<PAGE> 1
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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 SEPTEMBER 30, 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
November 12, 1998 was 10,192,838.
================================================================================
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SALIX PHARMACEUTICALS, LTD.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
- ------- --------------------- --------
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997 ............................................. 1
Condensed Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 1998 and 1997 ....................... 2
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 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>
<PAGE> 3
SALIX PHARMACEUTICALS, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 8,146 $ 15,173
Other current assets ......................................... 1,420 460
-------- --------
Total current assets .................................... 9,566 15,633
Property and equipment, net ........................................... 246
194
Other assets .......................................................... 51 51
-------- --------
$ 9,863 $ 15,878
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current liabilities ............... $ 2,138 $ 1,749
-------- --------
Total current liabilities ............................... 2,138 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 September 30, 1998 and December 31, 1997,
respectively .......................................... 27,609 27,520
Accumulated deficit .......................................... (19,884) (13,391)
-------- --------
Shareholders' equity .................................... 7,725 14,129
-------- --------
$ 9,863 $ 15,878
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE> 4
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 Nine months ended
September 30, September 30,
-------- -------- -------- --------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product revenue ..................................... $ 138 $ 216 $ 284 $ 216
Revenue from collaborative agreements and other ..... -- 1,800 501 1,821
-------- -------- -------- --------
Total revenues ................................. 138 2,016 785 2,037
-------- -------- -------- --------
Expenses:
Cost of products sold ............................... 207 389 495 389
License fees ........................................ -- 411 325 461
Research and development ............................ 1,474 1,183 4,841 2,498
General and administrative .......................... 607 708 2,095 1,939
-------- -------- -------- --------
Total expenses ................................. 2,288 2,691 7,756 5,287
-------- -------- -------- --------
Loss from operations ......................................... (2,150) (675) (6,971) (3,250)
-------- -------- -------- --------
Interest and other income, net ............................... 138 33 478 133
-------- -------- -------- --------
Net loss ....................................... $ (2,012) $ (642) $ (6,493) $ (3,117)
======== ======== ======== ========
Net loss per share, basic and diluted ........................ $ (0.20) $ (0.09) $ (0.64) $ (0.44)
======== ======== ======== ========
Shares used in computing net loss per share, basic and diluted 10,193 7,118 10,186 7,023
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
SALIX PHARMACEUTICALS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ...................................................... $ (6,493) $ (2,475)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ............................ 66 32
Changes in assets and liabilities:
Other current assets ..................................... (960) (352)
Accounts payable and other current liabilities ........... 389 (196)
-------- --------
Net cash used in operating activities ................ (6,998) (2,991)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment ........................... 118 (39)
-------- --------
Net cash used for property and equipment ................. 118 39
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock ........................ 89 1,063
-------- --------
Net cash provided by financing activities ................ 89 1,063
Net decrease in cash and cash equivalents .............................. (7,027) (1,967)
Cash and cash equivalents at beginning of period ....................... 15,173 5,624
-------- --------
Cash and cash equivalents at end of period ............................. $ 8,146 $ 3,657
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
SALIX PHARMACEUTICALS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997 filed with the
Securities and Exchange Commission. 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 losses per common share have been computed using the
weighted-average number of common shares outstanding during each period.
Common equivalent shares have been excluded from the computation, as their
effect is anti-dilutive in all periods.
3. Commitments
At September 30, 1998, the Company had a binding purchase order
commitment for inventory purchases aggregating approximately $770,000 to be
delivered in 1998.
4
<PAGE> 7
SALIX PHARMACEUTICALS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SEPTEMBER 30, 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 September 30, 1998. The exercise
price of these shares was U.S. $1.00 per share.
5
<PAGE> 8
SALIX PHARMACEUTICALS, LTD.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical results or anticipated results, including those set forth under
"Factors that May Affect Future Results" under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in, or
incorporated by reference into, this report. The following discussion should be
read in conjunction with the Company's Condensed Consolidated Financial
Statements and notes thereto included elsewhere in this report.
Unless otherwise indicated, all references to "dollars" or "$" 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,
balsalazide disodium, presently marketed in the United Kingdom under the brand
name Colazide, 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 balsalazide disodium
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 2002 at the earliest. As of September
30, 1998, the Company had accumulated losses of approximately $19.9 million.
