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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
COMMISSION FILE NUMBER: 000-23265
SALIX PHARMACEUTICALS, LTD.
(FORMERLY, SALIX HOLDINGS, 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)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
Common Shares, No Par Value The Toronto Stock Exchange
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part IIII of this Form 10-K or any
amendment to this Form 10-K: [X]
The aggregate market value of the Registrant's Common Shares held by
non-affiliates of the Registrant on March 22, 1999 (based on the closing sale
price of US $0.56 of the Registrant's Common Shares, as reported on The Toronto
Stock Exchange on such date) was approximately $4,053,465. Common Shares held by
each officer and director and by each person known to the Company who owns 5% or
more of the outstanding Common Shares have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
The number of the Registrant's Common Shares outstanding at March 22,
1999 was 10,208,837.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement to be filed for
its 1999 Annual Meeting of Stockholders to be held May 25, 1999 are incorporated
by reference into Part III of this report.
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SALIX PHARMACEUTICALS, LTD.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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Page
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PART I
Item 1. Business ........................................................................ 1
Item 2. Properties....................................................................... 19
Item 3. Legal Proceedings ............................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders ............................. 19
Executive Officers of the Registrant....................................................... 19
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............ 21
Item 6. Selected Consolidated Financial Data............................................. 23
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations ...................................................................... 24
Item 7a. Quantitative and Qualitative Disclosures about Market Risk ...................... 33
Item 8. Financial Statements and Supplementary Data...................................... 34
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ...................................................................... 34
PART III
Item 10. Directors and Executive Officers of the Registrant .............................. 35
Item 11. Executive Compensation .......................................................... 35
Item 12. Security Ownership of Certain Beneficial Owners and Management................... 35
Item 13. Certain Relationships and Related Transactions................................... 35
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ............... 36
SIGNATURES ................................................................................ 39
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PART I
ITEM 1. BUSINESS
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 those anticipated in these forward-looking statements
as a result of certain factors, 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.
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 and, commencing
in 1999, in Sweden under the brand name Colazide(R), and rifaximin will
demonstrate the Company's ability to execute this strategy.
In March 1998, the Company changed its name to Salix Pharmaceuticals,
Ltd. Prior to March 1998, the Company operated as Salix Holdings, Ltd. The
Company was incorporated in the British Virgin Islands in December 1993. Prior
to December 1993, the business of the Company was conducted by Salix
Pharmaceuticals, Inc., a California corporation ("Salix California"), which was
incorporated in California in 1989, and Glycyx Pharmaceuticals, Ltd., a Bermuda
corporation ("Glycyx"), each of which is now a subsidiary of Salix
Pharmaceuticals, Ltd. Unless the context otherwise requires, references in this
report to "Salix" and the "Company" refer to Salix Pharmaceuticals, Ltd., a
corporation organized under the laws of the British Virgin Islands, and its
wholly owned subsidiaries, Salix California and Glycyx. The Company's executive
offices are located at 3600 West Bayshore Road, Suite 205, Palo Alto, California
94303, and its telephone number at that address is (650) 856-1550.
The Company has generated limited revenues to date from the sales of
products and has been unprofitable since inception. The Company expects its
operating losses to continue as it continues its balsalazide commercialization
efforts. As of December 31, 1998, the Company had accumulated losses of
approximately $20.8 million. Since 1992, the Company has financed its operations
principally through reimbursement payments, license fees and milestone revenues,
totaling approximately $16.8 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 $29.8 million, of which $17.7 million were in research and
development expenses and $1.3 million in license fees to licensors. The
Company's alliances with Astra AB ("Astra"), a Swedish pharmaceutical company,
and a division of Menarini Pharmaceutical Industries s.r.l. ("Menarini"), an
Italian manufacturer and distributor of pharmaceutical products, 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 received $1.0 million within 15 days
after signing the agreement, and will receive
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$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 payments totaling $3.0 million, 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 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.
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 disodium from Biorex Laboratories
Limited ("Biorex") in exchange for participation in future milestone revenues
and profits. The Company will sell balsalazide disodium, 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 pre-market approvals
for balsalazide disodium in Austria, Belgium, Denmark, Italy, Luxembourg, and
Sweden, through the mutual recognition process of the European Union ("EU"). In
February 1999, Astra received price approval for balsalazide disodium from
Swedish regulators and has advised the Company of its intent to commence a
commercial launch under the brand name of Colazide in Sweden in 1999. Astra and
Menarini are awaiting final pricing approvals from Austria, Belgium, Denmark,
Italy and Luxembourg. The Company expects Astra and Menarini to undertake
commercial launches in the remaining EU countries which approved balsalazide
disodium for commercial sale in 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. The selling price of balsalazide disodium to Astra outside the United
Kingdom and Sweden 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 will continue to experience high initial
product launch costs due to the cost of scaling up manufacturing processes for
commercial distribution. In January 1999, Astra filed a submission with the
Reference Member State to obtain regulatory approval for the use of balsalazide
disodium for the maintenance of ulcerative colitis throughout the EU. The
submission applies to all EU countries in which balsalazide disodium is
currently approved. Astra anticipates that the review period by the Reference
Member State regulatory authority to be approximately 90 to 180 days, with
approval notification provided shortly thereafter, if obtained. There can be no
assurance that such approvals will be received in this time frame, if at all.
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.
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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 indirect sale
of product through marketing partners. In the case of balsalazide disodium, the
Company granted exclusive distribution rights in certain territories to
marketing partners 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 intends to pursue development of rifaximin for bacterial
infections of the lower gastrointestinal tract and is currently conducting a
Phase III clinical trial to study for the treatment of bacterial infectious
diarrhea. The Company intends to conduct and fund this clinical trial, as well
as any additional trials or clinical work as may be required to obtain
regulatory approvals. The Company believes there are opportunities to develop
rifaximin for other 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".
In the course of its transition to a commercial stage company, the
Company has leveraged its resources by establishing strategic alliances with
companies that have significant resources in clinical monitoring and
manufacturing. For the commercial production of Colazide, the Company has
entered into manufacturing arrangements with Akzo Nobel, formerly Courtaulds
Chemicals (Holdings) Limited ("Akzo"), and Anabolic, Inc. ("Anabolic"). In
addition, the Company is in the process of establishing an agreement with UCB,
AB, a Belgium based manufacturer, for the purpose of manufacturing balsalazide
disodium for European distribution and possibly distribution within the United
States.
BUSINESS STRATEGY
The Company's objective is to become a leading gastrointestinal
pharmaceutical company. The Company believes that by implementing the strategies
summarized below it will significantly reduce the risk, time and investment
normally associated with the development and commercialization of
pharmaceuticals.
In-license proprietary gastrointestinal products with near-term
commercial potential. The Company's principal focus is to identify and
in-license gastrointestinal products that have near-term commercial potential,
and to apply its product development expertise to commercialize these products.
In pursuing this strategy, the Company evaluates each product based on the
following:
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- The product must treat gastrointestinal diseases that are in
need of new pharmaceutical therapies. The Company believes the
gastrointestinal disease market is in need of new or more
effective pharmaceutical treatments and will provide the Company
a significant return on investment. The Company also believes
that by establishing itself as a recognized leader in the
gastrointestinal disease market, it will enhance its ability to
attract future in-licensing product opportunities.
- The product must have a substantial base of positive late-stage
clinical research data in humans and have the potential for
rapid regulatory approval. The Company will carefully evaluate
and in-license only those products that have an existing base of
positive late-stage data in humans demonstrating both safety and
efficacy. By in-licensing drugs with a substantial base of
late-stage clinical data and developing these drugs for diseases
that are in need of new or more effective pharmaceutical
treatments, the Company believes that it will be able to
minimize the costs and risk associated with inventing a drug and
conducting the early-stage clinical trials needed to determine
if a drug is safe and effective in humans. The Company also
believes that its strategy can significantly reduce the time and
risk of obtaining regulatory clearances.
- The product must be available to the Company on acceptable
licensing terms. The Company believes that there are significant
opportunities to in-license or acquire gastrointestinal products
from pharmaceutical companies in the United States and
internationally. This includes products developed by companies
that lack either the expertise or resources to pursue regulatory
approvals in the United States and certain other territories. In
addition, the Company believes that large pharmaceutical
companies are willing to out-license or sell products and
technologies that do not fit their product portfolios or fail to
meet their business or market criteria.
Establish a small, specialized sales force to market to a targeted group
of physicians. Of the 738,000 physicians in the United States, gastrointestinal
diseases are treated primarily by approximately 9,700 gastroenterologists. The
Company believes that it can effectively reach this small number of physicians
through a small, specialized sales and marketing group, without the investment
needed to develop and maintain the large sales force typically required in the
pharmaceutical industry. This direct sales force model will be the basis for the
Company's commercialization of rifaximin and future products in the United
States. The Company expects that, once fully established and operational, a
sales and marketing model premised on a domestic direct sales force will result
in higher operating margins than the distribution partner model that the Company
has established for Colazide sales. See "-Marketing and Sales."
Enhance market potential of products through development of additional
indications. Where appropriate, the Company intends to conduct clinical trials
for multiple indications to expand the approved use of its products. The Company
believes that both balsalazide and rifaximin have potential applications in
other disease indications which, if developed by the Company and approved by
regulatory authorities, will significantly enhance the commercial potential of
such products. In the case of Colazide, which has been approved by seven
European countries, including the United Kingdom, for the treatment of acute
ulcerative colitis and for which the Company has filed an NDA with the FDA for
the same indication, the Company believes that balsalazide, the active
ingredient in Colazide, may also have therapeutic applications for maintenance
of remission of ulcerative colitis. Similarly, rifaximin may be developed in the
future for potential use in treating several gastrointestinal infectious
conditions. The Company believes that the strategy of commercializing products
for initial indications will enable it to begin realizing product revenues while
completing the development of multiple indications. See "-Products Under
Development."
Enhance research and manufacturing capabilities through strategic
partnerships. The Company has established strategic relationships with companies
it believes have proven expertise in clinical monitoring and manufacturing. The
Company uses clinical research organizations ("CROs") to manage its clinical
trials, thus enabling the Company to reduce its fixed overhead costs and to
leverage its management resources. For the commercial production of Colazide,
the Company has entered into pharmaceutical manufacturing arrangements with Akzo
for bulk drug substance and Anabolic for finished dosage forms. See
"-Manufacturing."
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DISEASE BACKGROUND
Gastrointestinal Disease Overview
Gastrointestinal diseases have a major impact in the United States and
across the world. According to the National Institutes of Health, more than 60
million cases of gastrointestinal disease are reported annually in the United
States alone, resulting in more than 200 million days of restricted activity, 50
million visits to physicians, 10 million hospitalizations, and nearly 200,000
deaths. Current treatments for gastrointestinal disease in many instances either
have serious side effects or provide only partial symptomatic relief. The
Company believes there is significant need for new pharmaceutical therapies to
improve treatment of gastrointestinal diseases.
The Company is pursuing product indications for select gastrointestinal
conditions, including acute ulcerative colitis, maintenance of ulcerative
colitis, and bacterial infectious diarrhea, and investigating other potential
indications including antibiotic associated colitis, hepatic encephalopathy, and
specific forms of ulcers.
Inflammatory Bowel Disease/Ulcerative Colitis
Inflammatory bowel disease ("IBD") is a condition that covers both
ulcerative colitis and Crohn's disease. The cause of IBD is unknown and onset
can occur at any age but is most prevalent between the ages of 15 and 25. The
symptoms of ulcerative colitis and Crohn's disease are similar, but ulcerative
colitis affects the large colon while Crohn's disease can affect any part of the
gastrointestinal tract. These debilitating diseases are usually lifelong, and
there is currently no cure.
The Crohn's and Colitis Foundation of America estimates that IBD
afflicts two million people in the United States. Sales of drugs used to treat
IBD worldwide totaled approximately $638 million in 1997 and have reflected a
compound annual growth rate of approximately 20% between 1987 and 1996.
Ulcerative colitis is a chronic disease which causes ulceration of the inner
lining of the colon and rectum. Symptoms include diarrhea, abdominal pain,
rectal bleeding and fever. Decreased appetite and weight loss are also common.
As with many chronic illnesses, ulcerative colitis also can have serious
emotional side effects, including depression, anxiety and reduced self-esteem,
typically resulting from the painful and embarrassing symptoms caused by the
disease.
Medical treatment of ulcerative colitis over the past 50 years has
generally consisted of corticosteroids, which are typically unsuitable for
long-term treatment because of their significant side effects, and
5-aminosalicylic-acid ("5-ASA") drugs. To be effective, these drugs must travel
through the stomach and small intestine to the colon and be released in the
colon without significant quantities being absorbed in the bloodstream.
Sulfasalazine ("SASP"), which is taken orally, is the original 5-ASA drug and is
considered the current "gold standard" treatment (i.e., the most effective
available treatment). SASP is effective in reaching the colon with only low
absorption rates in the bloodstream. However, SASP also contains a carrier
molecule (sulfapyridine) which is toxic and results in a high incidence of side
effects such as nausea, headache, dizziness, anemia or other blood disorders,
and skin rashes. In approximately 30% of IBD patients who attempt treatment with
SASP, these side effects are so severe that the patient cannot tolerate
continued treatment.
In the early 1980s, pharmaceutical companies began developing new drugs
designed to deliver 5-ASA to the colon without the side effect profile of SASP,
and these drugs, including mesalamine, first appeared in the United States
market in the early 1990s. While the new drugs are generally better tolerated
than SASP, they continue to be limited in use because significant amounts of the
drugs may be absorbed in the bloodstream before reaching the colon. In other
cases, the drugs may not dissolve in the body, in which case they may remain
whole when passed through the bowel and are, therefore, not absorbed in the
colon. One of these drugs is mesalamine, the current market leader when measured
by dollar sales of drugs used to treat IBD.
An alternative treatment for ulcerative colitis where drug intervention
is ineffective is surgical removal of the large bowel. This procedure
effectively eliminates ulcerative colitis but with substantial physical and
emotional consequences for the patient, who must carry an external bag or have
an internal pouch constructed to collect waste.
