Series A Preferred Stock.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operations in the nine months ended September 30, 2000 was
approximately $4,319,000, compared to approximately $2,507,000 for the nine
months ended September 30, 1999. During the nine months ended September 30,
2000, the cash used in operations was due primarily to the net loss and our
equity in the loss of the joint venture. Increases in accounts payable were
offset by increases in accounts receivable from the joint venture and other
assets, including approximately $290,000 as a security deposit for our new
facility. In 1999, the cash used in operations was due primarily to the net loss
offset by the decrease in accounts receivable and the increase in accounts
payable during the period.
Cash used in investing activities in the nine months ended September 30,
2000 totaled approximately $580,000 and consisted of our investment in our joint
venture and purchases of lab equipment, office equipment and leasehold
improvements, offset by a net decrease in marketable securities of approximately
$2,035,000. Net cash provided by investing activities in the nine months ended
September 30, 1999 totaled approximately $426,000 and consisted of a net
decrease of approximately $522,000 of marketable securities offset by purchases
of laboratory equipment, fixtures and office equipment. We expect that future
capital expenditures may include additional product development and quality
control laboratory equipment as we work towards implementation of current Good
Manufacturing Practices ("cGMP") in our laboratories. We also expect to spend
approximately $700,000 over the next two quarters for leasehold improvements at
our new facility. We anticipate financing some portion of these improvements.
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Cash provided by financing activities in the nine months ended September
30, 2000 was approximately $5,782,000 and consisted primarily of net proceeds of
approximately $4,915,000 received in January 2000 from a private placement of
717,286 shares of common stock at a price of $7.00 per share. Cash provided by
financing activities in the nine months ended September 30, 1999 was
approximately $25,000, which consisted primarily of proceeds of $106,000 from
the equipment financing credit facility offset by payments on the equipment
financing credit facility and on capital lease obligations.
As of September 30, 2000, we had approximately $4,500,000 in cash, cash
equivalents and marketable securities, working capital of $3,200,000 and
accumulated losses of $28,500,000. On November 2, 2000 we signed an agreement
to sell a combination of common stock and warrants in a private placement
that will provide DepoMed with $5,000,000 (See Note 9 "Subsequent Events").
Funds from this agreement will be received by November 16, 2000.
We expect to continue to incur operating losses over the next several
years. Based on currently budgeted spending levels, we anticipate that our
capital resources as of September 30, 2000 will permit us to meet our capital
and operational requirements through the first quarter of 2001. The funds from
the private placement signed November 2, 2000 will allow us to extend operations
at least through the end of 2001. By reducing spending rates, if required, these
resources could be further extended. We are currently negotiating with several
pharmaceutical companies to license the Metformin GR product on terms which
could provide significant additional funding to the company.
We base our expectations on our current operating plan which may change as
a result of many factors. Accordingly, we could require additional funding
sooner than anticipated. Our cash needs may also vary materially from our
current expectations because of numerous factors, including:
- results of research and development;
- relationships with collaborative partners;
- changes in the focus and direction of our research and development
programs;
- technological advances; and
- results of clinical testing, requirements of the FDA and comparable
foreign regulatory agencies.
We will need substantial funds of our own or from third parties to:
- conduct research and development programs;
- conduct preclinical and clinical testing; and
- manufacture (or have manufactured) and market (or have marketed)
potential products using the DepoMed Systems.
Our existing capital resources will not be sufficient to fund our
operations until such time as we may be able to generate sufficient revenues to
support our operations. We have limited credit facilities and no other committed
source of capital. To the extent that our capital resources are insufficient to
meet our future capital requirements, we will have to raise additional funds to
continue our development programs. We may not be able to raise such additional
capital on favorable terms, or at all. If the company raises additional capital
by selling its equity or convertible debt securities, the issuance of such
securities could result in dilution of our shareholders' equity positions. If
adequate funds are not available the company may have to:
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- curtail operations significantly; or
- obtain funds through entering into collaborative agreements on
unattractive terms.
The inability to raise capital would have a material adverse effect on
the company.