Since 1992, the Company has financed its operations principally through
reimbursement payments, license fees and milestone revenues, totaling
approximately $16.3 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 $27.3 million, of which $16.6 million were in research and
development expenses and $1.5 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 it to fund the
development of balsalazide disodium, to in-license other gastrointestinal
products, and to help establish itself with a relatively small amount of outside
capital.
In October 1998 the Company signed an agreement with Astra in which the
Company will receive additional research and development funding of $3.0 million
from Astra related to an ongoing clinical trial comparing balsalazide disodium
to mesalamine, the current leading treatment for ulcerative colitis and Crohn's
disease. Under the agreement the Company will receive the funds in three
installments: $1.0 million within 15 days of signing the agreement, $1.0 million
upon completion of treatment of the last patient in the trial, and $1.0 million
upon delivery of the study results report. The Company anticipates that the last
two events will occur in 1999.
In exchange for the $3.0 million payment, Astra will receive rights to
the trial results for use throughout the territories in which it has a license
to market balsalazide disodium. In addition, the Company will transfer to Astra
the balsalazide disodium New Drug Application ("NDA") for balsalazide disodium,
which the Company filed in June 1997 with the United States Food and Drug
Administration ("FDA"), although the transfer will occur only after FDA approval
is received, if at all. Depending on the outcome of the trial, the results may
be useful for obtaining additional approvals in Europe and enhancing US labeling
for balsalazide disodium.
6
<PAGE> 9
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 balsalazide disodium, 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 balsalazide disodium in the
United Kingdom for the treatment of acute ulcerative colitis. Astra began the
commercial launch of balsalazide disodium under the brand name Colazide in
October 1997 in the United Kingdom. In May 1998, the Company received
notification of additional approvals for balsalazide disodium in Austria,
Belgium, Denmark, Italy, Luxembourg, and Sweden, through the mutual recognition
process of the European Union ("EU"). The Company expects Astra and Menarini to
undertake commercial launches of balsalazide disodium in these EU countries
beginning in early 1999. Astra and Menarini withdrew marketing applications from
other EU countries that had questions that could not be addressed within the
time constraints of the review period required by the mutual recognition
process. These countries are Finland, France, Germany, Greece, Ireland,
Netherlands, Portugal, and Spain. The application process for approval in these
countries is the responsibility of Astra and Menarini and there can be no
assurance that they will pursue such applications or, if they do, that they will
be successful. The Company recognized its initial product revenues from Astra's
sales of balsalazide disodium in the United Kingdom in 1997 and expects to
recognize product revenues from sales of balsalazide disodium by Menarini and
Astra outside the United Kingdom in early 1999. The selling price of balsalazide
disodium 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 balsalazide disodium 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.
In June 1997, the Company submitted an NDA to the FDA for balsalazide
disodium as a therapy for acute ulcerative colitis. In June 1998, the FDA issued
an "approvable" letter for the Company's balsalazide disodium NDA. The FDA's
letter indicated that the application might be approved upon the satisfaction of
specific issues relating to the manufacturing process and other technical
issues, as well as product labeling. To the extent necessary, the Company has
re-focused part of its management's efforts to concentrate fully on the
resolution of the remaining issues, as outlined in the approvable letter, as it
seeks to fulfill the FDA requirements and obtain final approval. The Company
anticipates that it will not be able to produce and provide the requested
information until 1999. While the Company believes that it can successfully
fulfill the FDA requirements and obtain marketing approval, there can be no
assurance that its efforts in this regard, in whole or in part, will be
successful. In addition, certain of the issues raised in the FDA letter require
the cooperation of the Company's third-party contract manufacturers to meet the
conditions of the approvable letter. There can be no assurance that the
Company's third-party contract manufacturers will fully comply with the
conditions of the approvable letter. If any issue contained in the approvable
letter is not resolved to the satisfaction of the FDA, there can be no assurance
that approval will be granted. Failure to obtain marketing approval for
balsalazide disodium from the FDA could have a material adverse impact on the
Company's financial condition and future results of operations.
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
balsalazide disodium by Astra and Menarini since the Company has retained the
distribution rights to rifaximin, whereas Astra and Menarini have the
distribution rights for balsalazide. In the case of balsalazide disodium, the
Company granted exclusive distribution rights in certain territories in exchange
for funding needed to complete
7
<PAGE> 10
late-stage development of balsalazide disodium, 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 for
specific indications.