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Hepatic Encephalopathy
Hepatic encephalopathy, a neuropsychiatric syndrome caused by the
build-up of toxic products, such as ammonia, in the bloodstream, is a common
complication of acute or chronic liver disease. Causes of liver disease include
alcohol abuse and hepatitis due to viruses, drug abuse or toxins. The liver
plays a key role in removing certain toxins found in the digestive tract from
the blood. In severe liver disease, the liver does not effectively remove
ammonia from the blood. As a result, ammonia accumulates in the bloodstream and
travels to the brain, potentially causing personality changes, impaired
consciousness, agitation or mania, and coma. The Company believes that hepatic
encephalopathy affects approximately 60,000 people in the United States.
Approximately 30% of hepatic encephalopathy patients go into coma, which is
fatal in up to 80% of these patients, despite aggressive intervention.
Existing treatment strategies for hepatic encephalopathy, including
antibiotics, focus on reducing levels of ammonia in the bloodstream. The Company
believes that current antibiotic therapies, including neomycin and
metronidazole, are inadequate treatments, however, due to their limited
antibacterial spectrum and broad side effects. Oral lactulose is also used to
reduce the amount of ammonia accumulated in the intestine by increasing the
number of bowel movements per day.
In spite of the small number of people afflicted with hepatic
encephalopathy, the Company believes that a significant market opportunity
exists for a drug that offers a more effective therapy than currently available
treatments. In addition, because hepatic encephalopathy affects a relatively
small number of patients, the Company has received Orphan Drug Designation from
the FDA for rifaximin to treat hepatic encephalopathy. In practice, Orphan Drug
Designation is available for therapies addressing indications affecting less
than 200,000 people, may allow the drug to receive a priority review by the FDA,
provides the product seven years of market exclusivity for the orphan indication
regardless of the drug's patent status, and may allow the FDA to rely only on a
single pivotal trial in approving an NDA. See "-Government Regulation".
Antibiotic Associated Colitis
Antibiotic associated colitis ("AAC") can be caused by taking certain
antibiotics to treat a variety of illnesses. These antibiotics can cause a
reduction in the presence of normal bacteria in the colon, a condition which
promotes overgrowth of the bacterium Clostridium difficile ("C. difficile"). C.
difficile produces toxins that cause severe diarrhea and inflammation of the
colon. If untreated, these symptoms can lead to toxic megacolon, colonic
perforation and death. Institutionalized patients, such as patients in nursing
homes, have a high risk of developing AAC. Independent research indicates that
up to 2,000,000 people develop AAC each year in North America.
Until recently, oral vancomycin was the preferred treatment for AAC.
However, the widespread use of vancomycin for treating enterococcal infections
has resulted in the development of vancomycin-resistant organisms (organisms
that do not respond to vancomycin therapy). Vancomycin resistant genes may also
be transferred to other microorganisms such as Staphylococcus aureus, an
organism responsible for many common infections. The emergence of these
resistant organisms has led the United States Centers for Disease Control and
Prevention to recommend that vancomycin be used for treatment of AAC only in
cases which fail to respond to metronidazole therapy or are severe and
potentially life-threatening.
Metronidazole, although not approved for AAC, is now the preferred
treatment for AAC. Although metronidazole is less costly than vancomycin, the
drug is absorbed not only in the digestive tract but also in the bloodstream
following drug administration. In addition, the safety and effectiveness of
metronidazole in treating AAC has not been confirmed by the FDA through the NDA
clearance process.
Infectious Diarrhea
Diarrhea is a leading cause of death in most developing countries, with
the greatest impact seen in infants and children. In the United States, children
under 5 years of age average two episodes of diarrhea per year. In developing
countries, the rate is two to three times higher. Overall, physicians in the
United States are consulted
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annually for approximately 8.2 million diarrhea episodes. Primary therapy for
infectious diarrhea is antibiotics, with the choice of antibiotic made on the
basis of effectiveness against the specific bacterial cause in each case or in
similar local cases. Antibiotic development in recent years has tended to focus
on broad spectrum antibiotics to cover the widest possible range of bacterial
forms. As new bacterial forms mutate and develop resistance to currently
available antibiotics, there is ongoing effort to develop more effective
antibiotic therapies.
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PRODUCTS UNDER DEVELOPMENT
The Company's principal focus is on gastrointestinal products with
late-stage clinical data on human safety and efficacy. The following table
summarizes Salix's current products in development.
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PRODUCT INDICATION STATUS
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Colazide(1) Acute ulcerative colitis - Approved in United Kingdom in July 1997
- NDA accepted for filing by FDA in
United States in August 1997
- Approved in seven European
countries: Austria, Belgium, Denmark, Italy,
Luxembourg, Sweden and the United Kingdom.
Additional Phase III/IV clinical study
ongoing
Colazide(1) Ulcerative colitis - Application submitted in approved
maintenance European countries in January 1999
Rifaximin Hepatic encephalopathy - Phase III clinical trial patient
enrollment completed(2)
Rifaximin Infectious diarrhea - Phase III clinical trial
scheduled to commence Q-1 1999
- Orphan Drug Designation granted by FDA
in February 1998
Rifaximin Antibiotic associated - IND submitted and cleared
colitis
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(1) Astra has exclusive commercial rights in all countries excluding Italy,
Spain, Portugal, Greece, Japan, Taiwan, and Korea. Menarini has
exclusive commercial rights in Italy, Spain, Portugal and Greece. See
"-Strategic Alliances" and "-Marketing and Sales".
(2) This trial is being conducted by Alfa Wassermann in Spain. The data
obtained in this trial may be used in partial support of an NDA filing,
data collection procedures and methodology established by Alfa
Wassermann as well as the outcome of the trial.
Colazide
Colazide (balsalazide disodium) is an orally administered,
anti-inflammatory drug designed to act in the gastrointestinal tract and
specifically in the colon. In July 1997, the Company obtained authorization to
market Colazide in the United Kingdom for the treatment of acute ulcerative
colitis. The Company believes that Colazide is also a potential treatment for
other inflammatory bowel disease conditions. Salix licensed Colazide from Biorex
and will sell Colazide, manufactured by third parties under contract with the
Company, to its distribution partners, Astra and Menarini. Colazide will be
distributed in all markets except certain countries in southern Europe and Asia
by Astra under a distribution agreement that provides Astra with exclusive
distribution rights, and in Italy, Spain, Portugal, and Greece by Menarini.
Astra launched Colazide in the United Kingdom in October 1997 and anticipates
commencing commercial launches in several other EU countries in 1999 subject to
obtaining final pricing approval. Sales of drugs used to treat IBD worldwide
totaled approximately $638 million in 1997 and have reflected a compound annual
growth rate of approximately 20% between 1987 and 1997. See "-Strategic
Alliances".
Colazide was developed after careful evaluation of the benefits and side
effects of existing therapies. Colazide is an orally administered drug therapy
that the Company believes is effective in delivering the therapeutic agent
directly to the colon. Medical treatment of ulcerative colitis over the past 50
years has consisted of corticosteroids, which are typically unsuited for
long-term treatments because of their significant side effect profile, and 5-ASA
drugs. To be effective, these drugs must travel through the stomach and small
intestine to the colon and be released in the colon without significant
quantities being absorbed in the bloodstream. SASP, which is taken orally, is
the original 5-ASA drug and is effective in reaching the colon with only low
absorption rates in the bloodstream. However, SASP also contains a carrier
molecule (sulfapyridine) which is toxic and results in a high incidence of side
effects such as nausea, headache, dizziness, anemia or other blood disorders,
and skin rashes. In
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approximately 30% of IBD patients who attempt treatment with SASP, these side
effects are so severe that the patient cannot tolerate continued treatment.
In the early 1980s, pharmaceutical companies began developing new drugs
to deliver 5-ASA to the colon without the side effect profile of SASP. These
drugs first appeared in the United States market in the early 1990s. While the
new drugs, including mesalamine, are generally better tolerated than SASP, they
continue to be limited in use because significant amounts of the drugs may be
absorbed in the bloodstream before reaching the colon. In other cases, the drugs
may not dissolve in the body, in which case they may remain whole when passed
through the bowel and are therefore not absorbed in the colon. See
"--Inflammatory Bowel Disease/Ulcerative Colitis".
Balsalazide disodium is a new chemical entity that consists of two
molecular structures. The first molecule, 5-ASA, is the active drug and
responsible for the actual therapeutic effect. The second molecule, 4-ABA, is a
non-toxic carrier molecule that enables the 5-ASA molecule to travel to the
colon without being absorbed in the bloodstream. The combination of these two
molecules into one chemical compound is designed to deliver the therapeutic
agent to the disease site.
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. 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.
The Company submitted the NDA following completion of five double-blind,
randomized, controlled, safety and efficacy studies evaluating Colazide as a
treatment for acute ulcerative colitis. Two pivotal Phase III studies were
completed in March 1995 and March 1996, respectively. A multi-center Phase III
study conducted in the United States, which evaluated 150 recently relapsed
patients with long-standing disease symptoms, was completed in March 1996. The
proposed marketing dose (6.75 grams per day) of Colazide was compared to a lower
dose of Colazide (2.25 grams per day) and to mesalamine over an eight week
treatment period. The study demonstrated a statistically significant
dose-response between the two Colazide doses for the primary endpoint of symptom
improvement, including stool frequency, rectal bleeding, sigmoidoscopic score
and physician's global assessment. Although the primary measure of symptom
improvement was not statistically significantly different between Colazide and
mesalamine, symptom improvement was noticeably favorable for Colazide. Secondary
measures of study-end symptom scores were also significantly more favorable for
Colazide than mesalamine with respect to rectal bleeding, sigmoidoscopic score
and physician's global assessment.
A trial completed in March 1995 evaluated 100 patients, most of whom had
been recently diagnosed with acute ulcerative colitis, over a 12 week treatment
period at multiple centers in the United Kingdom. The primary study endpoint
measured patient tolerance of Colazide versus mesalamine. While only one patient
in each group withdrew due to intolerance, patients treated with Colazide had
statistically significantly fewer side effects than those treated with
mesalamine. The secondary endpoint of the trial measured the efficacy of
Colazide relative to mesalamine and included primary measures of complete
remission, symptomatic remission, and median time to complete relief of
symptoms. Colazide proved statistically significantly more effective than
mesalamine for the endpoints of complete remission, symptomatic remission, and
median time to complete relief of symptoms.
In addition to the two pivotal Phase III trials, the Company completed
another trial in February 1996, comparing two doses of Colazide to placebo and
evaluating 180 patients at multiple centers in the United States. Due to ethical
concerns regarding treatment of active-disease patients with placebo, the
Company limited the study to four weeks, which reduced the opportunity for
Colazide to demonstrate its full therapeutic effect and no significant
difference between placebo and Colazide for the primary efficacy endpoint was
found. However,
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patients treated with Colazide showed statistically significantly fewer side
effects than patients treated with placebo. In addition, the Company believes
the lack of difference in efficacy between the two treatments is attributable to
the nature of the patients enrolled and the short duration of the trial. Many of
the patients enrolled had previously failed treatment with other therapies,
including 5-ASA containing products such as mesalamine.
The Company initiated a Phase III/IV clinical study of Colazide in the
treatment of acute ulcerative colitis in December 1997 and anticipates
completion of the study in 1999.
Rifaximin
Rifaximin belongs to the rifamycin class of antibiotics and
distinguishes itself from others of analogous structure due to its almost
complete lack of absorption out of the gastrointestinal tract, which allows high
concentrations of the active drug to reach and be maintained in the digestive
tract. The Company licensed rights in the United States and Canada to rifaximin
from Alfa Wassermann, which developed and currently markets the product in Italy
for hepatic encephalopathy and chronic intestinal infections as well as for
prophylactic use with infective complications of gastrointestinal surgery. The
Company currently has full commercial rights for rifaximin for the treatment of
gastrointestinal and respiratory tract diseases in the United States and Canada
and intends to establish an independent sales and marketing organization for the
purpose of fully exploiting these rights. The Company will initially pursue
regulatory approvals for rifaximin for bacterial infectious diarrhea. In the
future, the Company plans to investigate developing rifaximin for other
potential indications.
In February 1998, the FDA granted the Company Orphan Drug Designation
for rifaximin to treat hepatic encephalopathy. Orphan Drug Designation is
generally available for indications affecting less than 200,000 patients. In
practice, it may allow an NDA to receive a priority review by the FDA, gives the
product seven years of market exclusivity for the orphan indication regardless
of the drug's patent status, and may allow the FDA to permit approval of an NDA
based on a single pivotal Phase III trial. See "--Government Regulation". The
Company believes that approximately 60,000 persons currently suffer from hepatic
encephalopathy in North America. As part of its agreement with Alfa Wassermann,
the Company obtained clinical trial data for rifaximin.
To the extent resources are available, the Company intends to conduct
additional clinical trials using rifaximin to treat bacterial infections of the
lower gastrointestinal tract including AAC caused by C difficile, a gram
negative bacterium for which there are currently few effective therapies. Based
on research conducted by Alfa Wassermann, the Company believes that rifaximin
has broad spectrum activity and may be shown to be effective against C
difficile. Oral vancomycin was until recently the preferred treatment for AAC.
However, the emergence of vancomycin-resistant bacteria has prompted the United
States Centers for Disease Control and Prevention to recommend limited use of
vancomycin. No other therapy has been approved for the treatment of AAC in the
United States. Independent research indicates that up to 2,000,000 people
develop AAC each year in North America.
Lafutidine
Lafutidine is a third generation anti-ulcer treatment having two modes
of action: suppression of acid secretion in the stomach and protection of the
lining of the gastrointestinal tract. The combination of these two modes of
action works to protect the upper gastrointestinal tract from the adverse
effects of gastric acid and non-steriodal anti-inflammatory drugs ("NSAIDs"). In
February of 1999, the Company entered into a letter agreement with Fujirebio,
Inc. of Tokyo, Japan ("Fujirebio"), a Japanese pharmaceutical company, for the
purpose of exploring the scientific efficacy and potential market opportunities
that Lafutidine may offer. Under the terms of the letter agreement, the Company
will be negotiating to obtain exclusive rights to Lafutidine throughout the
world, excluding Japan, Taiwan, Korea, Brazil and Argentina. The Company intends
to continue its investigation of the efficacy of Lafutidine while negotiating
the specific terms and conditions of what could become a licensing agreement
between the Company and Fujirebio. There can be no assurance that the Company
will be able to validate the results of scientific data it has received to date
concerning Lafutidine, that further investigation of the commercial
opportunities presented by Lafutidine will justify an affirmative decision by
the Company to conclude a license agreement with Fujirebio, that a license
agreement could be negotiated on terms satisfactory to the
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Company, or that the Company would be successful in obtaining the necessary
regulatory approvals, both in the United States and the other countries which
the letter agreement anticipates, to market Lafutidine.
