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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 MARCH 31, 1998
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: 000-23265
__________________________
SALIX PHARMACEUTICALS, LTD.
(Exact name of Registrant as specified in its charter)
BRITISH VIRGIN ISLANDS 94-3267443
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3600 WEST BAYSHORE ROAD, SUITE 205
PALO ALTO, CALIFORNIA 94303
(Address of principal executive offices, including zip code)
(650) 856-1550
(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
filing requirements for the past 90 days. YES [X] NO [ ]
The number of shares of the Registrant's Common Stock outstanding as of
April 30, 1998 was 10,192,838.
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SALIX PHARMACEUTICALS, LTD.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
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Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 1998 and December 31, 1997. . . . . . . . . . . . . . . . . 1
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 1998 and 1997. . . . . . . . . . ... . . . . . 2
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1998 and 1997. . . . . . . . . ... . . . . . . 3
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . 6
PART II. OTHER INFORMATION
- ------- -----------------
Item 2. Changes in Securities and Use of Proceeds. ... . . . . . . . . . . . . . . 16
Item 6. Exhibits and Reports on Form 8-K . . . . . . ... . . . . . . . . . . . . . 16
Signatures . . . . . . . . . . . . . . . . . . . . . ... . . . . . . . . . . . . 17
</TABLE>
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SALIX PHARMACEUTICALS, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $ 13,036 $ 15,173
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . 762 460
-------- --------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . 13,798 15,633
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . 244 194
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 51
-------- --------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,093 $ 15,878
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current liabilities. . . . . . . . . . . . $ 2,114 $ 1,749
-------- --------
Total current liabilities . . . . . . . . . . . . . . . . . . . 2,114 1,749
Shareholders' equity:
Preferred stock, issuable in series, no par value;
5,000,000 shares authorized; none outstanding . . . . . . . . . . . -- --
Common stock, no par value; 20,000,000 shares authorized;
10,192,838 shares and 10,120,573 shares issued and outstanding
at March 31, 1998 and December 31, 1997,
respectively. . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,592 27,520
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . (15,613) (13,391)
-------- --------
Shareholders' equity . . . . . . . . . . . . . . . . . . . . . . 11,979 14,129
-------- --------
$14,093 $ 15,878
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
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SALIX PHARMACEUTICALS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------
1998 1997
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Revenue :
Revenue from collaborative agreements and other . . . . . . . . . . . $ -- $ 21
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . . . -- 21
------- -------
Expenses:
Cost of products sold . . . . . . . . . . . . . . . . . . . . . . . . 46 --
Research and development. . . . . . . . . . . . . . . . . . . . . . . 1,580 584
General and administrative. . . . . . . . . . . . . . . . . . . . . . 766 561
------- -------
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 2,392 1,145
------- -------
Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,392) (1,124)
Interest and other income. . . . . . . . . . . . . . . . . . . . . . . . . 170 31
------- -------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(2,222) $(1,093)
------- -------
------- -------
Net loss per share, basic and diluted. . . . . . . . . . . . . . . . . . . $ (0.22) $ (0.16)
------- -------
------- -------
Shares used in computing net loss per share, basic and diluted . . . . . . 10,171 6,885
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
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SALIX PHARMACEUTICALS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(2,222) $(1,093)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . 20 16
Changes in assets and liabilities:
Accounts receivable and other current assets . . . . . . . . . . (301) (39)
Accounts payable and other current liabilities . . . . . . . . . 364 (465)
------- -------
Net cash used in operating activities . . . . . . . . . . . . . (2,139) (1,581)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment . . . . . . . . . . . . . . . . . (70) (18)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock. . . . . . . . . . . . . . . . 72 561
------- -------
Net decrease in cash and cash equivalents. . . . . . . . . . . . . . . . . (2,137) (1,038)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . 15,173 5,624
------- -------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . $13,036 $ 4,586
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
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SALIX PHARMACEUTICALS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Salix Pharmaceuticals, Ltd. (the "Company") was incorporated in the
British Virgin Islands in December 1993 for the purpose of acquiring all of
the outstanding capital stock of Salix Pharmaceuticals, Inc., a California
corporation ("Salix California"), and Glycyx Pharmaceuticals, Ltd., a
Bermuda corporation ("Glycyx"). Salix California was incorporated in
California in 1989 and Glycyx was incorporated in Bermuda in 1992. The
Company is developing new pharmaceuticals, primarily focused in the area of
gastrointestinal disease. The Company conducts its business within one
industry segment.
The condensed consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated. These
statements are stated in United States dollars.
The accompanying unaudited condensed consolidated financial statements
include all adjustments (consisting only of normal recurring items) which,
in the opinion of management, are necessary for a fair presentation of
financial position, results of operations and cash flows. These financial
statements should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations included
elsewhere in this Report and with the audited financial statements for the
fiscal year ended December 31, 1997 included on the Company's Annual Report
on Form 10-K filed with the Securities and Exchange Commission on March 30,
1998. The results of operations for interim periods are not necessarily
indicative of results to be expected for a full year.
These statements have been prepared in accordance with accounting
principles generally accepted in the United States. The application of
these principles conforms in all material respects with financial
statements prepared using accounting principles generally accepted in
Canada. The Company's Common Shares are traded on The Toronto Stock
Exchange.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
2. NET LOSS PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement No. 128, "Earnings Per Share" ("FAS 128"). Basic and
diluted net loss per common share have been computed using the weighted-
average number of common shares outstanding during each period. Common
equivalent shares are excluded from the computation as their effect is
anti-dilutive in all periods.
3. COMMITMENTS
At March 31, 1998, the Company had a binding purchase order commitment
for inventory purchases aggregating $1.3 million to be delivered in 1998.