The Company intends to pursue development of rifaximin for bacterial infections
of the lower gastrointestinal tract. The Company intends to conduct and fund
clinical trials as may be required to obtain regulatory approvals. The Company
plans to develop rifaximin for other possible indications, including antibiotic
associated colitis and hepatic encephalopathy as financial resources will allow.
In February 1998, the Company received Orphan Drug Designation from the 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".
RESULTS OF OPERATIONS
Three and Nine Month Periods Ended September 30, 1998 and 1997
For the three and nine month periods ended September 30, 1998, the
Company recognized product revenue of $138,000 and $284,000, respectively. Due
to a short-term manufacturing delay during the first quarter of 1998, shipments
of balsalazide disodium were delayed and no revenues recognized during the first
quarter of 1998. Product shipments recommenced in April 1998. For the three and
nine month periods ended September 30, 1997, the Company recognized product
revenue of $216,000 and $284,000, respectively. For the three and nine month
periods ended September 30, 1997, the Company recognized revenue from
collaborative agreements of $1.8 million and $1.8 million, respectively. The
Company recognized no revenue from collaborative agreements for the three months
ended September 30, 1998 and $501,000 for the nine months ended September 30,
1998.
Operating expenses for the three months ended September 30, 1998 and
1997 were $2.3 million and $2.7 million, respectively. Operating expenses for
the nine months ended September 30, 1998 and 1997 were $7.8 million and $5.3
million, respectively. The increase in operating expenses in both the three and
nine month periods was the result of increases in all the expense categories
noted below.
Cost of products sold for the three and nine months ended September 30,
1998 were $207,000 and $495,000, respectively. 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.
License fees payable totaled $250,000 and $411,000 for the three months
ended September 30, 1998 and 1997, respectively. Current license fees payable
were due in connection with the Company's recognition of revenue from
collaborative agreements resulting from the approval of balsalazide disodium for
sale in certain European countries.
Research and development expense was $1.5 million and $1.2 million for
the three months ended September 30, 1998 and 1997, respectively, and $4.8
million and $2.5 million for the nine months ended September 30, 1998 and 1997,
respectively. The increase in research and development expenses in 1998 is due
primarily to increased spending for an ongoing balsalazide disodium clinical
trial initiated in late 1997 and continued spending in regulatory affairs
activities related to the balsalazide disodium NDA approval process in the
United States. Management expects research and development spending to remain
constant or increase due to additional planned clinical trial activities.
General and administrative expenses were $607,000 and $708,000 for the
three months ended September 30, 1998 and 1997, respectively, and $2.1 million
and $1.9 million for the nine months ended September 30, 1998 and 1997. The
three month decrease was due mainly to timing of certain development related
activities. The nine month increase was due mainly to additions of essential
personnel and the increased administrative costs related to becoming a public
reporting company in the United States in October 1997.
8
<PAGE> 11
Interest income increased to $138,000 in the three months ended
September 30, 1998 from $33,000 in the three months ended September 30, 1997.
Interest income increased to $478,000 for the nine months ended September 30,
1998 compared to $133,000 in the nine months ended September 30, 1997. Both
increases were the result of higher cash balances in 1998. See "Liquidity and
Capital Resources".
The Company has experienced net losses of $2.0 million and $642,000 for
the three months ended September 30, 1998 and 1997, respectively. Net losses for
the nine months ended September 30, 1998 and 1997 were $6.5 million and $3.1
million, respectively. The increase in net losses for both the three and nine
month periods are attributable to increased expenses and lower revenues from
collaborative agreements.
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. Further, the Company believes that it should not experience any
material adverse impact as a result of the impairment of software or hardware
and other information gathering systems which are not year 2000 compliant, as
the Company does not rely on any such systems today for on-going operations.
Moreover, the Company has had discussions with its financial institutions
regarding the status of their systems' compliance with the year 2000 date
capability and all have provided assurances to the Company that all such systems
and software have been made or will be remedied and compliant not later than
mid-1999. Additionally, the Company intends to conduct a survey of its key
vendor's systems in the first quarter 1999 to determine if their systems comply
with year 2000 requirements. Following this assessment, the Company will
determine what actions it will undertake to mitigate any adverse impact that
might result therefrom. Based upon information presently available, 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 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 and through September 30, 1998, the Company has financed its
operations principally through reimbursement payments, license fees and
milestone revenues, totaling approximately $16.3 million under collaborative
research and licensing agreements, and sales of equity and convertible debt
securities totaling approximately $27.6 million.