STRATEGIC ALLIANCES
The Company enters into various collaborations with corporate partners,
licensors, licensees and others. To date, the Company has entered into the
following strategic alliances:
Biorex Laboratories Limited
The Company in-licensed balsalazide and all its salts, including the
Company's first product, Colazide (balsalazide disodium), from Biorex, a
private, independent drug company headquartered in England. Biorex developed
Colazide and completed limited Phase III clinical trials. Under its agreements
with the Company, Biorex will participate in future milestone revenues and
profits from Colazide.
Pursuant to an agreement between Biorex and the Company, Biorex granted
the Company the exclusive worldwide right (other than Japan, Taiwan, Korea, and
the United States) to develop, manufacture and sell balsalazide for all disease
indications for a period of 15 years from the date of commercial launch, subject
to early termination in certain circumstances, including upon the material
breach by either party and, in the case of Biorex, in the event of Salix's
bankruptcy or if a sublicensee of the Company terminates or becomes entitled to
terminate such sublicense as a result of actions by the Company. Under a
separate agreement, Biorex granted the Company the exclusive right to develop,
manufacture and sell balsalazide for all disease indications in the United
States for a period of nine years from the date of commercial launch or the term
of the applicable patent, whichever is longer. Under these agreements, the
Company paid Biorex fees upon entering into the agreements and is obligated to
make additional milestone and royalty payments for the drug. The royalty
payments to be made by the Company pursuant to the agreement governing the
United States market are based on net sales, subject to minimum royalty payments
for the first five years following commercial launch. Under the agreement
governing territories other than the United States, the Company is obligated to
pay to Biorex a portion of any gross profit on Colazide sales to Astra and
Menarini outside the United States. Pursuant to such agreements, the Company is
responsible for completion of preclinical testing, clinical trials and
regulatory approvals for balsalazide.
Alfa Wassermann S.p.A.
The Company in-licensed rifaximin from Alfa Wassermann, a privately held
pharmaceutical company headquartered in Italy. Alfa Wassermann has developed
several glycosaminoglycans, rifaximin and alpha-interferon from human
leukocytes. Alfa Wassermann's principal areas of therapeutic focus include
anti-thrombotics, antibiotics, gastrointestinal products, NSAIDs,
immunomodulators, anti-hypertensives, and bronchopulmonary products. During
recent years, Alfa Wassermann has formed alliances with international partners
to expand and strengthen its marketing and research activities.
Pursuant to an agreement with the Company, Alfa Wassermann granted the
Company, in exchange for certain royalties, the exclusive right in the United
States and Canada to develop, make, use and sell or have sold rifaximin for the
treatment of gastrointestinal and respiratory tract diseases. Alfa Wassermann
has agreed separately to supply the Company with bulk active ingredient
rifaximin at a fixed price.
Pursuant to the license agreement, the Company has agreed to pay Alfa
Wassermann a net sales-based royalty as well as certain milestone payments. The
Company's obligation to pay royalties commences upon the commercial launch of
the product and continues until the later of (i) the expiration of the period in
which the manufacture, use or sale of the products by an unlicensed third party
would constitute an infringement on the patent covering the product or (ii) the
expiration of a period of 10 years from commercial launch. Thereafter, the
licenses granted to the Company shall continue as irrevocable royalty-free
paid-up licenses.
The license agreement does not have a set term and continues until
terminated in accordance with its terms. Either party to the agreement may
terminate it following a material breach by the other party and the failure of
such
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breaching party to remedy such breach within 60 days. In addition, Alfa
Wassermann has the right to terminate the agreement on three-months' written
notice in the event that the Company fails to use best efforts to develop the
product in a timely manner, fails to effect commercial launch within six months
of receipt of regulatory approval or fails to sell the product for a period of
six consecutive months after commercial launch. In addition, Alfa Wassermann may
terminate the agreement if the Company becomes involved in bankruptcy,
liquidation or similar proceedings. The Company may terminate the agreement in
respect of any indication or any part of the territory covered on 90 days'
notice at which point its rights with respect to such indiction or territory
shall cease.
Astra AB
Astra, an international pharmaceutical company headquartered in Sweden,
has extensive experience developing and marketing therapies for gastrointestinal
diseases. The Company's alliance with Astra partially funded the development of
Colazide. Through December 31, 1998, Salix had received revenues for milestone
payments and product development funding of approximately $13.6 million out of a
total of $19.0 million payable upon achievement of certain milestones under its
agreements with Astra. The remaining milestone revenues relate to European
marketing approvals, and FDA approval of the NDA. Under the terms of agreements
between the Company and Astra, the Company will sell encapsulated Colazide to
Astra for marketing and distribution in its territories at a price based on a
percentage of Astra's average ex-factory sales price. Astra launched Colazide in
the United Kingdom in October 1997 and intends to launch in Sweden in the first
quarter of 1999.
In October 1998 the Company signed an agreement with Astra in which the
Company will receive 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 received $1.0 million within 15 days
after signing the agreement and will receive $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 expects to receive the final two
installments 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"), 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.
Pursuant to contracts between the Company and Astra, the two companies
agreed to collaborate in developing and obtaining regulatory approval of
Colazide in all the countries of the world excluding Italy, Spain, Portugal, and
Greece (collectively, "Southern Europe") and Japan, Taiwan and Korea
(collectively, "East Asia"). Under these agreements, the Company granted Astra
exclusive distribution rights to Colazide in all markets (except for Southern
Europe and East Asia) for specified indications. In addition, the companies
agreed to collaborate on development and promotional plans for Colazide in the
United States market. Astra is obligated to provide the Company with milestone,
license and development payments, and has agreed to purchase encapsulated
product from the Company at a transfer price based on a percentage of Astra's
selling price. In addition, the Company granted Astra certain rights of first
negotiation with respect to the development and exploitation of additional
indications for balsalazide disodium and a right of first refusal to obtain
marketing rights in the United States for gastrointestinal products for which
Salix chooses not to assume the sole and exclusive responsibility for marketing.
For new indications for Colazide, the agreements provide that the Company cannot
market Colazide, either directly or through third parties, without the prior
consent of Astra.
The distribution agreement with Astra (which covers all countries of the
world except the United States, Southern Europe and East Asia) has a base term
of 15 years from the date of initial commercial launch, unless terminated
earlier in accordance with its terms. The agreement governing the United States
market expires, unless terminated earlier in accordance with its terms, upon the
later of (i) the expiration of the validity of the last of the
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patents relating to the product or (ii) nine years from launch of the product,
except with respect to provisions governing trademark license, indemnification
and confidential information each of which have independent termination
provisions. Under both agreements, either party to the agreement is entitled to
terminate the agreement upon a material breach by the other party and the
failure to remedy such breach within 30 days in the case of a payment breach or
90 days in the case of any other material breach or if the other party enters
bankruptcy, liquidation or similar proceedings.
Menarini Pharmaceutical Industries s.r.l.
Menarini, headquartered in Italy, is the largest manufacturer and
distributor of pharmaceuticals in Southern Europe. Menarini also has extensive
experience developing and marketing therapies for gastrointestinal disease in
its markets. Under its agreements with Menarini, the Company granted Menarini
certain manufacturing rights and exclusive distribution rights with respect to
Colazide in Italy, Spain, Portugal and Greece. Through December 31, 1998 the
Company had received revenues as partial contribution to research and
development costs borne by the Company of approximately $1.2 million. The
agreement calls for additional milestone revenues to be paid to Salix relating
to European marketing approvals in the Menarini territories. The funding
provided through this alliance has allowed Salix to fund partially the
development of Colazide. Under the terms of its agreements, Salix will sell bulk
active ingredient Colazide to Menarini for marketing and distribution in its
territories at cost plus a sales-based royalty.
Unless terminated sooner in accordance with its terms, the agreement
with Menarini continues until the earlier of the expiration of (i) the patents
relating to the product or (ii) a period of 15 years from the date of the
agreement, provided however that in any case the agreement shall continue for a
period of 10 years from the date of first launch. Either party may terminate the
agreement upon a material breach by the other party and the failure to remedy
such breach within 30 days in the case of a payment breach or 90 days in the
case of any other material breach or if a party enters liquidation, bankruptcy
or similar proceedings.
MANUFACTURING
The Company has in the past used and will continue to use third party
manufacturers to produce material for use in clinical trials and for commercial
product. This manufacturing strategy enables the Company to direct its financial
resources to product in-licensing and acquisition, product development, and
sales and marketing efforts, without devoting resources to the time and cost
associated with building large manufacturing plants.
Currently, bulk active ingredient Colazide is being manufactured for the
Company by Akzo in Scotland and is being encapsulated by Anabolic in Irvine,
California. The Company is in the process of validating the manufacturing
process of another company for the purpose of providing bulk encapsulated
balsalazide to European countries and the United States.
Under its supply agreement with the Company, Alfa Wassermann is
obligated to supply the Company with bulk active ingredient rifaximin.
Currently, Alfa Wassermann manufactures rifaximin for the Italian and other
European markets. At present, the Company is negotiating with several firms to
produce bulk active ingredient rifaximin under GMP standards for the infectious
diarrhea Phase III trial the Company plans to commence in the first quarter of
1999.
MARKETING AND SALES
The Company has retained marketing rights in the United States and
Canada to rifaximin and plans to establish its own marketing and sales
organization for rifaximin and future products. The Company intends to establish
a small, specialized sales force to market rifaximin to the limited group of
approximately 9,700 gastroenterologists in the United States who are responsible
for treating most gastrointestinal disease. The Company believes that a domestic
direct sales force can effectively reach this small number of physicians without
the investment needed to develop and maintain a large sales force. This direct
sales force model will be the basis for the commercialization of rifaximin and
future products in the United States.
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The Company has licensed the exclusive distribution rights for Colazide
to Astra and Menarini. The commercial relationships with Astra and Menarini have
provided the Company money needed to fund the late-stage development of
Colazide, to in-license other gastrointestinal products and to help establish
the Company as a viable gastrointestinal pharmaceutical company. The Company
received the necessary funding in exchange for the grant of exclusive
distribution rights to Astra and Menarini. The Company plans to implement future
North American product sales and marketing based on the direct sales force
model. See "-Strategic Alliances."
PATENTS AND PROPRIETARY RIGHTS
General
As with all pharmaceutical companies, the Company's success will depend
on its ability to maintain patent protection for its products, preserve trade
secrets, prevent third parties from infringing upon its proprietary rights, and
operate without infringing upon the proprietary rights of others, both in the
United States and internationally.
Colazide
The active ingredient of Colazide, balsalazide, and the method of
treating ulcerative colitis with Colazide are the subject of composition of
matter patents which have been issued to Biorex in the United States (expiring
July 2001), the United Kingdom (expiring July 2006), France (expiring May 2002),
Italy (expiring July 2001), and Germany (expiring April 2002). The Company holds
exclusive worldwide rights under the issued patents, excluding Japan, Korea and
Taiwan. The patents claim balsalazide disodium as well as several variant
molecules.
The Company has filed additional patent applicationsin its own name
covering the use of balsalazide or any metabolite thereof for colorectal cancer
chemoprevention. A patent for the method of treating colon cancer was issued in
the United States to the Company in March 1996 and expires in January 2014.
Assuming patents issue for pending applications, patents for the method of
treating colon cancer will expire in January 2015 in various countries in
Europe, Asia, and North America. Claims to additional metabolites are still
pending in subsequent filings worldwide. No assurances can be given that such
additional patents will issue or, if issued, that they will provide protection
against similar or competing products.
Rifaximin
Rifaximin is covered by substance of matter patents which have issued in
the United States and major market territories of Europe. The original United
States composition-of-matter patent, which also covers the process of making
rifaximin and the use of rifaximin for the treatment of gastrointestinal
infectious diseases, expires in May 2001. A related Canadian patent also expires
in May 2001. Additional patents on a manufacturing process and on the use of
rifaximin for the treatment of H. pylori infections have been issued in the
United States to Alfa Wassermann and such patents expire in April 2005 and June
2013, respectively. Related Canadian patents expire in April 2005 and February
2014, respectively.
Patent Term Extensions
The Company believes that some of these patents may be eligible for
extensions of up to five years based upon patent term restoration procedures in
Europe and in the United States under the Waxman-Hatch Act. Under the
Waxman-Hatch Act, the United States Patent and Trademark Office is directed to
extend the term of an eligible patent for a time equal to the "regulatory review
period for the approved product". This time period is generally one-half the
length of time between the effective date of the IND and submission of the NDA,
plus the length of time between filing and approval of the NDA, up to a total
possible extension of five years. Periods during which the applicant did not act
with "due diligence" are subtracted from the regulatory review period. Under
this law, the Colazide patent in the United States could be extended by up to
five years, giving the product patent protection until as late as 2006 if
approval in the United States is received before expiration of the original
patent term in 2001. In
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addition, the Company intends to seek patent extensions under similar laws in
effect in the European Union, which could give Colazide extended patent
protection in these jurisdictions until as late as 2006. For instance, the
United Kingdom regulatory authorities has granted a Supplemental Protection
Certificate extending the expiration date of the United Kingdom patent from
February 2002 to July 2006.
GOVERNMENT REGULATION
The research, testing, manufacture, marketing and distribution of drug
products are extensively regulated by governmental authorities in the United
States and other countries. In the United States, drugs are subject to rigorous
regulation by the FDA. The Federal Food, Drug and Cosmetic Act, as amended (the
"FDC Act"), and the regulations promulgated thereunder, and other federal and
state statutes and regulations, govern, among other things, the research,
development, testing, manufacture, storage, record keeping, labeling, promotion
and marketing and distribution of pharmaceutical products. Failure to comply
with applicable regulatory requirements may subject a company to administrative
sanctions or judicially imposed sanctions such as civil penalties, criminal
prosecution, injunctions, product seizure or detention, product recalls, and
total or partial suspension of product marketing and/or approvals. In addition,
non-compliance may result in the FDA's refusal to approve pending NDAs or
supplements to approved NDAs or in the withdrawal of an NDA. Any such sanction
could result in adverse publicity, which could have a material adverse effect on
the Company's business, financial conditions, and results of operation.