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SALIX PHARMACEUTICALS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 1998
(UNAUDITED)
4. SHAREHOLDERS' EQUITY
In May 1996, the Company closed the initial public offering of its
common shares in Canada, at which time the shares listed on The Toronto
Stock Exchange. In connection with that offering, the Company issued to
the underwriters common share purchase warrants, exercisable into 200,000
common shares at a price of Cdn. $7.00 (U.S. $5.25). All such purchase
warrants were exercised in 1997, raising additional proceeds to the Company
of approximately Cdn. $1,400,000 (U.S. $1,003,000).
In October 1997, the Company completed a public offering, issuing
3,000,000 common shares at a price of Cdn. $7.00 (U.S. $4.98). The Company
received approximately U.S. $14 million in cash, net of underwriting
discounts, commissions and other offering costs.
In addition, options to purchase an aggregate of 72,265 common shares
were exercised between January 1, 1998 and March 31, 1998. The exercise
price of these shares was U.S. $1.00.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THESE FORWARD LOOKING STATEMENTS ARE SUBJECT TO CERTAIN
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THOSE SET FORTH UNDER
"FACTORS THAT MAY AFFECT FUTURE RESULTS" UNDER "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN, OR
INCORPORATED BY REFERENCE INTO, THIS REPORT. THE FOLLOWING DISCUSSION SHOULD BE
READ IN CONJUNCTION WITH THE COMPANY'S CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT.
UNLESS OTHERWISE INDICATED, ALL REFERENCES TO "DOLLARS" OR "$" REFER TO
UNITED STATES DOLLARS. THE COMPANY'S COMMON SHARES TRADE ON THE TORONTO STOCK
EXCHANGE AND ARE QUOTED IN CANADIAN DOLLARS.
OVERVIEW
The Company's principal focus is to identify and acquire gastrointestinal
products that have near-term commercial potential and to apply its product
development expertise to commercialize these products. The Company selects
products that it believes serve a gastrointestinal disease in need of new
treatments, have the potential for rapid regulatory approval, and are marketable
to a small group of specialized physicians. The Company believes this strategy
will reduce the expense, time and risk normally associated with pharmaceutical
development. The Company believes that its first two products, COLAZIDE
(BALSALAZIDE DISODIUM) and rifaximin, will demonstrate the Company's ability to
execute this strategy.
The Company has generated limited revenues to date from the sales of
products, and it has been unprofitable since inception. The Company expects to
continue to incur substantial and increasing losses and expects its operating
expenses to increase as the Company continues its COLAZIDE commercialization
efforts in the United Kingdom and, subject to regulatory approval, elsewhere in
Europe and continues its product development and clinical programs for other
products. The Company does not expect to achieve substantial profitability on an
annual basis before 2001 at the earliest. As of March 31, 1998, the Company had
accumulated losses of approximately $15.6 million. Since 1992, the Company has
financed its operations principally through reimbursement payments, license fees
and milestone revenues, totaling approximately $15.8 million under collaborative
research and licensing agreements, and sales of equity and convertible debt
securities totaling approximately $27.6 million. Over the same period, the
Company has recorded expenses totaling $22.7 million, of which $13.3 million
were in research and development expenses and $1.2 million in license fees to
licensors. The Company's alliances with Astra AB ("Astra") and a division of
Menarini Pharmaceutical Industries s.r.l. ("Menarini") have allowed Salix to
fund the development of COLAZIDE, to in-license other gastrointestinal products,
and to help establish itself with a relatively small amount of outside capital.
The Company's collaborative research and licensing agreements provide for
payments in support of the Company's research activities, as well as additional
payments for licensing fees and upon the attainment of specified milestones.
Research reimbursements under these agreements are recorded when earned based on
contract costs incurred to date compared with total estimated contract costs.
License fees and milestone revenues are recognized according to contract terms.
Amounts received in advance of the applicable research activities are deferred
as unearned revenue. Amounts received that are refundable until the milestones
are achieved are deferred as advances from licensees until earned.
The Company licensed balsalazide from Biorex Laboratories Limited
("Biorex") in exchange for participation in future milestone revenues and
profits. The Company will sell COLAZIDE, the disodium salt of balsalazide, which
is manufactured by third parties under contract with the Company, to its
distribution partners, Astra and Menarini, at a formula price. The Company
received approval in July 1997 to market COLAZIDE in the United Kingdom for the
treatment of acute ulcerative colitis. Astra launched COLAZIDE commercially in
October 1997 in the United Kingdom. In May 1998, the Company received
notification of additional approvals for COLAZIDE in Austria, Belgium, Denmark,
Italy, Luxembourg, and Sweden. Commercial launches of COLAZIDE are expected in
these European countries by Astra and Menarini beginning in 1998. Astra and
Menarini withdrew marketing
6
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applications from countries that had questions that could not be addressed
within the time constraints of the review period. These countries include
Finland, France, Germany, Greece, Ireland, Netherlands, Portugal, and Spain.
The Company does not anticipate launches of COLAZIDE in the countries where
the marketing application was withdrawn until at least late 1999, if at all.
The Company recognized its initial product revenues from Astra's sales of
Colazide in 1997 and expects to recognize product revenues from sales of
COLAZIDE by Menarini in 1998. The selling price of COLAZIDE to Astra outside
the United Kingdom has not been determined, and the Company will be obligated
to pay to Biorex, the original licensor of the product, a portion of any
gross profit on COLAZIDE sales to Astra and Menarini outside the United
States. In addition, the Company anticipates high initial product launch
costs due to the cost of scaling up manufacturing processes for commercial
distribution.
The Company's second product, rifaximin, is currently under development.