At September 30, 1998, the Company had approximately $8.1 million in
cash and cash equivalents as compared to $15.2 million at December 31, 1997. The
decrease of $7.1 million from December 31, 1997 was due to cash used in
operating activities (see "Results of Operations").
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 that was declared
effective by the Securities and Exchange Commission on October 16, 1997.
9
<PAGE> 12
As of September 30, 1998, the Company had no long-term obligations. The
Company has non-cancelable purchase order commitments for inventory purchases of
approximately $770,000. The Company anticipates capital expenditures will total
approximately $150,000 in 1998.
The Company's purchases of raw materials and its product sales to its
European distribution partners are denominated in British Pound 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 its October 1997 offering of Common
Shares, together with the Company's cash reserves at September 30, 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 mid-1999. 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 changes 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's ability to execute its business plan, fund
future development efforts, and secure future licensing arrangements, as well as
fund the commercialization of rifaximin and other new potential products will
require the Company to raise additional funds in the form of debt or equity
financing in 1999. 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 or 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 balsalazide disodium 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. The FDA has not approved either balsalazide
or rifaximin for use in the United States. In June 1997, the Company submitted
an NDA to the FDA for balsalazide disodium as a therapy for acute ulcerative
colitis. In June 1998, the FDA issued an "approvable" letter to the Company for
the balsalazide disodium NDA. The FDA's letter indicated that the application
might be approved upon the satisfaction of specific issues relating to
manufacturing and other technical issues, as well as product labeling. To the
extent necessary, the Company has re-focused part of its management's efforts to
concentrate fully on the resolution of the remaining issues, as outlined in the
approvable letter, as it seeks to fulfill the FDA requirements and obtain final
approval. While the Company believes that it can successfully comply with the
issues raised by the approvable letter and obtain FDA approval for balsalazide
disodium, there can be no assurance that its efforts in this regard, in whole or
in part, will be successful. In addition, certain of the issues raised in the
FDA letter require the cooperation of the Company's third-party contract
manufacturers to meet the conditions of the approvable letter. There can be no
assurance that the Company's third-party contract manufacturers will be able to
fully comply with the
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<PAGE> 13
conditions of the approvable letter. If any issue contained in the approvable
letter is not resolved to the satisfaction of the FDA, there can be no assurance
that approval will be granted. If regulatory approval of balsalazide disodium or
any other product is granted, such approval will be limited to those disease
states 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 balsalazide disodium under the brand name 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 balsalazide
disodium as at treatment for acute ulcerative colitis in Austria, Belgium,
Denmark, Italy, Luxembourg, and Sweden through the mutual recognition process of
the EU. Astra and Menarini withdrew marketing applications from certain other EU
countries that had questions that could not be addressed within the time
constraints of the review period required by the mutual recognition process.
These countries are Finland, France, Germany, Greece, Ireland, Netherlands,
Portugal, and Spain. The application procedure for approval in these countries
is the responsibility of Astra and Menarini and there can be no assurance that
they will pursue such applications, or if they do, that they will be successful.
There can be no assurance that balsalazide disodium will receive approval 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 balsalazide disodium for the approved indications, or that the
Company's marketing partners will launch balsalazide disodium in the countries
where the marketing application has been approved.
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 determined through discussions
with the FDA that this study is not sufficient support for the filing of an NDA
with the FDA. Therefore, the Company may initiate a Company-sponsored trial in
the United States as financial resources may allow. 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 foreign 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 balsalazide disodium 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 balsalazide disodium. As of September 30, 1998, the Company had
incurred cumulative losses since inception of approximately $19.9 million.
Furthermore, the Company currently expects operating losses to continue at least
through 2001 and to increase from current levels as the Company continues to
develop balsalazide disodium and rifaximin. The Company's future operating
performance will depend on the timing of regulatory approvals of balsalazide
disodium and rifaximin, particularly the timing of FDA approval, and, if such
approvals can be obtained, will depend on market acceptance.
