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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q/A
(Amendment No. 1)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 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
March 22, 1999 was 10,208,837.
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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 June 30, 1998
and December 31, 1997 ................................................ 1
Condensed Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 1998 and 1997 ............................. 2
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 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 6. Exhibits and Reports on Form 8-K ........................................... 16
Signatures ............................................................................. 17
</TABLE>
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18
SALIX PHARMACEUTICALS, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
Restated
See Note
1-A
--------
June 30, December 31,
1998 1997
-------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 10,087 $ 15,173
Other current assets................................................... 789 460
-------- --------
Total current assets............................................ 10,876 15,633
Property and equipment, net................................................ 242 194
Other assets............................................................... 51 51
-------- --------
$ 11,169 $ 15,878
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current liabilities......................... $ 1,701 $ 1,749
-------- --------
Total current liabilities....................................... 1,701 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 June 30, 1998 and December 31, 1997,
respectively....................................................... 27,592 27,520
Accumulated deficit.................................................... (18,124) (13,391)
-------- --------
Shareholders' equity............................................... 9,468 14,129
-------- --------
$ 11,169 $ 15,878
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
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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>
Restated Restated
See Note See Note
1-A 1-A
-------- --------
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Product revenue............................................... $ 146 $ -- $ 146 $ --
Revenue from collaborative agreements and other............... -- -- -- 21
------- ------- ------- -------
Total revenues............................................. 146 -- 146 21
------- ------- ------- -------
Expenses:
Cost of products sold......................................... 242 -- 288 --
License fees.................................................. 76 50 76 50
Research and development...................................... 1,787 731 3,367 1,315
General and administrative.................................... 722 670 1,488 1,231
------- ------- ------- -------
Total expenses............................................. 2,827 1,451 5,219 2,596
------- ------- ------- -------
Loss from operations.................................................. (2,681) (1,451) (5,073) (2,575)
------- ------- ------- -------
Interest and other income (expense)................................... 170 69 340 100
------- ------- ------- -------
Net loss................................................... $(2,511) $(1,382) $(4,733) $(2,475)
======= ======= ======= =======
Net loss per share, basic and diluted................................. $ (0.25) $ (0.19) $ (0.46) $ (0.35)
======= ======= ======= =======
Shares used in computing net loss per share, basic and diluted........ 10,193 7,274 10,182 6,975
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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SALIX PHARMACEUTICALS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
Restated
See Note
1-A
--------
Six months ended
June 30,
------- -------
1998 1997
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................................... $(4,733) $(2,475)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.................................. 42 32
Changes in assets and liabilities:
Accounts receivable and other current assets................... (329) (352)
Accounts payable and other current liabilities................. (48) (196)
------- -------
Net cash used in operating activities...................... (5,068) (2,991)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment................................ (90) (39)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock ............................ 72 1,063
------- -------
Net cash provided by financing activities....................... 72 1,063
Net decrease in cash and cash equivalents.................................. (5,086) (1,967)
Cash and cash equivalents at beginning of period........................... 15,173 5,624
------- -------
Cash and cash equivalents at end of period................................. $10,087 $ 3,657
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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SALIX PHARMACEUTICALS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 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.
1.a. Restatement Financial Statements
Restatement of Financial Statements for the Quarter Ended June 30, 1998
Subsequent to the filing of its Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 with the Securities and Exchange Commission,
the Company determined that certain conditions present in its contractual
agreement with its distribution partner affected the
timing and dollar amounts of reported earned revenues from license
agreements for the quarter ended June 30, 1998. Specifically, the Company
recorded $501,000 of license revenue upon receipt of regulatory approval
to sell its product, Colazide, in Sweden. However, the Company's agreement
with its distribution partner states that payment would be made upon
regulatory approval and price approval, if applicable. Although the
Company had received regulatory approval in the second quarter of 1998,
pricing approval was not formally received until February 1999. For
the second quarter of 1998, the Company reversed the $501,000 from license
revenues and $249,000 from license fee expense. The resulting effect was
to increase net loss by $252,000 for the three months ended and six months
ended June 30, 1998. In February 1999, the Company received formal
notification of price approval from the Swedish regulators and will
recognize this revenue in the quarter ended March 31, 1999.
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 June 30, 1998, the Company had a binding purchase order commitment
for inventory purchases aggregating approximately $1.7 million to be
delivered in 1998.
4
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SALIX PHARMACEUTICALS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 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 June 30, 1998. The exercise
price of these shares was U.S. $1.00 per share.
5
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SALIX PHARMACEUTICALS, LTD.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical results or anticipated results, including those set forth under
"Factors that May Affect Future Results" under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in, or
incorporated by reference into, this report. The following discussion should be
read in conjunction with the Company's Condensed Consolidated Financial
Statements and notes thereto included elsewhere in this report.
Unless otherwise indicated, all references to "dollars" or "$" 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 2001 at the earliest. As of June 30,
1998, the Company had accumulated losses of approximately $18.1 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 $24.8 million,
of which $15.1 million were in research and development expenses and $1.3
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.