The steps ordinarily required before a new pharmaceutical product may be
marketed in the United States include: (i) preclinical laboratory tests,
preclinical studies in animals and formulation studies; (ii) the submission to
the FDA of a notice of claimed investigational exemption for a new drug or
antibiotic, which must become effective before clinical testing may commence;
(iii) adequate and well-controlled clinical human trials to establish the safety
and efficacy of the drug for each indication; (iv) the submission of an NDA to
the FDA; and (v) FDA review and approval of the NDA prior to any commercial sale
or shipment of the drug. Preclinical tests include laboratory evaluation of
product chemistry and formulation, as well as animal studies to assess the
potential safety and efficacy of the product. Preclinical tests must be
conducted in compliance with Good Laboratory Practice regulations. The results
of preclinical testing are submitted to the FDA as part of an IND. A 30-day
waiting period after the filing of each IND is required prior to the
commencement of clinical testing in humans. In addition, the FDA may, at any
time during this 30-day period or at any time thereafter, impose a clinical hold
on proposed or ongoing clinical trials. If the FDA imposes a clinical hold,
clinical trials cannot commence or recommence without FDA authorization and then
only under terms authorized by the FDA. In some instances, the IND application
process can result in substantial delay and expense.
Clinical trials to support NDAs are typically conducted in three
sequential phases, but the phases may overlap. In Phase I, the initial
introduction of the drug into healthy human subjects or patients, the drug is
tested to assess metabolism, pharmacokinetics and pharmacological actions and
safety, including side effects associated with increasing doses. Phase II
usually involves studies in a limited patient population to (i) assess the
efficacy of the drug in specific, targeted indications, (ii) assess dosage
tolerance and optimal dosage and (iii) identify possible adverse effects and
safety risks. If a compound is found to be potentially effective and to have an
acceptable safety profile in Phase II evaluations, Phase III trials are
undertaken to further demonstrate clinical efficacy and to further test for
safety within an expanded patient population at geographically dispersed
clinical study sites. There can be no assurance that Phase I, Phase II or Phase
III testing will be completed successfully within any specified time period, if
at all, with respect to any of the Company's products subject to such testing.
After successful completion of the required clinical testing, generally
an NDA is submitted. FDA approval of the NDA is required before marketing may
begin in the United States. The FDA reviews all NDAs submitted before it accepts
them for filing and may request additional information rather than accepting an
NDA for filing. In such an event, the NDA must be resubmitted with the
additional information and, again, is subject to review before filing. Once the
submission is accepted for filing, the FDA begins an in-depth review of the NDA.
Under the FDC
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Act, the FDA has 180 days in which to review the NDA and respond to the
applicant. The review process is often significantly extended by FDA requests
for additional information or clarification regarding information already
provided in the submission. The FDA may refer the application to an appropriate
advisory committee, typically a panel of clinicians, for review, evaluation and
a recommendation as to whether the application should be approved. The FDA is
not bound by the recommendation of an advisory committee. If FDA evaluations of
the NDA and the manufacturing facilities are favorable, the FDA may issue either
an approval letter or an approvable letter, which usually contains a number of
conditions that must be met in order to secure final approval of the NDA. When
and if those conditions have been met to the FDA's satisfaction, the FDA will
issue an approval letter, authorizing commercial marketing of the drug for
certain indications. If the FDA's evaluation of the NDA submission or
manufacturing facilities is not favorable, the FDA may refuse to approve the NDA
or issue a not approvable letter, outlining the deficiencies in the submission
and often requiring additional testing or information. If regulatory approval of
Colazide or any other product is granted, such approval will be limited to those
disease states and conditions for which the product has been found by the FDA to
be safe and effective, as demonstrated through well controlled clinical studies.
Even if such regulatory approval is obtained, a marketed 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.
For antibiotic drug products such as rifaximin, FDA testing and approval
procedures are analogous to those applicable to non-antibiotic drugs except that
approval also requires the establishment of an antibiotic monograph setting
forth the tests and specifications for the drug, which are published by the FDA
as a regulation and codified in the Code of Federal Regulations.
In June 1998, the Company received an approvable letter for the NDA
submitted to the FDA in June 1997 covering the use of Colazide as a therapy for
acute ulcerative colitis. Under the terms of the approvable letter, pre-market
clearance can be obtained only if the FDA determines that the Company has met
the requirements set forth in the approvable letter. There can be no assurance
that the Company can demonstrate, to the FDA's satisfaction, that requirements
of the approvable have been met. If clinical data, in addition to that filed in
the NDA, is requested from the Company to support approval of Colazide, such a
request is likely to significantly delay approval of the product, if approval is
granted at all. If regulatory approval of Colazide or any other product is
granted, such approval will be limited to those disease states 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.
Under the Orphan Drug Act, the FDA may designate a product as an orphan
drug if it is a drug intended to treat a "rare disease or condition," which is a
disease or condition that affects populations of fewer than 200,000 individuals
in the United States or a disease whose incidence rates number more than 200,000
where the sponsor establishes that it does not realistically anticipate that its
product sales will be sufficient to recover its costs. The sponsor that obtains
the first marketing approval for a designated orphan drug for a given rare
disease is eligible to receive marketing exclusivity for use of that drug for
the orphan indication for a period of seven years. In February 1998, the FDA
granted the Company Orphan Drug Designation for rifaximin to treat hepatic
encephalopathy.
Drug manufacturing establishments are subject to periodic inspection by
regulatory authorities and must comply with Good Manufacturing Practice
regulations. The Company or its third party manufacturer must pass a preapproval
inspection of its manufacturing facilities by the FDA before obtaining marketing
approval of any products for sale in the United States. These manufacturers are
also subject to periodic FDA inspections. In the event that violations of
applicable standards are found, the Company may be required to cease
distribution of some or all products and may be required to recall products
already distributed.
REGULATION OF DRUG COMPOUNDS OUTSIDE OF THE UNITED STATES
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<PAGE> 19
Outside the United States, the Company's ability to market a product is
contingent upon receiving marketing authorizations from the appropriate
regulatory authorities. The requirements governing the conduct of clinical
trials and marketing authorization vary widely from country to country. At
present, foreign marketing authorizations are applied for at a national level,
although within the European Union procedures are available to companies wishing
to market a product in more than one European Union member state. The foreign
regulatory approval process includes all of the risks associated with FDA
approval set forth above.
To market its products in Europe, the Company also must satisfy foreign
regulatory requirements, implemented by foreign health authorities, governing
human clinical trials and marketing approval. In the United Kingdom, the sale
and marketing of new drugs is subject to the approval of the Medicines Control
Agency (the "MCA"). As in the United States, a company seeking regulatory
approval must submit an application requesting such approval, which is referred
to as a Product Licence Application ("PLA"). The PLA is submitted after
completion of pre-clinical and clinical studies. The MCA may request additional
clinical information on efficacy or safety before formally reviewing the
application. Following a review of the PLA, the MCA makes a determination as to
approval of the new drug compound. The review process in the United Kingdom is
subject to many of the same uncertainties and risks associated with the approval
of new drugs by the FDA in the United States. Furthermore, approval may entail
ongoing requirements for post-marketing studies. Even if such regulatory
approval is obtained, a marketed product and its manufacturer and its
manufacturing facilities are subject to continual review and periodic
inspections by the MCA.
Under a relatively new regulatory system in Europe, marketing
authorizations, broadly speaking, may be submitted at either a centralized, a
decentralized or a national level. The centralized procedure is mandatory for
the approval of biotechnology and high technology products and available at the
applicant's option for other products. The centralized procedure provides for
the first time in the European Union (the "EU") for the grant of a single
marketing authorization which is valid in all EU Member States.
The decentralized procedure, which began in January 1998, created a new
system for mutual recognition of national approval decisions, makes changes in
existing procedures for national approvals and establishes procedures for
coordinated EU actions on products, suspensions and withdrawals. Under this
procedure, the holder of a national marketing authorization for which mutual
recognition is sought may submit an application to one or more Member States,
certify that the dossier is identical to that on which the first approval was
based or explain any differences and certify that identical dossiers are being
submitted to all Member States for which recognition is sought. Within 90 days
of receiving the application and assessment report, each Member State must
decide whether to recognize the approval. The procedure encourages Member States
to work with applicants and other regulatory authorities to resolve disputes
concerning mutual recognition. Lack of objection of a given country within 90
days automatically results in approval of the EU country. If such disputes
cannot be resolved within the 90 day period provided for review, the application
will be subject to a binding arbitration procedure. Notwithstanding these
simplified procedures, the foreign regulatory approval process includes many of
the risks associated with FDA approval set forth above. The PLA that the Company
filed with the MCA for the acute ulcerative colitis indication, which was
approved in July 1997, was filed under these mutual recognition procedures. See
"Products Under Development - Colazide."
The Company will choose the appropriate route of European regulatory
filing to accomplish the most rapid regulatory approvals. However, there can be
no assurance that the chosen regulatory strategy will secure regulatory
approvals or approvals of the Company's chosen product indications. Furthermore,
the Company must obtain pricing approval prior in addition to regulatory
approval prior to launching the product in the approving country. Failure to
obtain pricing approval in a timely manner or approval of pricing which would
support an adequate return on investment or generate a sufficient margin to
justify the economic risk may delay or prohibit the commercial launch of the
product in those countries.
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<PAGE> 20
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 that are engaged in research and development
efforts for 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 noncompetitive. 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 human resources and development capabilities than the
Company. For example, many large, well capitalized companies already offer
products in the United States and Europe that will compete with the Company's
proposed therapeutic applications of Colazide, including mesalamine (SmithKline
Beecham plc, Dr. Falk Pharma GmbH, Pharmacia & Upjohn, Inc., Solvay S.A., The
Procter & Gamble Company, and Hoechst Marion Roussel, Inc.), sulfasalazine
(Pharmacia & Upjohn, Inc.), and olsalazine (Pharmacia & Upjohn, Inc.).
Technological developments by competitors, earlier regulatory approval for
marketing competitive products, or superior marketing capabilities possessed by
competitors could adversely affect the commercial potential of the Company's
products, including Colazide, and could have a material adverse effect on the
Company's business, financial condition, and results of operations. In addition,
manufacturers of generic drugs may seek to compete directly with the Company's
products in the absence of effective patent protection or non-patent exclusivity
protections.
EMPLOYEES
As of December 31, 1998, the Company had 16 employees. The Company
believes that its future success will depend in part on its continued ability to
attract, hire, and retain qualified personnel. Competition for such personnel is
intense, and there can be no assurance that the Company will be able to
identify, attract, and retain such personnel in the future. None of the
Company's employees is represented by a labor union. The Company has not
experienced any work stoppages and considers its relations with its employees to
be good.
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<PAGE> 21
ITEM 2. PROPERTIES
The Company's headquarters are located in Palo Alto, California, where
it occupies approximately 5,000 square feet of office space under a lease
extending through August 31, 2001. The Company considers this space adequate for
its anticipated needs into the foreseeable future. In addition, the Company
leases approximately 200 square feet of office space in Hamilton, Bermuda and
approximately 260 square feet of office space in Dorset, England.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is party to various legal proceedings or
claims, either asserted or unasserted, which arise in the ordinary course of
business. Management has reviewed pending legal matters and believes that the
resolution of such matters will not have a significant adverse effect on the
Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders during
the fourth quarter of the year ended December 31, 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the
Company's executive officers as of March 1, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Randy W. Hamilton.......... 44 Chairman, President and Chief Executive Officer
John Brough................ 45 President, Glycyx Pharmaceuticals, Ltd.
Alvaro E. Carvajal......... 54 Vice President, Information Systems (Salix California)
Lorin K. Johnson, Ph.D..... 46 Vice President, Research and Development (Salix
California), and Director
Robert P. Ruscher.......... 38 Vice President, Corporate Development
Lise Riopel, Ph.D. ........ 43 Vice President, Clinical Affairs
</TABLE>
RANDY W. HAMILTON is a co-founder of the Company and has served as
Chairman of its Board of Directors and President and Chief Executive Officer
since December 1993. From November 1989 to present, Mr. Hamilton has also served
as President and Chief Executive Officer and as a director of Salix
Pharmaceuticals, Inc. Prior to 1989, Mr. Hamilton served as Director of Planning
and Business Development with SmithKline Diagnostics, Inc., a medical diagnostic
subsidiary of SmithKline Beecham plc, a pharmaceutical company, and as head of
Asian business development for California Biotechnology Inc. (now Scios, Inc.),
a biotechnology company.
JOHN BROUGH has served as President of Glycyx Pharmaceuticals, Ltd.
since July 1996. From April 1995 to April 1996, he served as President, and from
May 1989 to April 1995 as Director, Finance and Administration, of Syntex
Pharmaceuticals International Ltd., a subsidiary of Syntex Corporation
("Syntex"), a pharmaceutical company acquired in 1994 by The Roche Group.
ALVARO E. CARVAJAL has served as the Vice President, Information Systems
of Salix Pharmaceuticals since August 1997. From January 1994 to August 1997,
Mr. Carvajal served as the Director, Information Systems of Salix
Pharmaceuticals. From 1989 to January 1994, he served as an international
systems consultant for Syntex.
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<PAGE> 22
LORIN K. JOHNSON, PH.D. is a co-founder of the Company and has served as
a member of its Board of Directors since December 1993. From November 1989 to
present, Dr. Johnson has served as Vice President, Research and Development and
as a director of Salix California. Prior to co-founding Salix, Dr. Johnson
served as Director of Scientific Operations at California Biotechnology Inc.
Prior to joining California Biotechnology, Dr. Johnson was assistant Professor
of Pathology at Stanford University Medical Center.
ROBERT P. RUSCHER has served as the Company's Vice President, Corporate
Development since February 1996. From May 1996 to November 1996, he also served
as the Company's Chief Financial Officer. From April 1995 to February 1996, Mr.
Ruscher served as Director of Corporate Affairs. Since April 1994, Mr. Ruscher
has been associated with the law firm of Wyrick, Robbins, Yates & Ponton, L.L.P.
in Raleigh, North Carolina. From February 1993 to April 1994, Mr. Ruscher was an
associate at the law firm Venture Law Group in Menlo Park, California, and from
August 1989 to February 1993, he was an associate at the law firm Wilson Sonsini
Goodrich & Rosati in Palo Alto, California.
LISE RIOPEL has served as the Company's Vice President, Clinical Affairs
since January 1999. From May 1998 to January 1999, Ms. Riopel served as the
Company's Director, Clinical Affairs. From February 1996 to May 1998, Ms. Riopel
was employed by Xoma Corporation as Director, Clinical Operations. From April
1994 to February 1996, Ms. Riopel served as the Senior Director, Project
Management-East for iBRD - Rostrum Global.