Dependence on Collaborative Partners. The initial commercialization of
balsalazide disodium in the United Kingdom and, to the extent regulatory
approval is obtained, in other countries in which the Company has commercial
11
<PAGE> 14
rights to balsalazide disodium 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 balsalazide disodium 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
balsalazide disodium. Although Astra has agreed to use its best endeavors to
promote, market, and sell balsalazide disodium in its exclusive markets, there
are no specified financial thresholds that must be achieved for Astra to
maintain its exclusivity. The 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
balsalazide disodium 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 received marketing approval for balsalazide disodium in the
United Kingdom from the Medicine Controls Agency in July 1997 and Astra launched
balsalazide disodium commercially in the United Kingdom in October 1997, based
on a selling price set by Astra. Following regulatory approval of balsalazide
disodium in each country in Europe where Astra has exclusive distribution
rights, the Company and Astra must agree on the balsalazide disodium sales price
for such country, which may be less than the selling price in the United
Kingdom. The agreed sales price for balsalazide disodium will directly affect
the Company's revenues because the parties' agreement obligates Astra to
purchase balsalazide disodium from the Company, and the Company to supply
balsalazide disodium to Astra, at a transfer price equal to a percentage of
Astra's selling price. The Company does not anticipate significant margins from
balsalazide disodium 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 of approval of balsalazide disodium 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 countries for which marketing applications
were withdrawn, 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 and not the Company. There can be
no assurance that Astra and Menarini will seek such approvals, or if they do
that, the approvals will be granted.
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 balsalazide disodium, 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
balsalazide disodium 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. No assurances can
be given that the Company, or its contract manufacturers, will be able to
manufacture balsalazide disodium (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
balsalazide disodium. 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, the contract manufacturers that the Company may use must adhere to
current Good
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<PAGE> 15
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 balsalazide disodium would be adversely affected. In its "approvable" letter
relating to the NDA for balsalazide disodium, the FDA identified certain
manufacturing deficiencies that need to be addressed by the Company and its
manufacturers if the NDA is to be approved. There can be no assurance that the
Company or its manufacturers will be able to the address the FDA's concerns.
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. 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 balsalazide disodium 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 balsalazide disodium 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 balsalazide disodium 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 balsalazide disodium 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
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<PAGE> 16
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 balsalazide disodium composition of matter and method of
treating ulcerative colitis with balsalazide 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 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 for commercialization of 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.
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<PAGE> 17
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 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 balsalazide disodium, 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 balsalazide disodium, 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, President and Chief Executive Officer, and Lorin Johnson,
Ph.D.,Vice President, Research (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
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<PAGE> 18
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 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 traded on The Toronto Stock Exchange since May 1996 and no public trading
market exists for the Common Shares in the United States. 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. In
addition, the performance of the Company's stock on The Toronto Stock Exchange
may increase the difficulty of raising capital and there can be no assurance
that the Company will be able to access the public capital markets in the event
it needs to raise capital.
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.
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. Levesque Beaubien Geoffrion Inc.,
Yorkton Securities Inc., Marleau, Lemire Securities Inc., and Midland Walwyn
Capital Inc underwrote the offering. 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
<TABLE>
<CAPTION>
(a) Exhibits
<S> <C>
</TABLE>
16
<PAGE> 19
<TABLE>
<S> <C>
3.1.1 Notice of Amendment of Memorandum of Association
dated November 11, 1998
10.9.1 Letter Agreement dated October 16, 1998 to
Co-Participation Agreement dated April 30, 1993 by and
between Salix Pharmaceuticals, Inc. and Astra AB.
27.1 Financial Data Schedule
</TABLE>
17
<PAGE> 20
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: November 13, 1998 By: /s/ Randy Hamilton
-------------------
Randy Hamilton, President and
Chief Executive Officer
Date: November 13, 1998 By: /s/ David Boyle
----------------
David Boyle, Executive Vice President
and Chief Financial Officer
18
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
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<S> <C>
3.1.1 Notice of Amendment of Memorandum of Association
dated November 11, 1998
10.9.1 Letter Agreement dated October 16, 1998 to
Co-Participation Agreement dated April 30, 1993 by and
between Salix Pharmaceuticals, Inc. and Astra AB.
27.1 Financial Data Schedule
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<PAGE> 1
EXHIBIT 3.1.1
INTERNATIONAL BUSINESS COMPANIES ACT, CAP 291
SECTION 16(2)
NOTICE OF AMENDMENT OF
MEMORANDUM AND ARTICLES OF ASSOCIATION
TO: REGISTRAR OF COMPANIES
RE: SALIX PHARMACEUTICALS, LTD.
