<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 JUNE 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 July 28, 2000, was 7,189,363.
<PAGE>
DEPOMED, INC.
PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements: PAGE
----
Balance Sheets at June 30, 2000 and December 31, 1999 ...................................... 3
Statements of Operations for the three-month and six-month periods ended
June 30, 2000 and 1999, and for the period from inception (August 7, 1995)
to June 30, 2000 ....................................................................... 4
Statements of Cash Flows for the six-month periods ended June 30, 2000 and
1999, and for the period from inception (August 7, 1995)
to June 30, 2000 ....................................................................... 5
Notes to Financial Statements .............................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations .......................................................................... 9
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders...................................... 19
Item 6. Exhibits and Reports on Form 8-K ........................................................ 19
Signature ....................................................................................... 20
</TABLE>
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DEPOMED, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
----------------- ------------------
(UNAUDITED) (SEE NOTE 1)
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ASSETS
Current assets:
Cash and cash equivalents................................................. $ 2,621,286 $ 934,317
Marketable securities..................................................... 2,999,455 3,532,065
Receivable for capital stock.............................................. -- 17,015,000
Receivable from joint venture............................................. 585,562 --
Prepaid and other current assets.......................................... 121,550 169,385
----------------- ------------------
Total current assets.............................................. 6,327,853 21,650,767
Property and equipment, net..................................................... 863,218 779,631
Other assets.................................................................... 293,756 4,467
----------------- ------------------
$ 7,484,827 $ 22,434,865
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................... $ 326,791 $ 219,675
Accrued compensation...................................................... 205,520 275,047
Other accrued liabilities................................................. 340,320 131,889
Payable to joint venture.................................................. 659,147 12,015,000
Capital lease obligation, current portion................................. 34,631 41,131
Long-term debt, current portion........................................... 130,863 123,042
----------------- ------------------
Total current liabilities......................................... 1,697,272 12,805,784
Capital lease obligation, non-current portion................................... 36,090 53,952
Long-term debt, non-current portion............................................. 289,202 356,649
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 June 30, 2000 and December 31, 1999, respectively.................. 12,386,000 --
Common stock, no par value, 25,000,000 shares authorized;
7,189,363 and 6,475,077 shares issued and outstanding
at June 30, 2000 and December 31, 1999, respectively.................. 19,731,149 14,797,072
Capital stock issuable.................................................... -- 17,015,000
Deferred compensation..................................................... (147,736) (282,184)
Deficit accumulated during the development stage.......................... (26,496,082) (22,298,416)
Accumulated other comprehensive loss...................................... (11,068) (12,992)
----------------- ------------------
Total shareholders' equity........................................ 5,462,263 9,218,480
----------------- ------------------
$ 7,484,827 $ 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 JUNE 30, SIX MONTHS ENDED JUNE 30, TO
----------------------------- ------------------------------- JUNE 30,
2000 1999 2000 1999 2000
----------- ------------- ------------- ------------- ----------------
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Revenue:
Collaborative agreements...................... $ -- $ -- $ -- $ 115,327 $ 1,801,312
Collaborative agreements with affiliates...... 585,562 -- 961,980 -- 961,980
----------- ------------- ------------- ------------- ----------------
Total revenue................................. 585,562 -- 961,980 115,327 2,763,292
Operating expenses:
Research and development................ 1,715,616 763,889 2,988,377 1,493,081 10,166,992
General and administrative.............. 494,483 479,781 997,076 967,972 6,344,022
Purchase of in-process
research and development............. -- -- -- -- 298,154
----------- ------------- ------------- ------------- ----------------
Total operating expenses...................... 2,210,099 1,243,670 3,985,453 2,461,053 16,809,168
----------- ------------- ------------- ------------- ----------------
Loss from operations.......................... (1,624,537) (1,243,670) (3,023,473) (2,345,726) (14,045,876)
Other income (expenses):
Equity in loss of joint venture............... (659,961) -- (990,006) -- (13,005,006)
Interest income, net.......................... 105,286 80,362 186,813 174,681 925,800
----------- ------------- ------------- ------------- ----------------
Total other income (expenses)................. (554,675) 80,362 (803,193) 174,681 (12,079,206)
----------- ------------- ------------- ------------- ----------------
Net loss...................................... (2,179,212) (1,163,308) (3,826,666) (2,171,045) (26,125,082)
Accretion of dividend on preferred stock...... (210,000) -- (371,000) -- (371,000)
----------- ------------- ------------- ------------- ----------------
Net loss applicable to common stock........... $(2,389,212) $ (1,163,308) $ (4,197,666) $ (2,171,045) $ (26,496,082)
=========== ============= ============= ============== =================
Basic and diluted net loss per share.......... $ (0.33) $ (0.18) $ (0.59) $ (0.34)
=========== ============= ============= ==============
Shares used in computing basic
and diluted net loss per share.......... 7,189,363 6,475,000 7,110,870 6,473,991
=========== ============= ============= ==============
</TABLE>
See accompanying notes to Financial Statements.