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<PAGE> 23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
From May 1996 to October 1997, the Company's Common Shares traded on The
Toronto Stock Exchange exclusively under the symbol "SLX.s" following the
Company's initial public offering in Canada in May 1996. The suffix "s" on the
trading symbol reflected the Company's reliance, in connection with such
offering, on the exemption from the registration requirements of the United
States Securities Act of 1933, as amended (the "Securities Act"), set forth in
Regulation S thereunder. In October 1997, the Company completed a secondary
public offering in Canada and an initial public offering in the United States,
and the Common Shares issued in that offering were traded and quoted separately
under the symbol "SLX." On May 28, 1998, all of the Company's Common Shares
available for resale on The Toronto Stock Exchange began to trade under the
symbol "SLX." The following is a summary of the market price range in Canadian
dollars and the aggregate volume for the Common Shares as reported on The
Toronto Stock Exchange for the periods indicated. On December 31, 1998, The Bank
of Canada noon rate of exchange for United States Dollars into Canadian Dollars
was Cdn. $ 1.4296 = U.S. $1.00.
<TABLE>
<CAPTION>
SHARES TRADED UNDER SYMBOL "SLX.s" SHARES TRADED UNDER SYMBOL "SLX"
------------------------------------- ---------------------------------
HIGH LOW SHARE HIGH LOW SHARE
(CDN.$) (CDN.$) VOLUME (CDN.$) (CDN.$) VOLUME
------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Fiscal Year ended December 31, 1998
Fourth Quarter 1998............ 1.84 .50 2,265,955
Third Quarter 1998............. 5.50 1.05 1,840,670
Second Quarter 1998(1) ........ 7.85 6.25 58,370 8.00 4.50 275,435
First Quarter 1998 ............ 8.50 4.25 862,358 8.40 4.75 461,330
Fiscal Year ended December 31, 1997
Fourth Quarter 1997(2) ........ 7.90 5.00 295,938 7.05 5.00 445,354
Third Quarter 1997 ............ 9.00 6.50 235,200
Second Quarter 1997............ 9.95 7.60 640,283
First Quarter 1997............. 9.35 4.25 1,016,263
</TABLE>
(1) In the case of shares traded under the "SLX.s" symbol, through May 28, 1998.
(2) In the case of shares traded under the "SLX" symbol, from October 16, 1997.
On December 31, 1998, the closing price for the Common Shares as
reported on The Toronto Stock Exchange was Cdn. $1.25. As of March 22, 1999,
there were approximately 1,733 shareholders of record.
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, were not freely
tradable in the United States until October 1997, and no public trading market
currently exists for the Common Shares in the United States. Trading volume in
the Common Shares on The Toronto Stock Exchange has been relatively 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
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<PAGE> 24
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.
For a more thorough discussion of risks associated with purchasing or
holding the Common Shares, see the section captioned "Factors Affecting Future
Results" under Management's Discussion and Analysis of Financial Condition and
Results of Operations.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital
stock. The Company currently expects to retain future earnings, if any for use
in the operation and expansion of business and does not anticipate paying any
cash dividends in the foreseeable future.
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<PAGE> 25
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and the
Notes thereto included elsewhere in this report. The statements of operations
data for each of the three years in the period ended December 31, 1998, and the
balance sheet data as of December 31, 1998 and 1997, are derived from financial
statements of the Company that have been audited by Ernst & Young LLP,
independent auditors, and are included elsewhere in this report. The statements
of operations data for the years ended December 31, 1995 and 1994 and the
balance sheet data as of December 31, 1996, 1995 and 1994 are derived from the
audited financial statements of the Company that are not included in this
report. The Company has paid no cash dividends.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Product revenue ........................... $ 559 $ 245 $ -- $ -- $ --
Revenues from collaborative
agreements and other ................ 1,000 1,821 1,820 1,990 2,827
-------- -------- -------- -------- --------
Total revenues ........................... 1,559 2,066 1,820 1,990 2,827
Expenses:
Cost of products sold ..................... 926 827 -- -- --
License fees .............................. 78 461 605 100 --
Research and development .................. 5,967 3,516 2,053 2,888 3,199
General and administrative ................ 2,569 2,430 1,731 1,334 1,125
-------- -------- -------- -------- --------
Total expenses ........................... 9,540 7,234 4,389 4,322 4,324
-------- -------- -------- -------- --------
Loss from operations ........................ (7,981) (5,168) (2,569) (2,332) (1,497)
Interest income ............................. 502 400 290 18 48
Interest and other expense, net ............. 70 (22) (172) (106) (3)
-------- -------- -------- -------- --------
Net loss .................................... $ (7,409) $ (4,790) $ (2,451) $ (2,420) $ (1,452)
======== ======== ======== ======== ========
Net loss per share, basic and
diluted(1) ............................... $ (0.73) $ (0.63) $ (0.46) $ (0.77) $ (0.46)
======== ======== ======== ======== ========
Shares used in computing net loss
per share(1) ............................ 10,208 7,613 5,365 3,149 3,144
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents ............ $ 2,763 $ 15,173 $ 5,624 $ 188 $ 329
Short term investments ............... 4,500 -- -- -- --
Working capital (deficit) ............ 6,553 13,884 4,438 (3,432) (3,061)
Total assets ......................... 8,256 15,878 5,858 433 593
Long-term liabilities ................ -- -- -- 2,005 --
Accumulated deficit .................. (20,800) (13,391) (8,601) (6,150) (3,729)
Shareholders' equity (net capital
deficiency) ....................... 6,826 14,129 4,593 (5,226) (2,813)
</TABLE>
(1) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of shares used in computing net loss per share.
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<PAGE> 26
ITEM 7. 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" and elsewhere in, or incorporated by
reference into, this report.
Unless otherwise indicated, all references to "dollars" or "$" refer to
United States dollars. The Company's Common Shares trade on The Toronto Stock
Exchange and are quoted in Canadian dollars.
OVERVIEW
The Company's principal focus is to identify and acquire
gastrointestinal products that have near-term commercial potential and to apply
its product development expertise to commercialize these products. The Company
selects products that it believes serve a gastrointestinal disease in need of
new treatments, have the potential for rapid regulatory approval, and are
marketable to a small group of specialized physicians. The Company believes this
strategy will reduce the expense, time and risk normally associated with
pharmaceutical development. The Company believes that its first two products,
Colazide 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 losses and expects its operating expenses to
increase as the Company expands upon its Colazide commercialization efforts in
the United Kingdom and, subject to regulatory approval, elsewhere in Europe and
continues product development and commercialization of other products. As of
December 31, 1998, the Company had accumulated losses of approximately $20.8
million. Since 1992, the Company has financed its operations principally through
reimbursement payments, license fees and milestone revenues, totaling
approximately $16.8 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 $29.8 million, of which $17.7 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 Salix to fund the
development of Colazide, to in-license other gastrointestinal products, and to
help establish itself with a relatively small amount of outside capital.
The Company's collaborative research and licensing agreements provide
for payments in support of the Company's research activities, as well as
additional payments for licensing fees and upon the attainment of specified
milestones. Research reimbursements under these agreements are recorded when
earned based on contract costs incurred to date compared with total estimated
contract costs. License fees and milestone revenues are recognized according to
contract terms. Amounts received in advance of the applicable research
activities are deferred as unearned revenue. Amounts received which are
refundable until the milestones are achieved are deferred as advances from
licensees until earned.
The Company licensed balsalazide from Biorex Laboratories Limited
("Biorex") in exchange for participation in future milestone revenues and
profits. The Company will sell Colazide, the disodium salt of balsalazide, which
is manufactured by third parties under contract with the Company, to its
distribution partners, Astra and Menarini, at a formula price. The Company
received approval in July 1997 to market Colazide in the United Kingdom for the
treatment of acute ulcerative colitis. Astra launched Colazide commercially in
October 1997 in the United Kingdom. Commercial launches of Colazide are expected
in other European countries by Astra and Menarini beginning in 1999, subject to
receipt of regulatory and pricing approvals. The Company recognized its initial
product revenues from Astra's sales of Colazide in 1997 and recognized nominal
product revenues from sales of Colazide by Menarini in 1998. The selling price
of Colazide to Astra outside the United Kingdom and Sweden has not been
determined, and the Company will be obligated to pay to Biorex, the original
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<PAGE> 27
licensor of the product, a portion of any gross profit on Colazide sales to
Astra and Menarini outside the United States. In addition, the Company
anticipates high initial product launch costs due to the cost of scaling up
manufacturing processes for commercial distribution.
The Company's second product, rifaximin, is currently under development.
The Company obtained the rights to develop, make, use and sell rifaximin in
Canada and the United States from Alfa Wassermann S.p.A. ("Alfa Wassermann") in
exchange for future royalties and milestone payments. Under a separate
agreement, Alfa Wassermann will supply Salix with bulk active ingredient
rifaximin at a fixed price. If regulatory approvals are obtained, the Company
intends to establish its own direct sales force to market rifaximin. This
strategy for rifaximin represents the business model that the Company intends to
adopt for future product development and commercialization. Although the
creation of an independent sales organization will require a substantial
investment by the Company, the Company anticipates that the financial results
from rifaximin and future products will be more favorable to the Company than
those anticipated from the sale of Colazide by Astra and Menarini since the
Company has retained the distribution rights to rifaximin, whereas Astra and
Menarini have the distribution rights for Colazide. In the case of Colazide, the
Company granted exclusive distribution rights in certain territories in exchange
for funding needed to complete late-stage development of Colazide, to in-license
other gastrointestinal products and to help establish the Company as a viable
gastrointestinal pharmaceutical company. The Company is currently unable to
provide a meaningful estimate of the investment required to create an
independent sales organization because such investment is dependent on a number
of contingencies, including receipt of necessary regulatory approvals and
developments with current and future strategic partners.
The Company intends to pursue regulatory approvals for a single initial
indication for rifaximin, bacterial infectious diarrhea, with the cost of the
clinical trials being borne by Salix. The Company plans further development of
rifaximin for several other possible indications, which may include hepatic
encephalopathy and AAC. 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
Years Ended December 31, 1998, 1997, and 1996
Revenues for the year ended December 31, 1998 included product revenues
of $559,000 and revenues from collaborative agreements of $1.0 million from
Astra in connection with an on-going clinical trial related to Colazide. In the
second quarter of 1998, the Company initially recognized milestone revenue
totaling $501,000 in connection with Astra having obtained regulatory approval
from Swedish regulators to market Colazide within Sweden. Subsequently, in the
fourth quarter ended December 31, 1998, the Company reversed the recognition of
this revenue when it was determined that price approval, which is a condition
upon which revenues are due, had not been formally obtained as of that date. In
February 1999, the Company received formal notification of price approval from
the Swedish regulators and intends to recognize this revenue in the first
quarter of 1999. Revenues for the year ended December 31, 1997 included the
Company's initial revenues from Colazide product sales of $245,000 and milestone
revenues of $1.8 million relating to the approval of Colazide in the United
Kingdom and the filing of the NDA for Colazide in the United States. Revenues
totaled $1.6 million, $2.1 million, and $1.8 million for 1998, 1997, and 1996,
respectively. For 1996, license revenues were $1.2 million and revenue from
collaborative agreements for product development was $0.6 million. In 1996,
revenues from collaborative agreements for product development decreased as as
compared to 1995 as certain clinical trials for Colazide were completed.
Operating expenses were $9.5 million, $7.2 million and $4.4 million for 1998,
1997 and 1996, respectively. The increase in operating expenses is a result of
increases in all expense categories as noted below.
The Company recognized cost of products sold of $926,000 for the year
ended December 31, 1998. The Company recognized its first cost of products sold
related to initial product sales in the year ended December 31, 1997 of $0.8
million. Prior to 1997, the Company had no product revenues. Initial costs of
products are expected to remain high due to the cost of scaling up manufacturing
processes for commercial distribution.
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<PAGE> 28
License fee expenses of $.08 million, $0.5 million and $0.6 million in
1998, 1997 and 1996, respectively relate primarily to payments made to Biorex
and Alfa-Wassermann under the terms of the respective license agreements.
Research and development expense was $6.0, $3.5 million and $2.1 million
for 1998, 1997 and 1996, respectively. The increase in research and development
expenses in 1998 is due primarily to increased regulatory affairs activities to
maintain the NDA filing in the United States, as well as preparation for and
implementation of new development related activities for rifaximin. The increase
in research and development expense in 1997 as compared to 1996 included a one
time non-cash charge recognized in the third quarter of 1997 of $0.3 million
relating to modification of the terms of an existing employee stock option
arrangement. Research and development expense is expected to increase
significantly as additional clinical trials for Colazide and rifaximin are
initiated. Research and development expenses through 1996 are primarily for
clinical trials and both domestic and foreign regulatory affairs activities
related to the development of Colazide. General and administrative expenses were
$2.6million, $2.4 million and $1.7 million for 1998, 1997 and 1996,
respectively. The increases are due mainly to additions of key personnel and the
increased administrative costs related to being a public company in Canada.
Interest income for 1998 increased from 1997 by $0.1 million due to
larger average cash reserves in 1998 after completion of the follow-on public
offering in October 1997. See "Liquidity and Capital Resources".
The Company has experienced net losses of $7.4 million, $4.8 million and
$2.5 million for 1998, 1997 and 1996, respectively.
At December 31, 1998, the Company had federal net operating loss
carryforwards of approximately $13.7 million for United States income tax
purposes. These carryforwards will expire in varying amounts through 2018. 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, in the first quarter the Company conducted a survey of
its key vendors, inquiring as to the compliance of their systems with year 2000
requirements. The Company has been provided assurances from its key vendors and
business partners that those systems of the vendors and partners upon which the
Company's research and commercial efforts rely are compliant with year 2000
requirements. 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. Further, the
Company has made no contingency plans with respect to potential adverse events
resulting from the failure of its business partners and vendors to be year 2000
compliant, as the Company believes that such an adverse event would not have a
materially negative impact on its operations. In addition, the company has
transitioned its primary operating systems during the previous two years and
does not anticipate to incur any material costs throughout the remainder of 1999
to complete any aspect of its compliance. The Company has inquired and is not
presently aware of any potential adverse event relating to its computer-based
systems and those of its partners which would prevent the delivery of its
products to the customer. If the information provided by its vendors or its
partners 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.