IBC NO 103705
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We, HWR SERVICES LIMITED of Craigmuir Chambers, Road town, Tortola, British
Virgin Islands, Registered Agent of the above Company, hereby certify that the
document annexed hereto is a true extract of the minutes of a meeting of
directors held on 6th November, 1998 amending the Memorandum of Association.
Dated this 11th day of November, 1998
/s/ illegible
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HWR SERVICES LIMITED
Registered Agent
<PAGE> 2
SALIX PHARMACEUTICALS, LTD.
(The "Company")
(An International Business Company)
TRUE EXTRACT OF THE MINUTES OF A MEETING OF THE DIRECTORS OF THE COMPANY HELD ON
6TH NOVEMBER, 1998
RESOLVED: That Clause 7 of the Company's Memorandum of Association be
deleted in its entirety and replaced with the following:
"CLASSES, NUMBER AND PAR VALUE OF SHARES
7. The Company is authorized to issue two classes of shares, designated
"Preferred Stock" and "Common Stock", respectively. The total number of
shares which the Company shall have authority to issue is Forty-Five
Million (45,000,000), none of which has any par value. The number of
shares of Preferred Stock authorized to be issued is Five Million
(5,000,000), and the number of shares of Common Stock authorized to be
issued is Forty Million (40,000,000). The Preferred Stock may be issued
from time to time in series. The first series shall be designated Series
A Preferred Stock (the "Series A Preferred") and shall consist of One
Hundred Fifteen Thousand (115,000) shares with the rights, preferences,
privileges and restrictions set forth in Clause 8. The second series
shall be designated Series B Preferred Stock (the "Series B Preferred")
and shall consist of One Hundred Twenty-Six Thousand Four Hundred
Forty-Five (126,445) shares with the rights, preferences, privileges and
restrictions set forth in Clause 8. The third series shall be designated
Series C Preferred Stock (the "Series C Preferred") and shall consist of
Five Hundred Thousand (500,000) shares with the rights, preferences,
privileges and restrictions set forth in Clause 8. Any remaining shares
of Preferred Stock may be issued from time to time in one or more
series. The Board of Directors of the Company is authorized to determine
or alter the rights, preferences, privileges and restrictions granted to
or imposed upon any wholly unissued series of Preferred Stock, and
within the limitations and restrictions stated in any resolution or
resolutions of the Board originally fixing the number of shares
constituting any series, to increase or decrease (but not below the
number of shares of any such series then outstanding) the number of
shares of any such series subsequent to the issue of shares of that
series, to determine the designation of any series and to fix the number
of shares of any series."
Dated this 11th day of November, 1998
/s/ Authorized signatory
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HWR SERVICES LIMITED
Registered Agent
2
<PAGE> 1
EXHIBIT 10.9.1
October 16, 1998
Salix Pharmaceuticals, Inc.
2500 West Bayshore Road
Suite 205
Palo Alto, CA 94303
Attn: Mr. Randy Hamilton
President and CEO
RE: Co-Participation Agreement
Dear Randy:
This letter agreement (the "Letter Agreement") amends the
Co-Participation Agreement between Astra AB ("Astra") and Salix Pharmaceuticals,
Inc. ("Salix") dated as of April 30, 1993 (the "Co-Participation Agreement") as
follows:
1. Defined Terms. All capitalized terms used herein without
definition shall have the meanings ascribed to such terms in the
Co-Participation Agreement.
2. Definitions.
(a) The definition of "Applications" in Section 1.1 of the
Co-Participation Agreement is hereby amended and restated in its entirety as
follows:
"Applications" means any use for gastrointestinal disease in
humans excluding the treatment of, inhibition of or prevention against
neoplasia, dysplasia, hyperplasia, abherrent crypts, polyps, adenomas, carcinoma
and other forms of cancer of the gastrointestinal tract.
(b) Section 1.1 of the Co-Participation Agreement is hereby
amended to add the following definitions in alphabetical order:
"IND" means an Investigational New Drug Application made in
accordance with applicable regulations and requirements of the FDA as from time
to time in effect.
"Transferred NDA" means the New Drug Application (as approved
by FDA) with respect to the Developmental Product and any supplemental NDAs with
respect to the Product to be transferred to Astra on the terms and conditions
set forth in Section 2.6 of the Co-Participation Agreement, including such
changes thereto and supplemental NDAs as may thereafter be submitted or filed by
Astra.