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<PAGE>
DEPOMED, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<CAPTION>
PERIOD FROM
INCEPTION
SIX MONTHS ENDED JUNE 30, (AUGUST 7, 1995)
---------------------------------- TO
2000 1999 JUNE 30, 2000
----------------- ---------------- ------------------
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OPERATING ACTIVITIES
Net loss..................................................................... $(3,826,666) $(2,171,045) $(26,125,082)
Adjustments to reconcile net loss to net cash used in operating activities:
Equity in loss of joint venture.......................................... 990,006 -- 13,005,006
Depreciation and amortization............................................ 186,185 199,845 900,511
Accrued interest expense on notes........................................ -- -- 13,618
Amortization of deferred compensation.................................... 134,447 136,332 799,513
Value of stock options issued for services............................... 17,847 -- 43,897
Purchase of in-process research and development.......................... -- -- 298,154
Changes in assets and liabilities:
Accounts receivable.................................................. -- 306,148 --
Accounts receivable from joint venture............................... (585,562) -- (585,562)
Other current assets................................................. 47,835 33,360 (121,550)
Other assets......................................................... (289,289) 34,404 (293,914)
Accounts payable and other accrued liabilities....................... 315,547 (105,746) 667,111
Accrued compensation................................................. (69,527) 31,561 138,044
----------------- ---------------- ------------------
Net cash used in operating activities........................ (3,079,177) (1,535,141) (11,260,254)
----------------- ---------------- ------------------
INVESTING ACTIVITIES
Investment in joint venture.................................................. (330,859) -- (330,859)
Expenditures for property and equipment...................................... (265,388) (86,417) (1,395,229)
Purchases of marketable securities........................................... (1,487,620) (1,576,830) (8,455,459)
Maturities of marketable securities.......................................... 2,017,770 2,098,823 5,384,732
----------------- ---------------- ------------------
Net cash provided by (used in) investing activities.......... (66,097) 435,576 (4,796,815)
----------------- ---------------- ------------------
FINANCING ACTIVITIES
Payments on capital lease obligations........................................ (24,362) (30,778) (237,475)
Proceeds on equipment loan................................................... -- 105,734 599,867
Payments on equipment loan................................................... (59,626) (60,331) (179,802)
Proceeds from issuance of notes.............................................. -- -- 1,050,000
Payments on notes............................................................ -- -- (1,000,000)
Payments on shareholder loans................................................ -- -- (294,238)
Proceeds on issuance of common stock......................................... 4,916,231 4,998 18,740,003
----------------- ---------------- ------------------
Net cash provided by financing activities.................... 4,832,243 19,623 18,678,355
----------------- ---------------- ------------------
Net increase (decrease) in cash and cash equivalents......................... 1,686,969 (1,079,942) 2,621,286
Cash and cash equivalents at beginning of period............................. 934,317 4,058,716 --
----------------- ---------------- ------------------
Cash and cash equivalents at end of period................................... $ 2,621,286 $ 2,978,774 $ 2,621,286
================= ================ ==================
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................................................... $ 659,147 $ -- $ 12,674,147
================= ================ ==================
</TABLE>
See accompanying notes to Financial Statements.
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<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 June 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 June 30, 2000 the Company had approximately $5,600,000 in cash,
cash equivalents and marketable securities, working capital of $4,600,000 and
accumulated losses of $26,100,000. 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 next nine months.
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 supplies and the hours worked
by employees 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.
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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 SHARE
Net loss per 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 six months ended June 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 FASB 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 Opinion No. 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 interpretation on the
Company's financial position and results of operations is not expected to be
material.
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DEPOMED, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 will fund its research
through capital contributions from its partners based on the partners' ownership
percentage. DDL will subcontract 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 six months ended June 30, 2000, and for the period
from inception (November 30, 1999) to June 30, 2000, DDL recognized a net loss
of approximately $823,000, $1,236,000 and $16,236,000, respectively. The net
loss from inception to June 30, 2000, includes a $15,000,000 payment to Elan for
a technology license fee. DepoMed recognized 80.1% of DDL's net loss, or
approximately $660,000, $990,000 and $13,005,000 for the three and six months
ended June 30, 2000, and for the period from inception to June 30, 2000,
respectively. To date, DDL has not recognized any revenue.
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 5 "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 any time after two years, at
Elan's option, into the Company's common stock at a price of $12.00 per
share. For the quarter ended June 30, 2000, the Company accrued $210,000 as a
dividend on the Series A Preferred Stock. To date, the Company has accrued a
total of $371,000 related to the dividend on the Series A Preferred Stock.
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<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 will fund its research through
capital contributions from its partners based on the partners' ownership
percentage. DDL will subcontract research and development efforts to DepoMed,
Elan and others. DepoMed began subcontract development work for DDL in January
2000.
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<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 we are planning to initiate a Phase II
clinical trial in the third quarter of 2000. We have also developed a reduced
irritation aspirin and an enhanced absorption calcium supplement product.