FACTORS THAT MAY AFFECT FUTURE RESULTS
EARLY STAGE OF DEVELOPMENT; LIMITED REVENUES
We are at an early stage of development. Accordingly, our business is
subject to all of the business risks associated with a new enterprise,
including:
- uncertainties regarding product development;
- risks related to collaborative partnering relationships;
- lack of revenue and uncertainty regarding future revenues;
- limited financial and personnel resources; and
- lack of established credit facilities.
As we expand our research and development efforts, we anticipate that we
will continue to incur substantial operating losses for at least the next
several years. Therefore, we expect our cumulative losses to increase. To date,
we have had no revenues from product sales and only limited revenues from our
collaborative research and development arrangements and feasibility studies. Our
success will depend on commercial sales of products that generate significant
revenues for us. We cannot predict whether we will be able to achieve commercial
sales of any revenue-generating products.
NO ASSURANCE OF SUCCESSFUL PRODUCT DEVELOPMENT
Our research and development programs are at an early stage. In order for
us to incorporate a pharmaceutical product into a DepoMed System, we would need
to complete substantial additional research and development on an off-patent
drug or a drug provided by a collaborative partner. Even if we are successful,
the drug incorporated in the DepoMed System:
- may not be offered for commercial sale; or
- may prove to have undesirable or unintended side effects that prevent
or limit its commercial use.
Before we or others make commercial sales of products using the DepoMed
Systems, we or our collaborative partners would need to:
- conduct clinical tests showing that these products are safe and
effective; and
- obtain regulatory approval.
This process involves substantial financial investment. Successful
commercial sales of any of these products require:
- market acceptance;
- cost-effective commercial scale production; and
- reimbursement under private or governmental health plans.
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We will have to curtail, redirect or eliminate our product development
programs if we or our collaborative partners find that:
- the DepoMed Systems prove to have unintended or undesirable side
effects; or
- products which appear promising in preclinical studies do not
demonstrate efficacy in larger scale clinical trials.
These events could have a material adverse effect on the company.
DEPENDENCE ON ELAN AND NEED FOR ADDITIONAL COLLABORATIVE PARTNERS
We have generated all of our revenues through collaborative arrangements
with pharmaceutical and biotechnology companies. Currently, most of our revenues
are derived from our joint venture with Elan. If our joint venture with Elan is
terminated or fails to produce desired results, our revenues and results of
operations will suffer.
Our strategy to continue the research, development, clinical testing,
manufacturing and commercial sale of products using the DepoMed Systems requires
that we enter into additional collaborative arrangements.
The company may not be able to enter into future collaborative arrangements
on acceptable terms. The success of the Elan joint venture and any additional
collaborative arrangements requires that the company's collaborative partners:
- perform their obligations as expected; and
- devote sufficient resources to the development, clinical testing and
marketing of products developed under collaborations.
It is possible that Elan or our future collaborative partners may not:
- continue to fund their particular projects;
- perform their agreed-to obligations; or
- choose to develop and make commercial sales of products using the
DepoMed Systems.
For example, in the first quarter of 1999, we completed the first phase of
research and development under the March 1998 feasibility agreement with PRI. We
have not had any significant communication with PRI regarding their plans for
the product since the first quarter of 1999. In light of this, we no longer
expect to continue research and development work on the project even though the
project has not been canceled. There can be no assurance that a collaborative
partner's product development decisions will favor the DepoMed Systems or that
their timelines will be aligned with our own business strategies.
Any of following events could have a material adverse effect on the
company:
- any parallel development by a collaborative partner of competitive
technologies or products;
- arrangements with collaborative partners that limit or preclude the
company from developing products or technologies;
- premature termination of an agreement; or
- failure by a collaborative partner to devote sufficient resources to
the development; and commercial sales of products using the DepoMed
Systems.
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Collaborative agreements are generally complex and may contain provisions
which give rise to disputes regarding the relative rights and obligations of the
parties. Any such dispute could delay collaborative research, development or
commercialization of potential products, or could lead to lengthy, expensive
litigation or arbitration.
COMPETITION
Competition in pharmaceutical products and drug delivery systems is
intense. We expect competition to increase. Competing technologies or products
developed in the future may prove superior either generally or in particular
market segments to the DepoMed Systems or products using the DepoMed Systems.