3. NDA. Section 2.6 of the Co-Participation Agreement is hereby
amended and restated in its entirety as follows:
"Upon completion of the Dossier, Salix shall file the NDA for
the Developmental Product with the FDA and shall apply for and pursue obtaining
approval for the
<PAGE> 2
Salix Pharmaceuticals, Inc.
October 16, 1998
Page - 2 -
marketing and sale of the Developmental Product in the U.S., which includes the
responsibility to fund, perform and complete any Phase IV studies required by
the FDA as a condition for such FDA approval. The Project Team and Astra shall
have input into the conduct and performance of any such Phase IV study, subject
to Salix's right to final say under terms similar to those set forth in Section
2.3 of the Co-Participation Agreement. Upon FDA approval of the NDA for
Developmental Product, Salix shall transfer the Transferred NDA to Astra and
thereafter, with respect to the Transferred NDA regarding the Product for the
Applications, Astra shall have (i) the overall right and responsibility for the
management of the FDA relationship and all communications with the FDA and, (ii)
subject to the terms of the Co-Participation Agreement, full legal
responsibility to the FDA for all aspects of ownership and maintenance thereof,
including, without limitation, all adverse event reporting and other required
obligations. Upon the request of Astra, Salix shall provide to Astra and to the
FDA all additional data and information in Salix's possession (and not
previously provided to Astra) required for maintaining approval of the
Transferred NDA. Notwithstanding the foregoing, following FDA approval of the
NDA for the Developmental Product and the transfer to Astra of the Transferred
NDA, Astra and Salix shall cooperate to establish FDA approved labeling for the
Product and to resolve relevant issues regarding the Transferred NDA, subject to
Astra's right to final determination with respect to such issues. Astra will not
take any action to transfer or change any part or aspect of such Transferred NDA
(including, without limitation, any aspect of any Drug Master File,
manufacturing method or specification) to the extent such actions would
reasonably adversely effect Salix's supply and manufacture of Product under the
Co-Participation Agreement without the prior written consent of Salix (such
consent not to be unreasonably withheld); provided, however, that changes to the
Transferred NDA that are required by the FDA shall not be subject to the
foregoing prohibition and such changes shall be completed at Astra's sole cost
and expense; provided, further, however, that changes to the Transferred NDA
that are required by the FDA with respect to supply or manufacture of Product
shall be completed at Salix's sole cost and expense. Upon the written request of
Salix, Astra will seek, at Salix's sole cost and expense, approval of such
changes, amendments and variations to such Transferred NDA as are reasonably
requested by Salix (i) to obtain approval of additional suppliers and bulk
manufacturers of Product and (ii) to reflect changes in the manufacturing
process for Product to the extent Astra would not be materially and adversely
affected by such changes. Notwithstanding the foregoing, the rights granted to
Astra hereunder shall be in respect of Product only and Salix reserves all of
its rights with respect to any indications or applications for Balsalazide other
than the Applications to the extent set forth in the Co-Participation
Agreement."
4. IND. Section 2 of the Co-Participation Agreement is hereby
amended to add Section 2.8 as follows:
"2.8 Salix shall own the IND for Balsalazide and the
Developmental Product (including all underlying data); provided, however, that
Astra shall have the right to use, obtain full and unrestricted access to, and
license on a non-exclusive, royalty-free basis, if
<PAGE> 3
Salix Pharmaceuticals, Inc.
October 16, 1998
Page - 3 -
necessary, Salix's IND for Balsalazide and the Developmental Product (including
all underlying data) for the purpose of maintaining the Transferred NDA."
5. Transferred NDA Access. Section 2 of the Co-Participation
Agreement is hereby amended to add Section 2.9 as follows:
"2.9 Salix shall have the right to reference, use, obtain full
and unrestricted access to, and license on a non-exclusive, royalty-free basis,
if necessary, the Transferred NDA solely for the purpose of registering and
maintaining regulatory filings that do not constitute use for the Applications;
provided; however, that all contact with the FDA relating to the Transferred NDA
shall be conducted exclusively through and by Astra. Within thirty (30) days
after the request of Salix, Astra shall provide notification to FDA and other
applicable regulatory authorities to allow Salix to exercise its rights under
this Section."