These products have been reformulated to incorporate advances in polymer
technology and to address potential marketing opportunities. We are currently
seeking marketing partners to commercialize these products. 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
$26,100,000 for the period from inception through June 30, 2000. $13,005,000 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 2000 and beyond, expenses are expected to increase from their 1999
levels.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Revenue for the quarter ended June 30, 2000 was $586,000. There were
no revenues in the second quarter of 1999. Revenue for the six-month period
ended June 30, 2000 was $962,000, compared to $115,000 in the same period of
1999. The increase in 2000 revenue results 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 PRI feasibility
agreement. The product is currently under review at PRI.
Research and development expense increased to $1,716,000 and
$2,988,000 for the three and six months ended June 30, 2000, respectively,
compared to $764,000 and $1,493,000 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 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 second quarter of 2000 and
1999 was $494,000 and $480,000, respectively. General and administrative expense
for the six months ended June 30, 2000 was $997,000 compared to $968,000 in the
same period of 1999. In the three- and six-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.
-10-
<PAGE>
In the second quarter of 2000, we recognized a net loss of
approximately $660,000 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 net losses
totaling approximately $8,000,000 through 2001. DDL recorded research and
development expense of approximately $823,000 and no general and administrative
expense.
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. There is no amount outstanding on the loan at June 30, 2000;
however, $990,000 is available under the facility and we expect to utilize it
in the third quarter.
Net interest income was approximately $105,000 for the three months
ended June 30, 2000, compared to approximately $80,000 during the three months
ended June 30, 1999. In the six months ended June 30, 2000 and 1999, net
interest income was $187,000 and $175,000. The increase was due to higher cash
and investment balances as a result of the private placement completed in
January 2000. 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 two years, at Elan's option,
into DepoMed's common stock at a price of $12.00 per share. For the quarter
ended June 30, 2000, we accrued a dividend on the Series A Preferred Stock of
$210,000. To date, we have accrued a total of $371,000 related to the dividend
on the Series A Preferred Stock.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operations in the six months ended June 30, 2000 was
approximately $3,079,000, compared to approximately $1,535,000 for the six
months ended June 30, 1999. During the six months ended June 30, 2000, the cash
used in operations was due primarily to the net loss. Other increases in our
equity in the loss of the joint venture and accounts payable were partially
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 decreases in accounts receivable.
Cash used in investing activities in the six months ended June 30,
2000 totaled approximately $66,000 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
$530,000. Net cash provided by investing activities in the six months ended June
30, 1999 totaled approximately $436,000 and consisted primarily of a net
decrease in marketable securities of approximately $522,000 less 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 of 2000 for leasehold
improvements at our new facility. We anticipate financing some portion of these
improvements.
Cash provided by financing activities in the six months ended June 30,
2000 was approximately $4,832,000 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 six months ended June 30, 1999 was approximately
$20,000, 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.
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As of June 30, 2000, we had approximately $5,600,000 in cash, cash
equivalents and marketable securities, working capital of $4,600,000 and
accumulated losses of $26,100,000. We expect to continue to incur operating
losses over the next several years. We anticipate that our existing capital
resources will permit us to meet our capital and operational requirements
through the next nine months. However, we base this expectation 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:
- curtail operations significantly; or
- obtain funds through entering into collaboration 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.
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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.
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, all 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 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.
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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, the company is not currently conducting research and
development under the PRI feasibility agreement while PRI completes its internal
review of our work to date under the feasibility agreement. There can be no
assurance that PRI will support further development of its program based on our
technology.
Further, the company may not be able to enter into future
collaborative arrangements on acceptable terms. 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.
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.
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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.
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.
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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.
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 three issued United States patents and three
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.
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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.
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
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- 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.
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.
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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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The company held its annual meeting of shareholders on June 7, 2000
(the "Annual Meeting") to consider and vote on the following proposals: (i)
election of directors until the next Annual Meeting (Proposal 1), (ii) amendment
of the company's Amended and Restated 1995 Stock Option Plan (the "Plan") to
increase the number of shares available for issuance from 1,800,000 to 2,400,000
(Proposal 2) and (iii) ratification of Ernst & Young LLP as the company's
independent auditors (Proposal 3).
PROPOSAL 1 Drs. John W. Shell, John W. Fara, Messrs. John N. Shell
and G. Steven Burrill and Dr. W. Leigh Thompson, each of whom was a director
of DepoMed prior to the Annual Meeting, were elected as directors of the
company to serve until the next annual meeting of the shareholders of
DepoMed. Of the 5,884,444 shares voted at the Annual Meeting, 5,859,192
shares were voted for the election of Dr. Shell with 25,252 shares voting
against Dr. Shell; 5,863,293 shares were voted for the election of Dr. Fara
with 21,151 voting against Dr. Fara; 5,866,443 shares were voted for the
election of Messrs. Shell and Burrill with 18,001 voting against Messrs.
Shell and Burrill; and 5,866,444 shares were voted for the election of Dr.
Thompson with 18,000 shares voting against Dr. Thompson.
PROPOSAL 2 The shareholders of DepoMed approved Proposal 2 with a vote
of 2,847,327 shares voted for, 174,942 shares against, 3,941 abstaining.
PROPOSAL 3 The shareholders of DepoMed approved Proposal 3 with a vote
of 5,880,403 for, 2,450 shares against with 1,591 shares abstaining.
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: August 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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