These developments would make the DepoMed Systems or products using them
noncompetitive or obsolete.
All of our principal competitors have substantially greater financial,
marketing, personnel and research and development resources than us. In
addition, many of our potential collaborative partners have devoted, and
continue to devote, significant resources to the development of their own drug
delivery systems and technologies.
GOVERNMENT REGULATION
Numerous governmental authorities in the United States and other countries
regulate our research and development activities and those of our collaborative
partners. Governmental approval is required of all potential pharmaceutical
products using the DepoMed Systems and the manufacture and marketing of products
using the DepoMed Systems prior to the commercial use of those products. The
regulatory process will take several years and require substantial funds. If
products using the DepoMed Systems do not receive the required regulatory
approvals or if such approvals are delayed, the company's business would be
materially adversely affected. There can be no assurance that the requisite
regulatory approvals will be obtained without lengthy delays, if at all.
In the United States, the United States Food and Drug Administration (the
"FDA") rigorously regulates pharmaceutical products, including any drugs using
the DepoMed Systems. If a company fails to comply with applicable requirements,
the FDA or the courts may impose sanctions. These sanctions may include civil
penalties, criminal prosecution of the company or its officers and employees,
injunctions, product seizure or detention, product recalls, total or partial
suspension of production. The FDA may withdraw approved applications or refuse
to approve pending new drug applications, premarket approval applications, or
supplements to approved applications.
The company generally must conduct preclinical testing on laboratory
animals of new pharmaceutical products prior to commencement of clinical studies
involving human beings. These studies evaluate the potential efficacy and safety
of the product. The company then submits the results of these studies to the FDA
as part of an Investigational New Drug application ("IND"), which must become
effective before beginning clinical testing in humans.
Typically, human clinical evaluation involves a time-consuming and costly
three-phase process:
- In Phase I, the company conducts clinical trials with a small number
of subjects to determine a drug's early safety profile and its
pharmacokinetic pattern.
- In Phase II, the company conducts clinical trials with groups of
patients afflicted with a specific disease in order to determine
preliminary efficacy, optimal dosages and further evidence of safety.
- In Phase III, the company conducts large-scale, multi-center,
comparative trials with patients afflicted with a target disease in
order to provide enough data to demonstrate the efficacy and safety
required by the FDA prior to commercialization.
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The FDA closely monitors the progress of each phase of clinical testing.
The FDA may, at its discretion, re-evaluate, alter, suspend or terminate testing
based upon the data accumulated to that point and the FDA's assessment of the
risk/benefit ratio to patients.
The results of the preclinical and clinical testing are submitted to the
FDA in the form of a new drug application (an "NDA") for approval prior to
commercialization. In responding to an NDA, the FDA may grant marketing
approval, request additional information or deny the application. Failure to
receive approval for any products using the DepoMed Systems would have a
material adverse effect on the company.
Various FDA regulations apply to over-the-counter products that comply with
monographs issued by the FDA. These regulations include:
- cGMP requirements;
- general and specific over-the-counter labeling requirements (including
warning statements);
- advertising restrictions; and
- requirements regarding the safety and suitability of inactive
ingredients.
In addition, the FDA may inspect over-the-counter products and
manufacturing facilities. A failure to comply with applicable regulatory
requirements may lead to administrative or judicially imposed penalties. If an
over-the-counter product differs from the terms of a monograph, it will, in most
cases, require FDA approval of an NDA for the product to be marketed.
Foreign regulatory approval of a product must also be obtained prior to
marketing the product internationally. Foreign approval procedures vary from
country to country. The time required for approval may delay or prevent
marketing in certain countries. In certain instances the company or its
collaborative partners may seek approval to market and sell certain products
outside of the United States before submitting an application for United States
approval to the FDA. The clinical testing requirements and the time required to
obtain foreign regulatory approvals may differ from that required for FDA
approval. Although there is now a centralized European Union ("EU") approval
mechanism in place, each EU country may nonetheless impose its own procedures
and requirements. Many of these procedures and requirements are time-consuming
and expensive. Some EU countries require price approval as part of the
regulatory process. These constraints can cause substantial delays in obtaining
required approval from both the FDA and foreign regulatory authorities after the
relevant applications are filed, and approval in any single country may not
meaningfully indicate that another country will approve the product.