The Company obtained the rights to develop, make, use and sell rifaximin in
Canada and the United States from Alfa Wassermann S.p.A. ("Alfa Wassermann")
in exchange for future royalties and milestone payments. Alfa Wassermann has
also agreed to supply Salix with bulk active ingredient rifaximin at a fixed
price. If regulatory approvals are obtained, the Company intends to establish
its own direct sales force to market rifaximin. This strategy for rifaximin
represents the business model that the Company intends to adopt for future
product development and commercialization. Although the creation of an
independent sales organization will require a substantial investment by the
Company, the Company anticipates that the financial results from rifaximin
and future products will be more favorable to the Company than those
anticipated from the sale of COLAZIDE by Astra and Menarini since the Company
has retained the distribution rights to rifaximin, whereas Astra and Menarini
have the distribution rights for COLAZIDE. In the case of COLAZIDE, the
Company granted exclusive distribution rights in certain territories in
exchange for funding needed to complete late-stage development of COLAZIDE,
to in-license other gastrointestinal products and to help establish the
Company as a viable gastrointestinal pharmaceutical company. The Company is
currently unable to provide a meaningful estimate of the investment required
to create an independent sales organization because such investment is
dependent on a number of contingencies, including receipt of necessary
regulatory approvals and developments with current and future strategic
partners.
The Company intends to pursue regulatory approvals for two initial
indications for rifaximin, hepatic encephalopathy and bacterial infections of
the lower gastrointestinal tract. The Company will conduct and fund clinical
trials in connection with such regulatory approvals. The Company plans to
investigate further development of rifaximin for several other possible
indications. In February 1998, the Company received Orphan Drug Designation from
the United States Food and Drug Administration ("FDA") for rifaximin to treat
hepatic encephalopathy. Orphan Drug Designation can entail certain possible
advantages in the testing and approval process for the drug. See "Factors That
May Affect Future Results". Having obtained Orphan Drug Designation for
rifaximin, costs incurred through submission of an New Drug Application ("NDA")
with the FDA for the hepatic encephalopathy indication may be significantly
reduced.
RESULTS OF OPERATIONS
THREE MONTH PERIODS ENDED MARCH 31, 1998 AND 1997
There were no sales or milestone revenues in the three months ended March
31, 1998. Due to a short-term manufacturing delay, COLAZIDE product shipments
for the first quarter of 1998 were delayed and recommenced in April 1998.
During the three months ended March 31, 1997, the Company recognized $21,000 in
revenue from collaborative agreements.
Operating expenses were $2.4 million and $1.1 million for the three months
ended March 31, 1998 and 1997, respectively. The increase in operating expenses
is a result of increases in all expense categories as noted below.
The Company recognized its first cost of products sold related to initial
product sales of COLAZIDE in the second half of the year ended December 31,
1997. Although no product was shipped during the three months ended March 31,
1998, the Company incurred ongoing manufacturing related overhead costs of
$46,000. Prior to 1997, the Company had no product revenues. Initial costs of
products are expected to remain high due to the cost of scaling up manufacturing
processes for commercial distribution.
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No license fee expenses were due or payable during the three month periods
ended March 31, 1998 or 1997.
Research and development expense was $1.6 million, and $0.6 million for the
three months ended March 31, 1998 and 1997, respectively. The increase in
research and development expenses in 1998 is due primarily to increased spending
for an ongoing COLAZIDE clinical trial initiated in late 1997 and continued
spending in regulatory affairs activities related to the COLAZIDE NDA review
process in the United States. Management expects research and development
spending to continue to increase due to additional planned clinical trial
activities.
General and administrative expenses were $0.8 million and $0.6 million for
the three months ended March 31, 1998 and 1997, respectively. The increases are
due mainly to additions of key personnel and the increased administrative costs
related to becoming a public reporting company in the United States in October
1997.
Interest income increased to $170,000 in the three months ended March 31,
1998 from $31,000 in the three months ended March 31, 1997 due to larger average
cash reserves in the 1998 period after completion of the public offering in
October 1997. See "Liquidity and Capital Resources".
The Company has experienced net losses of $2.2 million and $1.1 million for
the three months ended March 31, 1998 and 1997, respectively.
At December 31, 1997, the Company had federal net operating loss
carryforwards of approximately $8.8 million for United States income tax
purposes. These carryforwards will expire in varying amounts through 2012. As
the Company adds new investors, utilization of the current loss carryforwards
may be substantially limited if, under United States Internal Revenue Code
Section 382, a change in ownership is deemed to have occurred within the three
most recent fiscal years.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. The Company's internal
operating systems rely exclusively on software products of third party vendors,
who have provided assurance to the Company that such products are year 2000
compliant. As a result, the Company does not believe that issues relating to
year 2000 compliance will result in a material adverse effect on its financial
condition or results of operations. If the information provided by such software
vendors were to prove incorrect, however, there can be no assurance that the
costs and disruption associated with implementing new or corrected software
would not have an adverse effect on the Company's business, financial condition
or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Since 1992, the Company has financed its operations principally through
reimbursement payments, license fees and milestone revenues, totaling
approximately $15.8 million under collaborative research and licensing
agreements, and sales of equity and convertible debt securities totaling
approximately $27.6 million.
As of March 31, 1998, the Company had approximately $13.0 million in cash
and cash equivalents. The decrease of $2.1 million from December 31, 1997 was
due to cash used in operating activities.
In October 1997, the Company offered and sold 3,000,000 Common Shares in an
underwritten public offering of securities in Canada and the United States at a
price of Cdn. $7.00 (U.S. $4.98), raising Cdn. $19,635,000 (U.S. $13,973,000)
net of underwriting discounts and commissions. The offering in the United States
was made pursuant to a Registration Statement on Form S-1 (File No. 333-33781)
that was declared effective by the Securities and Exchange Commission on October
16, 1997.
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As of March 31, 1998, the Company had no long term obligations. The
Company has non-cancelable purchase order commitments for inventory purchases
of $1.3 million. The Company anticipates capital expenditures in 1998 of
approximately $0.3 million.
The Company's purchases of raw materials and its product sales to its
European distribution partners are denominated in Pounds Sterling. Translation
into the Company's reporting currency, the United States dollar, has not
historically had a material impact on the Company's financial position.