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LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed product development,
operations and capital expenditures primarily from funding arrangements with
collaborative partners and from public and private sales of debt and equity
securities.
As of December 1998, the Company had approximately $7.3 million in cash,
cash equivalents and short-term investments. As of December 31, 1997, the
Company had approximately $15.2 million in cash and cash equivalents. The
decrease of $7.9 million from December 31, 1997 was due primarily to cash used
in operating activities.
On October 16, 1997, the Company offered and sold 3,000,000 Common
Shares in an underwritten public offering of securities in Canada and the United
States at a price of Cdn $7.00 (U.S. $ 4.98), raising Cdn $19,635,000 (U.S.
$13,973,000) net of underwriting discounts and commissions. The offering in the
United States was made pursuant to a Registration Statement on Form S-1 (File
No. 333-33781) that was declared effective by the Securities and Exchange
Commission on October 16, 1997.
As of December 31, 1998, the Company had no long term obligations. The
Company has non-cancelable purchase order commitments for inventory purchases of
$1.1 million. The Company anticipates capital expenditures in 1999 of $0.1
million.
The Company's purchases of raw materials and its product sales to its
European distribution partners are denominated in Pounds Sterling. Translation
into the Company's reporting currency, the United States dollar, has not
historically had a material impact on the Company's financial position.
Additionally, the Company's net assets denominated in currencies other than the
functional currency have not exposed the Company to material risk associated
with fluctuations in currency rates. Given these facts, the Company has not
considered it necessary to use foreign currency contracts or other derivative
instruments to manage changes in currency rates.
The Company has sustained continuing operating losses and expects to
incur substantial and increasing losses until product approvals are obtained and
product revenues reach a sufficient level to support ongoing operations. The
Company believes its cash and investment balances at December 31, 1998, should
be sufficient to satisfy the cash requirements of the Company's product
development programs through at least the first quarter of 2000. The Company's
actual cash requirements may vary materially from those now planned because of a
number of factors, including the results of research and development activities,
FDA and foreign regulatory processes, establishment of and change in
relationships with strategic partners, technological advances by the Company and
other pharmaceutical companies, the terms of the Company's collaboration
arrangements with strategic partners, and the status of competitive products.
The Company anticipates that it will need to raise additional funds in the form
of debt or equity financing to fund future licensing, development, and
commercialization of rifaximin and new products. The Company may also enter into
collaborative arrangements with corporate partners that could provide the
Company with additional funding in the form of equity, debt, licensing,
milestone and/or royalty payments. There can be no assurance that the Company
will be able to enter into such arrangements or raise any additional funds on
terms favorable to the Company.
FACTORS THAT MAY AFFECT FUTURE RESULTS
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.
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<PAGE> 30
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 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 a 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 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 has initiated a Company-sponsored trial for the
indication of bacterial infectious diarrhea in the United States and will
continue to pursue its completion as financial resources 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 infectious
diarrhea, 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
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<PAGE> 31
or for limited uses, or lack of market acceptance for either product, to the
extent regulatory approvals are obtained, would have a material adverse effect
on the Company's business, financial condition, and results of operations.
Limited Operating History; History of Operating Losses; Expectation of
Future Losses. The Company has only a limited history of operations consisting
primarily of development of its products and sponsorship with third parties of
research and clinical trials. The Company has had no earnings to date and has
not realized any material operating revenues from product sales, either directly
by the Company or indirectly through its development and distribution partners.
Substantially all of the Company's revenues to date have been derived from
milestone payments from the Company's collaborative partners related to the
development of Colazide and limited product sales of Colazide in the United
Kingdom. As of December 31, 1998, the Company had incurred cumulative losses
since inception of approximately $20.8 million. Furthermore, the Company
currently expects operating losses to continue at least through 2002 and to
increase from current levels or remain constant at current spending levels prior
to 2002 as the Company continues to develop Colazide and rifaximin. The
Company's future operating performance will depend on the timing of regulatory
approvals of Colazide and rifaximin, particularly the timing of FDA approval,
and, if such approvals can be obtained, will also depend on market acceptance.
Dependence on Collaborative Partners. The initial commercialization of
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.
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
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<PAGE> 32
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 Colazide
and rifaximin, and, therefore, is dependent on contract manufacturers for the
production of such products for development and commercial purposes. In the
event that the Company is unsuccessful in obtaining or retaining third-party
manufacturing or if the Company's manufacturers experience production
difficulties, delays or disruptions or fail to comply with regulatory
requirements, the Company may not be able to obtain adequate supplies of
products in a timely fashion or at acceptable quality, quantity, timing or
prices, or to commercialize its potential products as planned. No assurances can
be given that the Company, or its manufacturing partners, will be able to
manufacture future developed products in commercial quantities sufficient to
meet it's the Company's business objectives. Under the terms of the Company's
distribution agreements with Astra and Menarini, the obligations of such
companies to purchase product will terminate under certain circumstances in
which the Company is unable or unwilling to adequately supply them with product.
In such circumstances, Astra or Menarini, as the case may be, is granted a
temporary license to manufacture Colazide. Under certain situations, such
manufacturing licenses may become permanent, in which case the Company's
revenues from the arrangements could be, depending on the circumstances,
severely reduced or eliminated. Moreover, contract manufacturers that the
Company may use must adhere to current Good Manufacturing Practices, which are
regulations strictly enforced by the FDA through its facilities inspection
program. If these facilities cannot pass a pre-approval plant inspection, the
likelihood of the FDA's pre-market approval of Colazide will be adversely
affected. Certain material manufacturing changes that may occur after approval
are also subject to FDA review and approval. There can be no assurance that the
FDA or other regulatory agencies will approve the processes or the facilities by
which any of the Company's products may be manufactured. In addition, if the
facilities cannot pass regular post-approval inspections, manufacturing and
distribution may be disrupted, recalls of distributed products may be necessary,
and other sanctions could be applied. Any disruption in the supply in
manufacturing and marketing of the Company's proposed products would have a
material adverse effect on the Company's business, financial condition, and
results of operations.
Dependence on In-Licensing and Acquisition of New Products for Future
Growth. Whether or not Colazide or rifaximin receives regulatory approvals and
is successfully marketed, the Company's ability to grow in the future will
depend on its success in in-licensing or acquiring additional pharmaceutical
products. The Company seeks to in-license or acquire pharmaceutical products
that have been developed beyond the initial discovery phase and for which
late-stage human clinical data is already available. There can be no assurance
that such pharmaceutical products will be available on attractive terms for
in-licensing or acquisition by the Company.
Uncertainty of Market Acceptance. The Company's future success will
depend in part on its ability to develop and commercialize new products,
including Colazide and rifaximin, or new formulations of or indications for
current products. Assuming the Company can successfully develop such products
and obtain regulatory approvals, their future success will depend upon their
acceptance by the medical community and third-party payors as useful and
cost-effective. Market acceptance will depend upon several factors, including
the establishment of the safety, effectiveness, patient tolerance, and cost of
the Company's products relative to those of competitors. The Company and its
collaborative partners may be required to engage in extensive advertising,
educational programs or other means to market its products. Failure of any of
the Company's products to achieve market acceptance would have a material
adverse effect on the Company's business, financial condition, and results of
operations.
Lack of Sales and Marketing Experience. The Company has no experience
marketing and selling its products either directly or through distributors. The
Company's sales and marketing strategy for Colazide relies on its third-party
distributors, Astra and Menarini, to whom the Company has granted exclusive
marketing rights. There can be no assurance that either Astra or Menarini will
market Colazide successfully in any country in which they have exclusive rights.
The Company intends to establish its own direct sales force for the purpose of
achieving direct sales of rifaximin and other future products. There can be no
assurance that the Company's marketing and direct sales efforts will be
successful.
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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, the Company's failure to satisfy its manufacturing
obligations under its agreements with distribution partners. In the event that
Biorex or Alfa Wassermann terminate their respective license agreements, the
Company would have no further rights to utilize their respective patents or
trade secrets to manufacture and market products based on balsalazide or
rifaximin, as the case may be. The Company's licenses for balsalazide and
rifaximin provide that the Company's royalty obligations may extend beyond the
expiration date of the underlying patents, which could have a material adverse
effect on the Company's business, financial condition, and results of operations
in the event a generic version of balsalazide or rifaximin, as the case may be,
were introduced. In addition, the Company's license agreement with Alfa
Wassermann also provides that the Company may not promote, distribute or sell
any antibiotic products that compete with rifaximin in its licensed territory
(the United States and Canada) for a period of five years after the first
commercial sale of rifaximin under the agreement, thereby limiting the Company's
ability to in-license, develop, or market such products.
Patents and Proprietary Rights; Expiration of Patents. Because of the
substantial length of time and expense associated with bringing new products
through development and regulatory approval to the marketplace, the
pharmaceutical industry places considerable importance on obtaining patent and
trade secret protection for new technologies, products and processes. Because
the Company's strategy is to in-license or acquire pharmaceutical products which
typically have been discovered and initially researched by others, such products
may have limited or no remaining patent protection due to the time elapsed since
their discovery. The patents for the Colazide composition of matter and method
of treating ulcerative colitis with Colazide expire in July 2001 in the United
States, July 2006 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
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<PAGE> 34
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 Colazide, including mesalamine
(SmithKline Beecham plc, Dr. Falk Pharma GmbH, Pharmacia & Upjohn, Inc., Solvay
S.A., The Procter & Gamble Company, and Hoechst Marion Roussel, Inc.),
sulfasalazine (Pharmacia & Upjohn, Inc.), and olsalazine (Pharmacia & Upjohn,
Inc.). Technological developments by competitors, earlier regulatory approval
for marketing competitive products, or superior marketing capabilities possessed
by competitors could adversely affect the commercial potential of the Company's
products, including Colazide, and could have a material adverse effect on the
Company's business, financial condition, and results of operations. In addition,
manufacturers of generic drugs may seek to compete directly with the Company's
products in the absence of effective patent protection or non-patent exclusivity
protection.
Currency Fluctuations. A significant portion of the company's business
is conducted in currencies other than the United States dollar. Foreign currency
transaction gains and losses arising from normal business operations are
credited to or charged against earnings in the period incurred. As a result,
fluctuations in the value of the currencies in which the Company conducts its
business relative to the United States dollar have caused and will continue to
cause currency transaction gains and losses. Although translation into the
Company's reporting currency has not historically had a material impact on the
Company's financial position, due to the substantial volatility of currency
exchange rates, among other factors, the Company cannot predict the effect of
exchange rate fluctuations upon future operating results. There can be no
assurance that the Company will not experience currency losses in the future.
The Company has not previously undertaken hedging transactions to cover its
currency exposure but may hedge a portion of its currency exposure in the future
as management deems appropriate.
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Management of Growth. The Company expects to experience significant
growth in the number of its employees and the scope of its operations. This
growth is expected to place a significant strain on the Company's management and
operations. The Company's ability to manage such growth effectively will depend
upon its ability to broaden its management team and its ability to attract,
hire, and retain skilled employees. The Company's success will also depend on
the ability of its officers and key employees to continue to implement and
improve its operational, management information and financial control systems
and to expand, train and manage its employee base. The Company's inability to
manage growth effectively could have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence on Key Personnel; Ability to Recruit Personnel. The Company
is dependent upon a number of key management and technical personnel, none of
whom is bound by an employment agreement with the Company, including Randy
Hamilton, chairman, Chief Executive Officer and President, Lorin Johnson, Vice
President, Research (Salix California), Robert Ruscher, Vice President,
Corporate Development, (Salix California), John Brough, President (Glycyx
Pharmaceuticals, Ltd.), and Lise Riopel, PhD., Vice President, Clinical Affairs
(Salix California). 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. 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. 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.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Due to the nature and maturity of the Company's short term investments
the Company does not believe such investments present significant market risk.
-33-
<PAGE> 36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is set forth in the Company's
Consolidated Financial Statements and Notes thereto beginning at page F-1 of
this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-34-
<PAGE> 37
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item concerning the Company's directors is
incorporated by reference from the section captioned "Election of Directors"
contained in the Company's Proxy Statement related to the 1999 Annual Meeting of
Shareholder scheduled to be held on May 25, 1999, which will be filed by the
Company with the United States Securities and Exchange Commission within 120
days of the end of the Company's fiscal year pursuant to General Instruction
G(3) of Form 10-K (the "Proxy Statement"). The information required by this Item
concerning executive officers of the Registrant is set forth in Part I of this
report. The information required by this Item concerning compliance with Section
16(a) of the United States Securities Exchange Act of 1934, as amended, is
incorporated by reference from the section of the Proxy Statement captioned
"Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the information under the section captioned "Executive Compensation" contained
in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the information under the section captioned "Security Ownership of Management
and Certain Beneficial Owners" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the information under the sections captioned "Compensation Committee Interlocks
and Insider Participation" and "Certain Transactions" contained in the Proxy
Statement.
-35-
<PAGE> 38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following statements are filed as part of this report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................... F-2
Balance Sheets........................................................ F-3
Statement of Operations............................................... F-4
Statement of Shareholders' Equity (Net Capital Deficit)............... F-5
Statement of Cash Flows............................................... F-6
Notes to Financial Statements......................................... F-7
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES
Schedules not listed above have been omitted because the
information required to be set forth therein is not applicable
or is shown in the financial statements or notes thereto.
3. EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Exhibit Title
----------- -------------
<S> <C>
3.1(a) Memorandum of Association of Salix Holdings, Ltd.
3.1.1(c) Notice of Amendment to Memorandum and Articles of
Association dated March 3, 1998
3.2(a) Articles of Association of Salix Holdings, Ltd.
4.1(a) Form of Common Share Certificate.
4.2(a) Form of Warrant to purchase Common Shares.
4.3(a) Form of Warrant to purchase Common Shares.
10.1(a) Form of Indemnification Agreement between the
Registrant and each of its officers and directors.
10.2(a) Form of 1994 Stock Plan for Salix Holdings, Ltd.
and form of Stock Option and Restricted Stock
Purchase Agreements thereunder.
10.3(d) Form of 1996 Stock Plan for Salix Holdings, Ltd.
and form of Notice of Stock Option Grant and Stock
Option Agreement thereunder.
10.4(b) Amendment Agreement effective as of September 17,
1992 by and among Glycyx Pharmaceuticals, Ltd.,
Salix Pharmaceuticals, Inc. and Biorex
Laboratories, Inc.
10.5(b) License Agreement, dated September 17, 1992
between Biorex Laboratories Limited and Glycyx
Pharmaceuticals Limited and letter agreement
amendments thereto.