MANUFACTURING, MARKETING AND SALES
We do not have and do not intend to establish in the foreseeable future
internal manufacturing, marketing or sales capabilities. Rather, we intend to
use the facilities of our collaborative partners or those of contract
manufacturers to manufacture products using the DepoMed Systems. Our dependence
on third parties for the manufacture of products using the DepoMed Systems may
adversely affect our ability to develop and deliver such products on a timely
and competitive basis. There may not be sufficient manufacturing capacity
available to the company when, if ever, it is ready to seek commercial sales of
products using the DepoMed Systems. In addition, we expect to rely on our
collaborative partners or to develop distributor arrangements to market and sell
products using the DepoMed Systems. The company may not be able to enter into
manufacturing, marketing or sales agreements on reasonable commercial terms, or
at all, with third parties. Failure to do so would have a material adverse
effect on the company.
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Applicable cGMP requirements and other rules and regulations prescribed by
foreign regulatory authorities will apply to the manufacture of products using
the DepoMed Systems. The company will depend on the manufacturers of products
using the DepoMed Systems to comply with cGMP and applicable foreign standards.
Any failure by a manufacturer of products using the DepoMed Systems to maintain
cGMP or comply with applicable foreign standards could delay or prevent their
commercial sale. This could have a material adverse effect on the company.
PATENTS AND PROPRIETARY RIGHTS
Our success will depend in part on our ability to obtain and maintain
patent protection for our technologies and to preserve our trade secrets. Our
policy is to file patent applications in the United States and foreign
jurisdictions. We currently hold four issued United States patents and four
United States patent applications are pending. Additionally, we are currently
preparing a series of patent applications representing our expanding technology
for filing in the United States. We have also applied for patents in numerous
foreign countries. Some of those countries have granted our applications and
other applications are still pending. No assurance can be given that our patent
applications will be approved, or that any issued patents will provide
competitive advantages for the DepoMed Systems or our technologies.
With respect to already issued patents and any patents which may issue
from our applications, there can be no assurance that claims allowed will be
sufficient to protect our technologies. The United States maintains patent
applications in secrecy until a patent issues. As a result, the company cannot
be certain that others have not filed patent applications for technology covered
by our pending applications or that the company was the first to file patent
applications for such technology. Competitors may have filed applications for,
or may have received patents and may obtain additional patents and proprietary
rights relating to, compounds or processes that may block our patent rights or
permit the competitors to compete without infringing the patent rights of the
company. In addition, there can be no assurance that:
- any patents issued to the company will not be challenged, invalidated
or circumvented; or
- the rights granted under the patents issued to the company will
provide proprietary protection or commercial advantage to the company.
We also rely on trade secrets and proprietary know-how. We seek to protect
that information, in part, through entering into confidentiality agreements with
employees, consultants, collaborative partners and others before such persons or
entities have access to our proprietary trade secrets and know-how. These
confidentiality agreements may not be effective in certain cases, due to, among
other things, the lack of an adequate remedy for breach of an agreement or a
finding that an agreement is unenforceable. In addition, our trade secrets may
otherwise become known or be independently developed by competitors.
Our ability to develop our technologies and to make commercial sales of
products using our technologies also depends on not infringing others' patents.
We are not aware of any claim of patent infringement against us. However, if
claims concerning patents and proprietary technologies arise and are determined
adversely to the company, the claims could have a material adverse effect on the
company. Extensive litigation regarding patent and other intellectual property
rights is common in the pharmaceutical industry. We may need to engage in
litigation to enforce any patents issued or licensed to the company or to
determine the scope and validity of third-party proprietary rights. There can be
no assurance that our issued or licensed patents would be held valid by a court
of competent jurisdiction. Whether or not the outcome of litigation is favorable
to the company, the diversion of our financial and managerial resources to such
litigation could have a material adverse effect on the company. We may also be
required to participate in interference proceedings declared by the United
States Patent and Trademark Office for the purpose of determining the priority
of inventions in connection with the patent applications of the company or other
parties. Adverse determinations in litigation or interference proceedings could
require the company to seek licenses (which may not be available on commercially
reasonable terms) or subject the company to significant liabilities to third
parties. These events could have a material adverse effect on the company.