Additionally, the Company's net assets denominated in currencies other than the
functional currency have not exposed the Company to material risk associated
with fluctuations in currency rates. Given these facts, the Company has not
considered it necessary to use foreign currency contracts or other derivative
instruments to manage changes in currency rates.
The Company has sustained continuing operating losses and expects to incur
substantial and increasing losses until product approvals are obtained and
product revenues reach a sufficient level to support ongoing operations. The
Company believes that the net proceeds from the recently completed offering of
Common Shares, together with the Company's cash reserves at March 31, 1998 and
the cash flow from operations, should be sufficient to satisfy the cash
requirements of the Company's product development programs through at least
1998. The Company's actual cash requirements may vary materially from those now
planned because of a number of factors, including the results of research and
development activities, FDA and foreign regulatory processes, establishment of
and change in relationships with strategic partners, technological advances by
the Company and other pharmaceutical companies, the terms of the Company's
collaboration arrangements with strategic partners, and the status of
competitive products. The Company anticipates that it will need to raise
additional funds in the form of debt or equity financing to fund future
licensing, development, and commercialization of rifaximin and new products. The
Company may also enter into collaborative arrangements with corporate partners
that could provide the Company with additional funding in the form of equity,
debt, licensing, milestone and/or royalty payments. There can be no assurance
that the Company will be able to enter into such arrangements or raise any
additional funds on terms favorable to the Company.
FACTORS THAT MAY AFFECT FUTURE RESULTS
THIS REPORT, INCLUDING THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTAINS FORWARD-LOOKING
STATEMENTS AND OTHER PROSPECTIVE INFORMATION RELATING TO FUTURE EVENTS. THESE
FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION ARE SUBJECT TO CERTAIN RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS ON ANTICIPATED RESULTS, INCLUDING THE FOLLOWING:
DEPENDENCE ON CURRENTLY LICENSED PRODUCTS; UNCERTAINTY OF REGULATORY
APPROVAL OF COMPANY'S PRODUCTS. The Company's future success will depend, among
other factors, on its ability to in-license, develop, and commercialize new
pharmaceutical products. The Company currently licenses two pharmaceutical
products, balsalazide and rifaximin, and the Company's prospects over the next
three to five years are substantially dependent on regulatory approval and
successful commercialization of these products. The Company has in-licensed
certain rights to balsalazide and rifaximin in certain markets from Biorex and
Alfa Wassermann, respectively. In addition, the Company has entered into
agreements relating to the development, commercialization, manufacture, and
marketing of COLAZIDE, the disodium salt of balsalazide, with Astra and
Menarini.
Development, manufacture, and marketing of both balsalazide and rifaximin
are subject to extensive regulation by governmental authorities in the United
States and other countries. Neither drug has been approved by the FDA for use in
the United States. In June 1997, the Company submitted an NDA to the FDA
relating to COLAZIDE as a therapy for acute ulcerative colitis. The NDA was
accepted for filing by the FDA in August 1997 and is subject to a detailed
substantive review. The Company believes that the FDA approval to market
COLAZIDE will not be obtained before late 1998, if at all. The NDA can be
approved only if the FDA determines that the NDA contains substantial evidence
from clinical trials that the drug is safe and effective for its intended use.
There can be no assurance that the results of the Company's preclinical or
clinical studies, including its United States Phase III clinical testing in
combination with the results from a European Phase III safety and efficacy
study, will demonstrate, to the FDA's satisfaction, substantial evidence that
the drug is safe and effective. If clinical data, in addition to that filed in
the NDA, is requested from the Company to support approval of COLAZIDE, such a
request is likely to delay significantly any pending review and approval of the
product, if approval is granted at all. If regulatory approval of COLAZIDE or
any other product is granted, such approval will be limited to those disease
states
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and conditions for which the product has been shown to be safe and effective,
as demonstrated to the FDA's satisfaction through well controlled clinical
studies. Furthermore, approval may entail ongoing requirements for
post-marketing studies. Even if such regulatory approval is obtained, a
marketed product, promotional activities for the product, its manufacturer
and its manufacturing facilities are subject to continual review and periodic
inspections. In addition, identification of certain side effects after a drug
is on the market or the occurrence of manufacturing problems could cause
subsequent withdrawal of approval, reformulation of the drug, additional
preclinical testing or clinical trials and changes in labeling of the product.
In July 1997, the Medicines Control Agency in the United Kingdom approved
COLAZIDE as a treatment for acute ulcerative colitis in the United Kingdom. The
Company and its partners, Astra and Menarini, received in May 1998 notification
of approval of COLAZIDE as at treatment for acute ulcerative colitis in Austria,
Belgium, Denmark, Italy, Luxembourg, and Sweden. Astra and Menarini withdrew
marketing applications from countries that had questions that could not be
addressed within the time constraints of the review period. These countries
include Finland, France, Germany, Greece, Ireland, Netherlands, Portugal, and
Spain. The Company does not anticipate launches of COLAZIDE in the countries
where the marketing application was withdrawn until at least late 1999, if at
all. There can be no assurance that COLAZIDE will receive approval from the FDA
or from regulatory agencies in any member country of the European Union where
the marketing application was withdrawn. Even if such approvals are ultimately
received, there can be no assurance as to the timing of such approvals or market
acceptance of COLAZIDE for the approved indications.
With respect to rifaximin, Alfa Wassermann has recently completed patient
enrollment in a clinical trial in Spain relating to the drug as a therapy for
hepatic encephalopathy. The Company has determined through discussions with the
FDA that this Spanish study will not be sufficient support for the filing of an
NDA with the FDA. Therefore, the Company will continue its plans to initiate a
Company-sponsored trial for hepatic encephalopathy in the United States later
this year. There can be no assurance that this new clinical trial for rifaximin
will demonstrate that the drug is safe and effective for the indication tested,
that such clinical trial will support the filing of an NDA for rifaximin as a
therapy for hepatic encephalopathy, that in the event an NDA is filed with the
FDA, the Company will be successful in obtaining regulatory approval in the
United States, or that the Company will obtain regulatory approval for rifaximin
from authorities in any other jurisdiction.