10.6(b) Research and Development Agreement dated September
21, 1992 between Glycyx Pharmaceuticals, ltd. and
AB Astra and letter agreement amendments thereto.
</TABLE>
-36-
<PAGE> 39
<TABLE>
<CAPTION>
Exhibit No. Exhibit Title
----------- -------------
<S> <C>
10.7(b) Distribution Agreement dated September 21,
1992 between Glycyx Pharmaceuticals, Ltd. and AB
Astra.
10.8(b) Amended and Restated License Agreement by and
between Salix Pharmaceuticals, Inc. and Biorex
Laboratories, Limited, dated April 16, 1993.
10.9(b) Co-Participation Agreement, dated April 30, 1993
between Salix Pharmaceuticals, Inc. and AB Astra
as amended by Amendment No. 1 thereto effective
September 30, 1993.
10.9.1(c) Letter Agreement dated October 16, 1998 to
Co-Participation Agreement dated April 30, 1993 by
and between Salix Pharmaceuticals, Inc. and AB
Astra.
10.10(b) Manufacturing Agreement, dated September 15, 1993
between Courtaulds Chemicals Limited and Glycyx
Pharmaceuticals, Limited.
10.11(b) Distribution Agreement, dated September 23, 1994
between Glycyx Pharmaceuticals, Ltd. and Menarini
International Operations Luxembourg SA and
amendments thereto.
10.12(b) License Agreement, dated June 24, 1996, between
Alfa Wassermann S.p.A. and Salix Pharmaceuticals,
Ltd.
10.13(b) Supply Agreement, dated June 24, 1996, between
Alfa Wassermann S.p.A. and Salix Pharmaceuticals,
Ltd.
10.14(a) Lease dated January 1, 1992 by and between
Kontrabecki Mason Developers and Salix
Pharmaceuticals, Inc., as amended.
10.15(d) Consulting Agreement dated July 31, 1998 between
Salix Pharmaceuticals, Ltd. and James Shook.
10.16(e) Severance Agreement and Mutual Release dated
January 6, 1999 between Salix Pharmaceuticals,
Ltd. and David Boyle.
10.17(e) Letter Agreement dated February 5, 1999 between
Glycyx Pharmaceuticals, Ltd. and Fujirebio, Inc.
21.1(a) Subsidiaries of the Registrant.
23.1(e) Consent of Ernst & Young LLP, Independent
Auditors.
24.1(e) Power of Attorney (see page 39).
27.1(e) Financial Data Schedule
</TABLE>
(a) Incorporated by reference to the exhibit bearing the same number
filed with the Registrant's Registration Statement on Form S-1
(Registration No. 333-33781), which the United States Securities and
Exchange Commission declared effective on October 16, 1997.
(b) Incorporated by reference to the exhibit bearing the same number
filed with the Registrant's Registration Statement on Form S-1
(Registration No. 333-33781), which the United States Securities and
Exchange Commission declared effective on October 16, 1997. The
Registrant has received confidential treatment with respect to certain
portions of this exhibit. Such portions have been omitted from this
exhibit and have been filed separately with the United States
Securities and Exchange Commission.
(c) Incorporated by reference to exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the three months ended September 30,
1998.
(d) Incorporated by reference to exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the three months ended June 30,
1998.
(e) Filed herewith.
-37-
<PAGE> 40
(b) REPORTS ON FORM 8-K.
The Registrant filed no Current Reports on Form 8-K during the three
months ended December 31, 1998.
(c) EXHIBITS
See Item 14(a)(3) above.
(d) FINANCIAL STATEMENT SCHEDULES
See Item 14(a)(1) above.
-38-
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 in the City of Palo
Alto, California.
SALIX PHARMACEUTICALS, LTD.
Date: March 30, 1999 By: /s/Randy W. Hamilton
---------------------------------
Randy W. Hamilton, Chairman
of the Board, President
and Chief Executive Officer
Date: March 30, 1999 By: /s/William J. Vaughan
----------------------------------
William J. Vaughan,
Corporate Controller
(Chief Accounting Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Randy W. Hamilton and William J.
Vaughan and each of them acting individually, as his or her attorney-in-fact,
each with full power of substitution, for him or her in any and all capacities,
to sign any and all amendments to this Report on Form 10-K, and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Randy Hamilton Chairman of the Board, President and Chief March 30, 1999
- ------------------------------- Executive Officer (Principal Executive
Randy Hamilton Officer)
/s/ William Vaughan Corporate Controller March 30, 1999
- ------------------------------- (Chief Accounting Officer)
William Vaughan
/s/ Lawrance A. Brown, Jr. Director March 30, 1999
- -------------------------------
Lawrance A. Brown, Jr.
/s/ John F. Chappell Director March 30, 1999
- -------------------------------
John F. Chappell
/s/ Nicholas M. Ediger Director March 30, 1999
- -------------------------------
Nicholas M. Ediger
/s/ Lorin K. Johnson Director March 30, 1999
- -------------------------------
Lorin K. Johnson
/s/ David E. Lauck Director March 30, 1999
- -------------------------------
David E. Lauck
</TABLE>
-39-
<PAGE> 42
SALIX PHARMACEUTICALS, LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS
ENDED DECEMBER 31, 1998
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statement of Shareholders' Equity (Net Capital Deficiency).... F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE> 43
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Salix Pharmaceuticals, Ltd.
We have audited the accompanying consolidated balance sheets of Salix
Pharmaceuticals, Ltd. as of December 31, 1998 and 1997 and the related
consolidated statements of operations, shareholders' equity (net capital
deficiency), and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Salix Pharmaceuticals, Ltd. at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with accounting principles
generally accepted in the United States.
(Signed) ERNST & YOUNG LLP
Palo Alto, California
February 25, 1999
F-2
<PAGE> 44
SALIX PHARMACEUTICALS, LTD.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 2) .................................... $ 2,763 $ 15,173
Short term investments ................................................ 4,500 --
Inventory, net ........................................................ 615 284
Prepaids and other current assets ..................................... 105 176
-------- --------
Total current assets .............................................. 7,983 15,633
Property and equipment, net (Note 2) ...................................... 222 194
Other assets .............................................................. 51 51
-------- --------
$ 8,256 $ 15,878
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................... $ 1,430 $ 1,749
-------- --------
Total current liabilities ........................................... 1,430 1,749
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized, issuable
in series,
None outstanding ..................................................... -- --
Common stock, no par value; 20,000,000 shares authorized; 10,208,837
and 10,120,573 shares issued and outstanding at December 31, 1998
and 1997, respectively ................................................ 27,626 27,520
Accumulated deficit ................................................... (20,800) (13,391)
-------- --------
Shareholders' equity .............................................. 6,826 14,129
-------- --------
$ 8,256 $ 15,878
======== ========
</TABLE>
On behalf of the Board:
RANDY W. HAMILTON LORIN K. JOHNSON
Director Director
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 45
SALIX PHARMACEUTICALS, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Product revenue (Note 11) .................... $ 559 $ 245 $ --
Revenue from collaborative agreements and
other (Note 6) ........................ 1,000 1,821 1,820
-------- -------- --------
Total revenues ........................... 1,559 2,066 1,820
-------- -------- --------
Expenses:
Cost of products sold ........................ 926 827 --
License fees (Note 5) ........................ 78 461 605
Research and development (Note 2) ............ 5,967 3,516 2,053
General and administrative ................... 2,569 2,430 1,731
-------- -------- --------
Total expenses ........................... 9,540 7,234 4,389
-------- -------- --------
Loss from operations ............................. (7,981) (5,168) (2,569)
Interest income .................................. 502 400 290
Interest and other expense, net .................. 70 (22) (172)
-------- -------- --------
Net loss ................................. $ (7,409) $ (4,790) $ (2,451)
======== ======== ========
Net loss per share, basic and diluted ............ $ (0.73) $ (0.63) $ (0.46)
======== ======== ========
Shares used in computing net loss per share,
basic and diluted ................................ 10,208 7,613 5,365
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 46
SALIX PHARMACEUTICALS, LTD.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
SHAREHOLDERS'
PREFERRED COMMON STOCK EQUITY
STOCK --------------------------- ACCUMULATED (NET CAPITAL
AMOUNTS SHARES AMOUNTS DEFICIT DEFICIENCY)
---------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 ....................... $ 845 3,150,965 $ 79 $ (6,150) $ (5,226)
Issuance of common stock for
conversion of debentures, including accrued
interest ....................................... -- 1,167,625 3,503 -- 3,503
Issuance of common stock for
conversion of Series A, B and C convertible
preferred stock ................................ (845) 466,445 845 -- --
Issuance of common stock in
connection with the Company's initial
public offering of securities, net of
issuance costs of $1,473 ...................... -- 2,000,000 8,694 -- 8,694
Issuance of common stock upon
exercise of stock options ..................... -- 73,138 73 -- 73
Net loss ........................................... -- -- -- (2,451) (2,451)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 ....................... -- 6,858,173 $ 13,194 $ (8,601) $ 4,593
Issuance of common stock for
exercise of warrants .......................... -- 200,000 1,004 -- 1,004
Issuance of common stock in
connection with the
Company's public offering of
securities, net of
issuance costs of $1,977 .................... -- 3,000,000 12,973 -- 12,973
Issuance of common stock upon
exercise of stock options ..................... -- 62,400 62 -- 62
Expense recognized on extension
of the exercise
period of common stock options ................ -- -- 287 -- 287
Net loss ........................................... -- -- -- (4,790) (4,790)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 ....................... $ -- 10,120,573 $ 27,520 $ (13,391) $ 14,129
Issuance of common stock upon
exercise of stock options ...................... -- 88,264 106 -- 106
Net loss ........................................... -- -- -- (7,409) (7,409)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 ....................... $ -- 10,208,837 $ 27,626 $ (20,800) $ 6,826
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 47
SALIX PHARMACEUTICALS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ............................................. $ (7,409) $ (4,790) $ (2,451)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation and amortization ...................... 91 70 55
Changes in assets and liabilities:
Other current assets and other assets ............ (260) (422) (22)
Accounts payable ................................. (319) 484 (118)
Advances from licensees .......................... -- -- (1,186)
Unearned revenue ................................. -- -- (599)
-------- -------- --------
Net cash used in operating activities .................. (7,897) (4,658) (4,321)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment .................. (119) (119) (21)
Purchases of short term investments .................. (4,500) -- --
-------- -------- --------
Net cash used in investing activities .................. (4,619) (119) (21)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible debentures ..... -- -- 1,375
Proceeds from issuance of common stock ............... 106 14,326 8,767
Payments of principal on secured promissory note ..... -- -- (364)
-------- -------- --------
Net cash provided by financing activities ...... 106 14,326 9,778
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ... (12,410) 9,549 5,436
Cash and cash equivalents at beginning of year ......... 15,173 5,624 188
-------- -------- --------
Cash and cash equivalents at end of year ............... $ 2,763 $ 15,173 $ 5,624
======== ======== ========
NONCASH FINANCING ACTIVITIES
Issuance of convertible debentures for promissory
notes and related interest ........................ $ -- $ -- $ 1,905
======== ======== ========
Issuance of convertible debentures for amount due
licensor ........................................... $ -- $ -- $ 100
======== ======== ========
Issuance of common stock for convertible debentures
and related interest ............................ $ -- $ -- $ 3,503
======== ======== ========
Issuance of common stock for preferred stock ......... $ -- $ -- $ 845
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 48
SALIX PHARMACEUTICALS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(EXPRESSED IN U.S. DOLLARS)
1. Organization and Basis of Presentation
Salix Pharmaceuticals, Ltd., formerly Salix Holdings, 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. Salix and Glycyx had
identical shareholder ownership interests in the period from the
inception of Glycyx through March 1994. The Company is developing new
pharmaceuticals, primarily focused in the area of gastrointestinal
disease. The Company received its first product approval in fiscal 1997
and commenced product shipments in the third quarter of 1997. In June
1998, the Company received an approvable letter from the United States
Food and Drug Administration (FDA) which, pending the completion of
certain items to be completed prior to final approval to market, is
expected to enable the Company to launch its balsalazide disodium
product in the United States.
In March 1994, Salix California Pharmaceuticals, Ltd. entered
into an agreement with the shareholders of Salix California and Glycyx,
whereby it issued shares in exchange for the shareholders' interests in
Salix California and Glycyx. As a result of the exchange, Salix
California and Glycyx became wholly owned subsidiaries of the Company.
These statements are stated in United States dollars and are
prepared under accounting principles generally accepted in the United
States. All significant intercompany balances and transactions have been
eliminated.
The Company has sustained continuing operating losses and
expects such losses to continue until additional product approvals are
obtained and product revenues reach a sufficient level to support
ongoing operations. There can be no assurance that such product
approvals and revenues will be obtained on a timely basis, if at all.
The Company believes that its current cash and investment balances
should be sufficient to satisfy the cash requirements of product
development programs for at least the next year. The Company's actual
cash requirements may vary materially from those now planned because of
results of research and development activities, establishment of and
changes in relationships with strategic partners, changes in focus and
direction of the Company's research and development programs, the FDA
regulatory process, and other factors. To the extent that the Company
proceeds with the development and licensing of new products, the Company
anticipates that it will need to raise additional funds in the form of
debt or equity financing to fund its future operations. 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, or at
all. If adequate capital is unavailable, the Company may have to
substantially reduce or eliminate expenditures for research and
development of new products and indications.
F-7
<PAGE> 49
SALIX PHARMACEUTICALS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
(EXPRESSED IN U.S. DOLLARS)
2. Summary of Significant Accounting Policies
These statements have been prepared in accordance with
accounting principles generally accepted in the United States.
USES OF ESTIMATES
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.
REVENUE RECOGNITION
Product sales are recorded upon shipment of order, net of
estimated returns (which have been minimal). Product sales in 1998 were
limited to shipments made to one of the Company's licensees.
The Company's collaborative research and licensing agreements
with its license partners provide for payments in support of the
Company's research activities and additional payments 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, to the
extent that no performance obligations remain. Amounts received in
advance of the applicable research activities are deferred as unearned
revenue. Amounts received which are subject to refundability until the
point at which milestones are achieved are deferred as advances from
licensees, until earned.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with
maturities from date of purchase of three months or less to be cash
equivalents. The Company maintains its cash and cash equivalents in
several different instruments with various banks and brokerage houses.