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FLUCTUATIONS IN OPERATING RESULTS
The following factors will affect our quarterly operating results and may
result in a material adverse effect on the company:
- variations in revenues obtained from collaborative agreements,
including milestone payments, royalties, license fees and other
contract revenues;
- success or failure of the company in entering into further
collaborative relationships;
- decisions by collaborative partners to proceed or not to proceed with
subsequent phases of the relationship or program;
- the timing of any future product introductions by us or our
collaborative partners;
- market acceptance of the DepoMed Systems;
- regulatory actions;
- adoption of new technologies;
- the introduction of new products by our competitors;
- manufacturing costs and capabilities;
- changes in government funding; and
- third-party reimbursement policies.
RELATIONSHIPS OF ADVISORS WITH OTHER ENTITIES
Two groups (the Policy Advisory Board and Development Advisory Board)
advise the company on business and scientific issues and future opportunities.
Certain members of our Policy Advisory Board and Development Advisory Board work
full-time for academic or research institutions. Others act as consultants to
other companies. In addition, except for work performed specifically for and at
the direction of the company, any inventions or processes discovered by such
persons will be their own intellectual property or that of their institutions or
other companies. Further, invention assignment agreements signed by such persons
in connection with their relationships with the company may be subject to the
rights of their primary employers or other third parties with whom they have
consulting relationships. If the company desires access to inventions which are
not its property, the company will have to obtain licenses to such inventions
from these institutions or companies. The company may not be able to obtain
these licenses on commercially reasonable terms.
HEALTHCARE REFORM; UNCERTAIN AVAILABILITY OF HEALTHCARE REIMBURSEMENT
The healthcare industry is changing rapidly as the public, government,
medical professionals, third-party payors and the pharmaceutical industry
examine ways to contain or reduce the cost of health care. Changes in the
healthcare industry could impact our business, particularly to the extent that
the company develops the DepoMed Systems for use in prescription drug
applications.
Certain foreign governments regulate pricing or profitability of
prescription pharmaceuticals sold in their countries. There have been a number
of federal and state proposals to implement similar government control in the
United States, particularly with respect to Medicare payments. The company
expects that these proposals will continue to be advanced. In addition, downward
pressure on pharmaceutical pricing in the United States has increased due to an
enhanced emphasis on managed care. The company expects this pressure to continue
to increase. The company cannot predict whether any such legislative or
regulatory proposals will be adopted or the effect such proposals or managed
care efforts may have on its business. However, the announcement of such
proposals or efforts could have a material adverse effect on the company's
ability to raise capital. Further, the adoption of such proposals or efforts
would have a material adverse effect on the company and any prospective
collaborative partners.
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Sales of products using the DepoMed Systems in domestic and foreign markets
will depend in part on the availability of reimbursement from third-party
payors, such as government health administration authorities and private health
insurers. Third-party payors are increasingly challenging the price and
cost-effectiveness of prescription pharmaceutical products. Significant
uncertainty exists as to the reimbursement status of newly approved healthcare
products. Accordingly, products using the DepoMed Systems may not be eligible
for third-party reimbursement at price levels sufficient for us or our
collaborative partners to realize appropriate returns on our investments in the
DepoMed Systems.
PRODUCT LIABILITY
Our business involves exposure to potential product liability risks that
are inherent in the production and manufacture of pharmaceutical products. Any
such claims could have a material adverse effect on the company. We have
obtained product liability insurance for clinical trials currently underway.
Although, there can be no assurance that:
- the company will be able to obtain product liability insurance for
future trials;
- the company will be able to maintain product liability insurance on
acceptable terms;
- the company will be able to secure increased coverage as the
commercialization of the DepoMed Systems proceeds; or
- any insurance will provide adequate protection against potential
liabilities.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 2000 DEPOMED, INC.
By /s/ John F. Hamilton
------------------------------
John F. Hamilton
Vice President and
Chief Financial Officer
(Authorized Officer and
Principal Accounting
and Financial Officer)
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