6. Phase III/IV Clinical Study. Section 6 of the Co-Participation
Agreement is hereby amended to add Section 6.7 as follows:
"Salix is presently conducting a study in the United States,
CP079701, comparing Balsalazide with Asacol(R) (the "Study"). Salix agrees to
conduct and complete the Study in the manner set forth in the protocol titled "A
PHASE III RANDOMIZED, DOUBLE-BLIND, DOSE-RESPONSE COMPARISON OF COLAZIDE(R)
(BALSALZIDE DISODIUM) 6.75 G DAILY VS. ASACOL(R) (MELSALAMINE) 2.4 G DAILY IN
PATIENTS WITH ACTIVE MILD OR MODERATE ULCERATIVE COLITIS" and dated December 19,
1997 (including, without limitation, completing the Study with 150 "evaluable"
(per protocol) patients as specified therein). In consideration therefor, Astra
shall pay Salix $3 million as follows: (i) $1 million within 15 days after the
date of this Letter Agreement; (ii) $1 million within 15 days after the last
patient out of the Study; and (iii) $1 million within 15 days after completion
and submission to Astra of a complete study report on the Study. Salix shall
keep Astra fully informed as to the status and conduct of the Study (including,
without limitation, periodic reports on the Study's progress and forecasted time
and date for completion of the Study) and shall provide to Astra full and
unrestricted access to such results of the Study. In addition, Salix shall
permit Astra to use the results of such Study and to disclose the same to third
parties in connection with the use, regulatory approval and sale of the Product
in any jurisdiction or territory in which Astra has rights to the Product."
7. Supply of Product. The last sentence of Section 12.7 of the
Co-Participation Agreement is hereby amended to delete the word "after" and
replace such word with "within".
8. Patent Term Restoration. Section 21 of the Co-Participation
Agreement is hereby amended to add Section 21.5 as follows:
<PAGE> 4
Salix Pharmaceuticals, Inc.
October 16, 1998
Page - 4 -
"21.5 Salix and Astra shall cooperate with each other in
obtaining patent term restoration or supplemental protection certificates or
their equivalents in the U.S. where applicable to the Product."
9. Astra Associate. Salix acknowledges that Astra
Pharmaceuticals, L.P. ("APLP") is an "Astra Associate" for purposes of the
Co-Participation Agreement and that the rights and obligations of Astra therein
and in this Letter Agreement may be exercised or discharged, as the case may be,
by APLP. Astra and Salix each acknowledge that any notice or communication
received by Salix from APLP shall be deemed as received from Astra for purposes
of the Co-Participation Agreement. For purposes of notices under the
Co-Participation Agreement, all notices to Astra shall require a copy thereof to
APLP at 725 Chesterbrook Blvd., Wayne, PA 19087-5677, facsimile transmission
number 610-695-1924 and marked for the attention of General Counsel.
10. Effectiveness. Except as set forth in this Letter Agreement,
the Co-Participation Agreement shall remain in full force and effect and
unchanged and is hereby confirmed in all respects.
11. Governing Law. This Letter Agreement shall be governed by and
construed in accordance with the laws of the State of New York, excluding any
choice of law rules which may direct the application of the law of any other
jurisdiction.
12. Counterparts. This Letter Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
If the foregoing is acceptable to you, please evidence your
agreement by executing a copy of this Letter Agreement and returning same to the
undersigned.
Very truly yours,
ASTRA AB
(publ)
By: /S/ Carl-Gustaf Johansson
---------------------------------
Name: Carl-Gustaf Johansson
Title: N/A
ACCEPTED and AGREED to
this 16th day of October, 1998:
SALIX PHARMACEUTICALS, INC.
<PAGE> 5
Salix Pharmaceuticals, Inc.
October 16, 1998
Page - 5 -
By: /S/ Randy W. Hamilton
-------------------------------
Name: Randy W. Hamilton
Title: President and CEO
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 8,146
<SECURITIES> 0
<RECEIVABLES> 584
<ALLOWANCES> 0
<INVENTORY> 718
<CURRENT-ASSETS> 9,566
<PP&E> 246
<DEPRECIATION> 232
<TOTAL-ASSETS> 9,863
<CURRENT-LIABILITIES> 2,138
<BONDS> 0
0
0
<COMMON> 27,609
<OTHER-SE> (19,884)
<TOTAL-LIABILITY-AND-EQUITY> 9,863
<SALES> 138
<TOTAL-REVENUES> 138
<CGS> 207
<TOTAL-COSTS> 207
<OTHER-EXPENSES> 2,081
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,012)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