The Company expects that a significant portion of its potential revenues
for the next few years will depend on regulatory approval and sales of these
products. Failure to obtain regulatory approvals, delays in obtaining regulatory
approvals, obtaining regulatory approvals for COLAZIDE or rifaximin in only
limited markets or for limited uses, or lack of market acceptance for either
product, to the extent regulatory approvals are obtained, would have a material
adverse effect on the Company's business, financial condition, and results of
operations.
LIMITED OPERATING HISTORY; HISTORY OF OPERATING LOSSES; EXPECTATION OF
FUTURE LOSSES. The Company has only a limited history of operations consisting
primarily of development of its products and sponsorship with third parties of
research and clinical trials. The Company has had no earnings to date and has
not realized any material operating revenues from product sales, either directly
by the Company or indirectly through its development and distribution partners.
Substantially all of the Company's revenues to date have been derived from
milestone payments from the Company's collaborative partners related to the
development of COLAZIDE. As of March 31, 1998, the Company had incurred
cumulative losses since inception of approximately $15.6 million. Furthermore,
the Company currently expects operating losses to continue at least through 2000
and to increase from current levels prior to 2000 as the Company continues to
develop COLAZIDE and rifaximin. The Company's future operating performance will
depend on the timing of regulatory approvals of COLAZIDE and rifaximin,
particularly the timing of FDA approval, and, if such approvals can be obtained,
will also depend on market acceptance.
DEPENDENCE ON COLLABORATIVE PARTNERS. The initial commercialization of
COLAZIDE in the United Kingdom and, to the extent regulatory approval is
obtained, in other countries in which the Company has commercial rights to
COLAZIDE is entirely dependent on Astra and Menarini, in their respective
territories. Under its agreements with Astra, the Company has granted Astra
exclusive rights to distribute and sell COLAZIDE on a worldwide basis with the
exception of Italy, Spain, Portugal, and Greece, where the Company has granted
exclusive distribution rights to Menarini, and with the exception of Japan,
Taiwan, and Korea, where the Company does not have rights to COLAZIDE. Although
Astra has agreed to use its best endeavors to promote, market, and sell COLAZIDE
in its exclusive markets, there are no specified financial thresholds that must
be achieved for Astra to maintain its exclusivity. The
10
<PAGE>
Company's agreements with Astra provide for, with respect to Europe, a term
of 15 years and, with respect to the United States, a term ending on the
later to occur of the expiration date of the last expiring patent and the
date nine years from the first commercial launch date of COLAZIDE but, in
either event, the agreements may be terminated earlier by either party upon
the occurrence of specified events, including a material breach.
The Company's agreements with Astra require Astra to accomplish the
commercial launch of COLAZIDE in any jurisdiction within 90 days of receipt of
regulatory approval in that jurisdiction, subject to a 90 day cure period during
which period Astra has the opportunity to accomplish the commercial launch
without triggering Salix's rights to terminate the agreement or amend it to make
Astra's right non-exclusive. The Company received marketing approval for
COLAZIDE in the United Kingdom from the Medicine Controls Agency in July 1997
and Astra launched COLAZIDE commercially in the United Kingdom in October 1997,
based on a selling price set by Astra. Following regulatory approval of COLAZIDE
in each country in Europe where Astra has exclusive distribution rights, the
Company and Astra must agree on the COLAZIDE sales price for such country, which
may be less than the selling price in the United Kingdom. The agreed sales price
for COLAZIDE will directly affect the Company's revenues because the parties'
agreement obligates Astra to purchase COLAZIDE from the Company, and the Company
to supply COLAZIDE to Astra, at a transfer price equal to a percentage of
Astra's selling price. The Company does not anticipate significant margins from
COLAZIDE sales to Astra in the United Kingdom or in other European Union
countries, where pricing has not yet been determined. In addition, while the
Company and its partners, Astra and Menarini, received in May 1998 notification
for approval of COLAZIDE as a treatment for acute ulcerative colitis in Austria,
Belgium, Denmark, Italy, Luxembourg and Sweden, Astra and Menarini withdrew
marketing applications from countries that had questions that could not be
addressed within the time constraints of the review period. Although the
Company has been advised by both Astra and Menarini that they intend to seek
approval in those European countries, including Finland, France, Germany,
Greece, Ireland, Netherlands, Portugal and Spain, the decision as to which
additional approvals to seek, the order in which to seek them and the
responsibility to complete the approval process lies with Astra and Menarini.
There can be no assurance that the Company will be able to negotiate
acceptable collaborative arrangements in the future, or that its current or
future collaborative arrangements, including the agreements with Astra or
Menarini, will be successful or will not be terminated by the other party.
Although the Company believes that parties to any collaborative arrangements
would have an economic motivation to succeed in performing their contractual
responsibilities, the amount and timing of resources to be devoted to these
activities in most instances will not be within the control of the Company.
Failure of the Company and its collaborative partners to develop, commercialize,
manufacture or market products, including COLAZIDE, would have a material
adverse effect on the Company's business, financial condition, and results of
operations.
DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING. The Company currently does
not manufacture its potential pharmaceutical products, including COLAZIDE and
rifaximin, and, therefore, is dependent on contract manufacturers for the
production of such products for development and commercial purposes. In the
event that the Company is unsuccessful in obtaining or retaining third-party
manufacturing or if the Company's manufacturers experience production
difficulties, delays or disruptions or fail to comply with regulatory
requirements, the Company may not be able to obtain adequate supplies of
products in a timely fashion or at acceptable quality, quantity, timing or
prices, or to commercialize its potential products as planned. The Company's
initial product, COLAZIDE, has never been manufactured in commercial quantities.