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,
6
<PAGE> 9
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
1998. 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.
Moreover, the application process 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 late
1998. 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 a New Drug Application ("NDA") to
the United States Food and Drug Administration (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 may 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. 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. Moreover, the Company and its United
States marketing partner have yet to determine the brand name under which
balsalazide disodium will be marketed in the United States, nor has the Company
obtained final approval from the FDA of its name submission.
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 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 two initial
indications: 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 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".
7
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RESULTS OF OPERATIONS
Three and Six Month Periods Ended June 30, 1998 and 1997
For the three and six month periods ended June 30, 1998, the Company
recognized $146,000 in product revenue. Due to a short-term manufacturing delay
during the first quarter of 1998, balsalazide disodium product shipments were
delayed and no revenues were recognized. Product shipments recommenced in April
1998. For the six months ended June 30, 1997, the Company recognized $21,000 in
revenue from collaborative agreements.
Operating expenses for the three months ended June 30, 1998 and 1997
were $2.8 million and $1.5 million, respectively. Operating expenses for the six
months ended June 30, 1998 and 1997 were $5.2 million and $2.6 million,
respectively. The increase in operating expenses is the result of increases in
all expense categories as noted below.
Cost of products sold for the three and six months ended June 30, 1998
were $242,000 and $288,000, 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 totaled $76,000 and $50,000 for both the three and six
month periods ended June 30, 1998 and 1997, respectively. Current license fees
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, as well as license fees due in connection
with product sales.
Research and development expense was $1.8 million and $731,000 for the
three months ended June 30, 1998 and 1997, respectively, and $3.4 million and
$1.3 million for the six months ended June 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 will continue to increase due to
additional planned clinical trial activities.
General and administrative expenses were $722,000 and $670,000 for the
three months ended June 30, 1998 and 1997, respectively, and $1.5 million and
$1.2 million for the six months ended June 30, 1998 and 1997. 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 June 30,
1998 from $69,000 in the three months ended June 30, 1997 due to larger average
cash reserves in the 1998 period after completion of the public offering in
October 1997. Interest income increased to $340,000 in six months ended June 30,
1998 from $100,000 in the six months ended June 30, 1997. See "Liquidity and
Capital Resources".
The Company has experienced net losses of $2.5 million and $1.4 million
for the three months ended June 30, 1998 and 1997, respectively. Net losses for
the six months ended June 30, 1998 and 1997 were $4.7 million and $2.5 million,
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.
8
<PAGE> 11
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.
At June 30, 1998, the Company had approximately $10.1 million in cash
and cash equivalents as compared to $15.2 million at December 31, 1997. The
decrease of $5.1 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 that was declared
effective by the Securities and Exchange Commission on October 16, 1997.
As of June 30, 1998, the Company had no long term obligations. The
Company has non-cancelable purchase order commitments for inventory purchases of
approximately $1.7 million. The Company anticipates total capital expenditures
of approximately $0.3 million in 1998.
The Company's purchases of raw materials and its product sales to its
European distribution partners are denominated in British 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 June 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
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 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, 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.
9
<PAGE> 12
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. Neither balsalazide nor rifaximin has been
approved by the FDA 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 may 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. 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 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 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.
10
<PAGE> 13
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 intends to initiate a Company-sponsored
trial in the United States. 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 June 30, 1998, the Company had
incurred cumulative losses since inception of approximately $18.1 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 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 also 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
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's agreements with Astra require Astra to accomplish the
commercial launch of balsalazide disodium 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 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
11
<PAGE> 14
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. The Company's
initial product, balsalazide disodium, has never been manufactured in commercial
quantities. 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 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.
12
<PAGE> 15
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 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 basalazide 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
13
<PAGE> 16
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 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 basalazide 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
14
<PAGE> 17
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
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 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
15
<PAGE> 18
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
16
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<S> <C>
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: March 31, 1999 By: /s/ Randy Hamilton
--------------------------------------
Randy Hamilton, President and
Chief Executive Officer
Date: March 31, 1999 By: /s/ William J. Vaughan
--------------------------------------
William J. Vaughan, Corporate Controller
(Chief Accounting Officer)
18
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<CASH> 10,087
<SECURITIES> 0
<RECEIVABLES> 261
<ALLOWANCES> 0
<INVENTORY> 437
<CURRENT-ASSETS> 10,876
<PP&E> 450
<DEPRECIATION> 208
<TOTAL-ASSETS> 11,169
<CURRENT-LIABILITIES> 1,701
<BONDS> 0
0
0
<COMMON> 27,592
<OTHER-SE> (18,124)
<TOTAL-LIABILITY-AND-EQUITY> 11,169
<SALES> 146
<TOTAL-REVENUES> 146
<CGS> 242
<TOTAL-COSTS> 567
<OTHER-EXPENSES> 2,509
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,733)
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,073
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,733)
<EPS-PRIMARY> ($0.25)
<EPS-DILUTED> ($0.25)
</TABLE>