No assurances can be given that the Company, or its manufacturing partners, will
be able to manufacture COLAZIDE (or other future developed products) in
commercial quantities that would enable the Company to meet its business
objectives. Under the terms of the Company's distribution agreements with Astra
and Menarini, the obligations of such companies to purchase product will
terminate under certain circumstances in which the Company is unable or
unwilling to adequately supply them with product. In such circumstances, Astra
or Menarini, as the case may be, is granted a temporary license to manufacture
COLAZIDE. Under certain situations, such manufacturing licenses may become
permanent, in which case the Company's revenues from the arrangements could be,
depending on the circumstances, severely reduced or eliminated. Moreover,
contract manufacturers that the Company may use must adhere to current Good
Manufacturing Practices, which are regulations strictly enforced by the FDA
through its facilities inspection program. If these facilities cannot pass a
pre-approval plant inspection, the likelihood of the FDA's pre-market approval
of COLAZIDE will be adversely affected. Certain material manufacturing changes
that may occur after approval are also subject to FDA review and approval.
There can be no assurance that the FDA or other regulatory agencies will approve
the processes or the facilities by which any of the Company's products may be
manufactured.
11
<PAGE>
In addition, if the facilities cannot pass regular post-approval inspections,
manufacturing and distribution may be disrupted, recalls of distributed
products may be necessary, and other sanctions could be applied. Any
disruption in the supply in manufacturing and marketing of the Company's
proposed products would have a material adverse effect on the Company's
business, financial condition, and results of operations.
DEPENDENCE ON IN-LICENSING AND ACQUISITION OF NEW PRODUCTS FOR FUTURE
GROWTH. Whether or not COLAZIDE or rifaximin receives regulatory approvals
and is successfully marketed, the Company's ability to grow in the future
will depend on its success in in-licensing or acquiring additional
pharmaceutical products. The Company seeks to in-license or acquire
pharmaceutical products that have been developed beyond the initial discovery
phase and for which late-stage human clinical data is already available.
There can be no assurance that such pharmaceutical products will be available
on attractive terms for in-licensing or acquisition by the Company.
UNCERTAINTY OF MARKET ACCEPTANCE. The Company's future success will depend
in part on its ability to develop and commercialize new products, including
COLAZIDE and rifaximin, or new formulations of or indications for current
products. Assuming the Company can successfully develop such products and obtain
regulatory approvals, their future success will depend upon their acceptance by
the medical community and third-party payors as useful and cost-effective.
Market acceptance will depend upon several factors, including the establishment
of the safety, effectiveness, patient tolerance, and cost of the Company's
products relative to those of competitors. The Company and its collaborative
partners may be required to engage in extensive advertising, educational
programs or other means to market its products. Failure of any of the Company's
products to achieve market acceptance would have a material adverse effect on
the Company's business, financial condition, and results of operations.
LACK OF SALES AND MARKETING EXPERIENCE. The Company has no experience
marketing and selling its products either directly or through distributors. The
Company's sales and marketing strategy for COLAZIDE relies on its third-party
distributors, Astra and Menarini, to whom the Company has granted exclusive
marketing rights. There can be no assurance that either Astra or Menarini will
market COLAZIDE successfully in any country in which they have exclusive rights.
The Company intends to establish its own direct sales force for the purpose of
achieving direct sales of rifaximin and other future products. There can be no
assurance that the Company's marketing and direct sales efforts will be
successful.
DEPENDENCE ON EXCLUSIVE LICENSES. The Company's rights to balsalazide and
rifaximin are derived from its license agreements with Biorex and Alfa
Wassermann, respectively. The Company's rights under these licenses are subject
to early termination by Biorex or Alfa Wassermann, as the case may be, under
certain circumstances, including material breach by the Company, the bankruptcy
or insolvency of the Company, or the Company's failure to satisfy its
manufacturing obligations under its agreements with distribution partners. In
the event that Biorex or Alfa Wassermann terminate their respective license
agreements, the Company would have no further rights to utilize their respective
patents or trade secrets to manufacture and market products based on balsalazide
or rifaximin, as the case may be. The Company's licenses for balsalazide and
rifaximin provide that the Company's royalty obligations may extend beyond the
expiration date of the underlying patents, which could have a material adverse
effect on the Company's business, financial condition, and results of operations
in the event a generic version of balsalazide or rifaximin, as the case may be,
were introduced. In addition, the Company's license agreement with Alfa
Wassermann also provides that the Company may not promote, distribute or sell
any antibiotic products that compete with rifaximin in its licensed territory
(the United States and Canada) for a period of five years after the first
commercial sale of rifaximin under the agreement, thereby limiting the Company's
ability to in-license, develop, or market such products.
PATENTS AND PROPRIETARY RIGHTS; EXPIRATION OF PATENTS. Because of the
substantial length of time and expense associated with bringing new products
through development and regulatory approval to the marketplace, the
pharmaceutical industry places considerable importance on obtaining patent and
trade secret protection for new technologies, products and processes. Because
the Company's strategy is to in-license or acquire pharmaceutical products which
typically have been discovered and initially researched by others, such products
may have limited or no remaining patent protection due to the time elapsed since
their discovery. The patents for the COLAZIDE composition of matter and method
of treating ulcerative colitis with COLAZIDE expire in July 2001 in the United
States, February 2002 in the United Kingdom, May 2002 in France, July 2001 in
Italy, and April 2002 in Germany. The patents for the method of treating colon
cancer using balsalazide expire in January 2014 in the United States and,
assuming patents issue from pending applications, in January 2015 in various
countries in Europe, Asia, and
12
<PAGE>
North America. The patents for the rifaximin composition of matter (also
covering a process of making rifaximin and using rifaximin to treat
gastrointestinal infectious diseases) expire in May 2001 in the United States
and Canada. The patents for another process of making rifaximin expire in
April 2005 in both the United States and Canada. Patents for the use of
rifaximin for H. PYLORI infections expire in June 2013 in the United States
and February 2014 in Canada. Although the Company believes it may be granted
extensions of up to five years in certain circumstances, based on patent term
restoration procedures established in Europe and in the United States under
the Waxman-Hatch Act for products that have received regulatory approval,
there is no assurance that such extensions will be granted. The Company has
filed applications for use patents for additional indications using
balsalazide and related chemical substances. There can be no assurance that
any patents will be issued. There can be no assurance that competitors will
not develop products based on the same active ingredients for marketing as
soon as the applicable patents expire or at any time thereafter or that
competitors will not design around existing patents. Sales of such generic
versions could have an adverse effect on the Company's business, financial
condition, and results of operations. The Company's success will depend in
part on its ability to obtain United States and foreign patent protection for
its products and processes, preserve its trade secrets, and operate without
infringing on the proprietary rights of third parties. There can be no
assurance that patents will issue with respect to, or that the claims allowed
will provide sufficient protection to, the Company's present or future
technology.
There can be no assurance that any other patents will be issued on any of
the Company's patent applications or on patent applications licensed from third
parties. Moreover, there can be no assurance that claims allowed in the patents
or patent applications are or will be sufficiently broad to protect the
Company's technology or that the patents will provide protection against
competitive products or otherwise be commercially valuable.
Furthermore, as with any pharmaceutical company, the Company's patent and
other proprietary rights are subject to uncertainty. The Company's patent or
other proprietary rights related to its products might conflict with current or
future rights of others. For instance, there is no assurance that the use of the
Company's technology will not infringe the patent rights of others. For the same
reasons, the products of others could infringe the patent or other proprietary
rights of the Company. Litigation or patent interference proceedings, either of
which could result in substantial cost to the Company, may be necessary to
enforce any patents issued to and other proprietary rights of the Company or to
determine the scope and validity of other parties' proprietary rights. The
defense and prosecution of patent and intellectual property claims are both
costly and time-consuming, even if the outcome is favorable to the Company. Any
adverse outcome could subject the Company to significant liabilities to third
parties, require disputed rights to be licensed from third parties, or require
the Company to cease selling its products.
In addition to patent protection, the Company also relies on trade secrets,
proprietary know-how and technological advances which it seeks to protect, in
part, through confidentiality agreements with its collaborative partners,
employees and consultants. There can be no assurance that these agreements will
not be breached, that the Company will have adequate remedies for any breach, or
that the Company's trade secrets and proprietary know-how will not otherwise
become known or be independently developed by others.
There can be no assurance that the Company will be able to obtain a license
to any third-party technology that it may require to conduct its business or
that, if obtainable, such technology can be licensed at a reasonable cost.
Failure by the Company to obtain a license to any technology that it may require
to commercialize its technologies or products will have a material adverse
effect on the Company. In addition, there can be no assurance that others will
not independently develop substantially equivalent proprietary information or
obtain access to the Company's know-how, or that others will not be issued
patents which prevent the manufacture or sale of Company products or require
licensing and the payment of significant fees or royalties by the Company in
order for it to be able to carry on its business. Litigation, which could result
in substantial cost to the Company, may be necessary to enforce or defend the
Company's patents or proprietary rights.
INTENSE COMPETITION. Competition in the pharmaceutical industry is intense
and characterized by extensive research efforts and rapid technological
progress. The Company believes that there are numerous pharmaceutical and
biotechnology companies, both public and private and including large well-known
pharmaceutical companies, as well as academic research groups throughout the
world engaged in research and development efforts with respect to pharmaceutical
products targeted at gastrointestinal diseases and conditions addressed by the
Company's current and potential products. In particular, the Company is aware of
products in research or development by competitors that address the diseases
being targeted by the Company's products. There can be no assurance that
developments by
13
<PAGE>
others will not render the Company's current and potential products obsolete
or non-competitive. Competitors may be able to complete the development and
regulatory approval process sooner and, therefore, market their products
earlier than the Company. Many of the Company's competitors have
substantially greater financial, marketing and personnel resources and
development capabilities than the Company. For example, many large, well
capitalized companies already offer products in the United States and Europe
that target the proposed indications for COLAZIDE, including mesalamine
(SmithKline Beecham plc, Dr. Falk Pharma GmbH, Pharmacia & Upjohn, Inc.,
Solvay S.A., The Procter & Gamble Company, and Hoechst Marion Roussel, Inc.),
sulfasalazine (Pharmacia & Upjohn, Inc.), and olsalazine (Pharmacia & Upjohn,
Inc.). Technological developments by competitors, earlier regulatory approval
for marketing competitive products, or superior marketing capabilities
possessed by competitors could adversely affect the commercial potential of
the Company's products, including COLAZIDE, and could have a material adverse
effect on the Company's business, financial condition, and results of
operations. In addition, manufacturers of generic drugs may seek to compete
directly with the Company's products in the absence of effective patent
protection or non-patent exclusivity protection.
CURRENCY FLUCTUATIONS. A significant portion of the company's business is
conducted in currencies other than the United States dollar. Foreign currency
transaction gains and losses arising from normal business operations are
credited to or charged against earnings in the period incurred. As a result,
fluctuations in the value of the currencies in which the Company conducts its
business relative to the United States dollar have caused and will continue to
cause currency transaction gains and losses. Although translation into the
Company's reporting currency has not historically had a material impact on the
Company's financial position, due to the substantial volatility of currency
exchange rates, among other factors, the Company cannot predict the effect of
exchange rate fluctuations upon future operating results. There can be no
assurance that the Company will not experience currency losses in the future.
The Company has not previously undertaken hedging transactions to cover its
currency exposure but may hedge a portion of its currency exposure in the future
as management deems appropriate.
MANAGEMENT OF GROWTH. The Company expects to experience significant growth
in the number of its employees and the scope of its operations. This growth is
expected to place a significant strain on the Company's management and
operations. The Company's ability to manage such growth effectively will depend
upon its ability to broaden its management team and its ability to attract,
hire, and retain skilled employees. The Company's success will also depend on
the ability of its officers and key employees to continue to implement and
improve its operational, management information and financial control systems
and to expand, train and manage its employee base. The Company's inability to
manage growth effectively could have a material adverse effect on the Company's
business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL; ABILITY TO RECRUIT PERSONNEL. The Company is
dependent upon a number of key management and technical personnel, none of whom
is bound by an employment agreement with the Company, including Randy Hamilton,
chairman, Chief Executive Officer and President, Lorin Johnson, Vice President,
Research (Salix Pharmaceuticals, Inc.), and James Shook, Senior Vice President,
Development (Salix Pharmaceuticals, Inc.). The loss of the services of one or
more key employees could have a material adverse effect on the Company. The
Company's success will also depend on its ability to attract and retain
additional highly qualified management and technical personnel. The Company
faces intense competition for qualified personnel, many of whom are often
subject to competing employment offers. In the event the Company obtains
regulatory approvals for rifaximin, it intends to sell rifaximin through a small
direct sales force. New employees, particularly new sales and marketing
employees, will require substantial training and education concerning the
Company's products. There can be no assurance that the Company will be
successful in attracting and retaining qualified personnel as necessary, and the
failure to do so could have a material adverse effect on the Company's business,
operating results, and financial condition.
PRICE VOLATILITY; LIMITED TRADING VOLUME; FOREIGN EXCHANGE RISK. The
securities markets have from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies. In addition, the market prices of the common stock of many
publicly traded pharmaceutical and biotechnology companies have in the past and
can in the future be expected to be especially volatile. Announcements of
technological innovations or new products by the Company or its competitors,
developments or disputes concerning proprietary rights, publicity regarding
actual or potential medical results relating to products under development by
the Company or its competitors, regulatory developments in both the United
States and other countries, public concern as to the safety of pharmaceutical
products and economic and other external factors, as
14
<PAGE>
well as period-to-period fluctuations in the Company's financial results, may
have a significant impact on the market price of the Company's Common Shares.
The Company's Common Shares have been traded on The Toronto Stock Exchange
since May 1996 and no public trading market exists for the Common Shares in
the United States. In addition, trading volume in the Common Shares on The
Toronto Stock Exchange has been low, and there can be no assurances that an
active trading market will develop or be sustained on The Toronto Stock
Exchange, or any other exchange or dealer quotation system.
The Common Shares trade on The Toronto Stock Exchange in Canadian
dollars. In addition to the general market risks associated with ownership of
equity securities and the more specific risks of ownership of the Common
Shares of the Company, U.S. holders of the Common Shares also bear exchange
rate risks resulting from fluctuations in the relative values of the Canadian
dollar and the U.S. dollar. The value of the Canadian dollar has fluctuated
substantially in the past relative to the United States dollar and other
currencies and may continue to do so in the future. As a result, for U.S.
investors and other non-Canadian investors, the value of the Common Shares in
United States dollars or other currencies may vary independently of changes
in the trading price of the Common Shares on The Toronto Stock Exchange and
for reasons unrelated to the Company or its business, results of operations,
or financial condition.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In October 1997, the Company completed the sale of 3,000,000 Common Shares
at a per share price of Cdn. $7.00 (U.S. $4.98) in a firm commitment
underwritten public offering. The offering was effected in Canada pursuant to
final receipts issued by each of the provincial securities commissions and in
the United States pursuant to a Registration Statement on Form S-1 (Registration
No. 333-33781), which the United States Securities and Exchange Commission
declared effective on October 14, 1997. The offering was underwritten by
Levesque Beaubien Geoffrion Inc., Yorkton Securities Inc., Marleau, Lemire
Securities Inc., and Midland Walwyn Capital Inc. In the United States, the
offering was made by the United States broker-dealer affiliates of the
underwriters, NBC Levesque International Ltd., Yorkton Capital Inc., Marleau
Lemire (USA), Inc., and Midland Walwyn Capital Corporation, respectively. On
October 16, 1997, the date of the effectiveness of the Registration Statement
covering the public offering, the Bank of Canada noon rate of exchange for
United States dollars into Canadian dollars was Cdn. $1.3866 per U.S. $1.00.
Of the Cdn. $21,000,000 in aggregate proceeds raised in connection with the
October 1997 offering, (i) approximately Cdn. $1,365,000 was paid to the
underwriters in connection with underwriting discounts, and (ii) approximately
Cdn. $1,403,000 was paid by the Company in connection with offering expenses,
including legal, printing, and filing fees. There were no direct or indirect
payments to directors or officers of the Company or any other person or entity.
None of the offering proceeds have been used for the construction of plant,
building or facilities or the purchase or installation of machinery or equipment
or for purchases of real estate or the acquisition of other businesses. The
Company is currently investing the net offering proceeds for future use as
additional working capital. Such remaining net proceeds have been invested in
short-term, interest-bearing, investment grade securities. A portion of the net
proceeds may be used for the acquisition of technologies, businesses or products
that are complementary to those of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K with the United States Securities and
Exchange Commission on March 24, 1998 relating to Registrant's name
change from Salix Holdings, Ltd. to Salix Pharmaceuticals, Ltd.
16
<PAGE>
SIGNATURES
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.
SALIX PHARMACEUTICALS, LTD.
Date: May 11, 1998 By: /s/ Randy Hamilton
-------------------------------
Randy Hamilton, President and
Chief Executive Officer
Date: May 11, 1998 By: /s/ David Boyle
--------------------------------
David Boyle, Vice President,
Finance & Administration, and
Chief Financial Officer
17
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