This diversification of risk is consistent with Company policy to
maintain liquidity and ensure the safety of principal. For these
short-term instruments, the carrying value approximates fair value at
both December 31, 1998 and 1997.
SHORT TERM INVESTMENTS
The Company considers all investments that have a maturity of
greater than three months and less than one year to be short-term
investments. The Company maintains its short-term investments with
various banks and brokerage houses. This diversification of risk is
consistent with Company policy to maintain liquidity and ensure the
safety of principal. For these short-term investments, the carrying
value approximates fair value at December 31, 1998 and 1997. Fair value
is considered to be the lesser of cost or current market value at the
balance sheet date. The Company has classified its short term
investments as held to maturity.
F-8
<PAGE> 50
SALIX PHARMACEUTICALS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
(EXPRESSED IN U.S. DOLLARS)
2. Summary of Significant Accounting Policies, Continued
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated over
the estimated useful lives of the assets, generally five years, using
the straight-line method. Property and equipment consist of the
following at December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cost:
Furniture and equipment......... $174 $133
Computer equipment.............. 292 212
Laboratory equipment............ 105 107
--- ---
571 452
Accumulated depreciation:
Furniture and equipment......... 115 84
Computer equipment.............. 146 117
Laboratory equipment............ 88 57
-- --
349 258
--- ---
Net property and equipment........... $222 $194
==== ====
</TABLE>
INVENTORIES
Raw materials, work-in-process and finished goods inventories
are stated at the lower of standard cost (which approximates actual cost
on a first-in, first-out cost method) or market value. All inventories
at December 31, 1998 and 1997 have been classified as raw material.
COMPREHENSIVE LOSS
As of January 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 established new
rules for the reporting and display of comprehensive income and its
components; however, the adoption of the Statement had no impact on the
Company's net loss or stockholders' equity. For the years ended December
31, 1998, 1997 and 1996, comprehensive loss was equal to net loss.
F-9
<PAGE> 51
SALIX PHARMACEUTICALS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
(EXPRESSED IN U.S. DOLLARS)
2. Summary of Significant Accounting Policies, Continued
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to
the current year presentation. Such reclassifications had no effect on
net loss or stockholders' equity.
FOREIGN CURRENCY TRANSLATION
The functional currency for the Company is the United States
dollar. The adjustment resulting from the remeasurement of assets and
liabilities not denominated in the functional currency, if any, is
reflected in operations. Foreign currency transaction gains were not
material for the years ended December 31, 1998, 1997 and 1996.
NET LOSS PER COMMON SHARE
In February 1997, the FASB issued FAS No. 128 "Earnings Per
Share." Basic and diluted net loss per common share have been computed
using the weighted-average number of common shares outstanding during
each year. Common equivalent shares are related to outstanding options
and warrants are excluded from the computation as their effect is
anti-dilutive in all periods. (See notes 8 and 10)
3. Initial Public Offering and Follow-on Offering
In May 1996, the Company completed its initial public offering,
listed on The Toronto Stock Exchange, and issued 2,000,000 shares of its
common stock at a price of Cdn. $7.00 (U.S. $5.25) per share. The
Company received approximately U.S. $8.7 million in cash, net of
underwriting discounts, commissions and other offering costs.
Simultaneously with the closing of the initial public offering, each
outstanding share of convertible preferred stock was automatically
converted into one share of common stock, and U.S. $3.5 million
principal and accrued interest of convertible debentures issued in
January and February 1996 were converted into 1,167,625 "units"
consisting of one common share and one-half of one common share purchase
warrant (see Note 10).
In October 1997, the Company completed a follow-on public
offering, issuing 3,000,000 shares of its common stock at price of Cdn.
$7.00 (U.S. $4.98). The Company received approximately U.S. $13 million
in cash, net of underwriting discounts, commissions and other offering
costs.
4. Foreign Subsidiaries
Glycyx, a wholly owned subsidiary incorporated in Bermuda,
recognized net losses of $1,813,000, $1,031,076 and $38,567 in the years
ended December 31, 1998, 1997 and 1996, respectively. Salix, a wholly
owned subsidiary incorporated in the United States, recognized net
losses of $4,982,292, $3,119,220 and $2,053,899 in the years ended
December 31, 1998, 1997 and 1996, respectively. Net assets of Glycyx at
December 31, 1998 and 1997 were $183,747 and $299,404, respectively.
F-10
<PAGE> 52
SALIX PHARMACEUTICALS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
(EXPRESSED IN U.S. DOLLARS)
5. Technology Licensing
In January 1991 and March 1992, the Company entered into license
agreements with a company possessing certain patents relating to
balsalazide, a therapeutic agent with potential use in the treatment of
ulcerative colitis and other diseases. Under the agreements, the Company
is obligated to pay the licensor, which is also a shareholder in the
Company, a royalty based on a percentage of gross profit on the drug in
one defined territory and a sales-based royalty in other territories. In
addition, milestone payments from the Company to the licensor will be
paid to the licensor based upon development efforts. In the January 1991
agreement, as amended, the Company obtained the exclusive right to
develop and market balsalazide in the United States. In the March 1992
agreement, as amended, the Company licensed the exclusive right to
develop, manufacture and market the same drug in the rest of the world
excluding Japan, Taiwan and Korea. The first product under development
pursuant to these licenses is Colazide(R), a form of balsalazide
proposed for the treatment of ulcerative colitis. At December 31, 1998
and 1997, no amounts were due the licensor.
6. License Revenue and Revenue from Collaborative Agreements
In September 1992, the Company entered into research,
development and distribution agreements whereby the Company granted its
partner an exclusive right to promote, market, distribute and sell
Colazide in certain territories outside of the United States. The
research under this agreement took place through December 1993 and
revenue from research funding was recognized as earned.
In 1992, the Company received a portion of the license fees
payable under the agreement, with the remaining payments due upon the
receipt of approval to market the product by the relevant regulatory
authorities in five principal territories. Under the distribution
agreement, the partner will purchase product from the Company at an
agreed upon price based on a percentage of the partner's selling price
of the product. The licensee has the right to offset Pound Sterling
750,000 (approximately $1,244,025 at December 31, 1998 exchange rates)
previously paid to the Company in the form of a 20% discount against the
price of Colazide purchased by the licensee.
In April 1993, Salix entered into a collaborative agreement with
the above-mentioned partner covering pharmaceutical product development
and marketing of Colazide in the United States. In consideration for the
rights granted, the partner agreed to pay the Company a specified
licensing fee and to fund development up to a specified amount. In the
fourth quarter of 1998, the Company received collaborative development
revenue in connection with a letter agreement by and between its
subsidiary, Salix Pharmaceuticals, Inc. and Astra AB , whereby Astra AB
paid the Company $1,000,000 upon the signing of the agreement, and has
agreed to pay two additional installments of $1,000,000 each upon (i)
the last patient out of the on-going trial and (ii) upon the completion
and delivery of the clinical results report to Astra AB. The Company
recognized license fee revenue of $1,821,000 in 1997, of which $821,000
occurred upon the attainment of marketing approval for Colazide in the
United Kingdom and of which $1,000,000 occurred upon the filing of a NDA
with the United States Food and Drug Administration. The Company
recognized development revenue of $599,000 in 1996 under the April 1993
agreements.
In October 1992, the Company entered into a distribution
agreement with a second licensee for Colazide in southern Europe. This
agreement calls for payments to the Company in support of clinical
trials and upon the achievement of certain milestones. Under this
agreement, the partner is obligated to purchase product when approved
from the Company at an agreed upon price. Such milestones were achieved
and accepted by the licensee in 1996 and revenue of $1,186,400 was
recognized.
F-11
<PAGE> 53
SALIX PHARMACEUTICALS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
(EXPRESSED IN U.S. DOLLARS)
7. Commitments
The Company leases an office facility under an agreement
expiring in August 2001. Rent expense was approximately $256,000,
$167,000 and $112,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
Future payments for operating leases at December 31, 1998 are as
follows (in thousands):
<TABLE>
<CAPTION>
OPERATING
LEASE
---------
<S> <C>
Years ending December 31,
1999........................ 296
2000........................ 353
2001........................ 357
------
Total minimum payments required. $1,006
======
</TABLE>
At December 31, 1998, the Company had a binding purchase order
commitment for inventory purchases aggregating $1.1 million to be
delivered in 1999.
8. Shareholders' Equity
PREFERRED STOCK
In May 1996, the Company closed its initial public offering of
its common stock. At that time, all issued and outstanding shares of the
Company's Series A, B and C convertible preferred stock were converted
into 466,445 shares of the Company's common stock. A total of 5,000,000
shares of preferred stock are authorized and issuable in series. No
shares of preferred stock were issued as of December 31, 1998 or 1997.
STOCK OPTION PLANS
The Company's 1994 Stock Plan (the "Plan") was adopted by the
board of directors in March 1994 and approved by the shareholders in
March 1995. The Company's 1996 Stock Option Plan (the "1996 Plan") was
adopted by the board of directors and approved by the Company's
shareholders in February 1996. The options granted under the Plan and
the 1996 Plan may be either incentive stock options or nonstatutory
stock options. Options granted expire no later than ten years from the
date of grant.
For incentive stock options, the option price shall be at least 100% of
the fair market value on the date of grant, and no less than 85% of the
fair market value for nonqualified stock options. If, at the time the
Company grants an option, the optionee directly or by attribution owns
stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company, the option price shall be at least 110%
of the fair market value and shall not be exercisable more than five
years after the date of grant. The options generally become exercisable
in
F-12
<PAGE> 54
SALIX PHARMACEUTICALS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
(EXPRESSED IN U.S. DOLLARS)
8. Shareholders' Equity, Continued
increments of 1/48th per month over a period of 48 months from the date
of grant. Options may be granted with different vesting terms as
determined by the board of directors.
At December 31, 1998, the Company had reserved 2,128,529 shares
of common stock, 1,526,198 for issuance to eligible participants under
two options plans and 602,331 for outstanding warrants. (See note 10)
Aggregate option activity is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
---------------------------
SHARES WEIGHTED-
AVAILABLE NUMBER OF AVERAGE
FOR GRANT SHARES EXERCISE PRICE
--------- --------- --------------
<S> <C> <C> <C>
Balance at December 31, 1995 ... 74,175 425,825 $1.00
Additional shares authorized 650,000 -- --
Options granted ............ (133,000) 133,000 $3.82
Options exercised .......... -- (73,138) $1.00
Options canceled ........... 4,687 (4,687) $1.00
-------- ---------- -----
Balance at December 31, 1996 ... 595,862 481,000 $1.78
Options granted ............ (480,500) 480,500 $5.81
Options exercised .......... -- (62,400) $1.00
Options canceled ........... 15,989 (15,989) $3.40
-------- ---------- -----
Balance at December 31, 1997 ... 131,351 883,111 $4.00
Additional shares authorized ... 600,000 -- --
Options granted ............ (488,080) 488,080 $2.49
Options exercised .......... -- (88,264) $1.21
Options canceled ........... 271,094 (271,094) $5.10
-------- ---------- -----
Balance at December 31, 1998 ... 514,365 1,011,833 $3.20
======== ========== =====
</TABLE>
F-13
<PAGE> 55
SALIX PHARMACEUTICALS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
(EXPRESSED IN U.S. DOLLARS)
8. Shareholders' Equity, Continued
Exercise prices for options outstanding as of December 31, 1998 ranged
from $0.81 to $7.00 per share.
<TABLE>
<CAPTION>
OPTIONS CURRENTLY
OPTIONS OUTSTANDING EXERCISABLE
- ------------------------------------------------------------- ---------------------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
NUMBER CONTRACTUAL EXERCISE WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING LIFE (YRS) PRICE NUMBER EXERCISABLE EXERCISE PRICE
- -------------- ----------- ---------- ----- ------------------ --------------
<S> <C> <C> <C> <C> <C>
$0.81 - 1.81 439,780 7.48 $0.90 261,330 $ 0.90
$3.57 - 5.39 478,900 7.55 4.86 266,634 4.86
$6.25 - 7.00 75,000 8.38 6.63 29,281 6.63
------- ---- ----- ------- ------
993,680 7.82 $3.20 557,245 $ 4.13
======= ==== ===== ======= ======
</TABLE>
At December 31, 1997, options were exercisable to purchase 445,805
shares at a weighted-average exercise price of $2.85 per share. At December 31,
1996, options were exercisable to purchase 272,167 shares at a weighted-average
exercise price of $1.21.
The weighted-average fair value of options granted in fiscal 1998 and
1997 was $1.61 and $2.87, respectively.
F-14
<PAGE> 56
SALIX PHARMACEUTICALS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
(EXPRESSED IN U.S. DOLLARS)
9. Shareholders' Equity, Continued
STOCK-BASED COMPENSATION
As permitted under FASB Statement No. 123, "Accounting for
Stock-Based Compensation" ("FASB 123"), the Company has elected to
follow Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25") in accounting for stock-based awards to
employees. Under APB 25, the Company generally recognizes no
compensation expense with respect to such awards.
Pro forma information regarding net loss and net loss per share
is required under FASB 123 for awards granted after December 31, 1994 as
if the Company had accounted for its stock-based awards to employees
under the fair value method of FASB 123. The fair value of the Company
stock-based awards to employees was estimated using a Black-Scholes
option pricing model (minimum value model for awards prior to the
Company's initial public offering). The Black-Scholes option valuation
model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable.
In addition, the Black-Scholes model requires the input of highly
subjective assumptions including the expected stock price volatility.
Because the Company's stock-based awards to employees have
characteristics significantly different from those of traded options,
and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair
value of its stock-based awards to employees. The fair value of the
Company's stock-based awards to employees was estimated assuming no
expected dividends and the following weighted-average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected life (years) 5 5 5
Expected volatility 0.6 0.6 0.6
Risk-free interest rate 5.40% 5.74% 6.13%
</TABLE>
Had compensation cost for the Company's stock-based compensation
plan been determined based on the fair value at the grant dates for
awards under those plans consistent with the method of SFAS 123, the
Company's net loss and loss per share would have been increased to the
pro forma amounts indicated below for the year ended December 31, 1998
and 1997, respectively. For year ended December 31, 1996, the effect of
applying the FASB 123 Black-Scholes option valuation model to the
Company's stock option grants did not result in pro forma net loss and
loss per share amounts that are materially different from historical
amounts reported. Therefore, such pro forma information is not
separately presented for that year.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Pro forma net loss (in thousands) ($7,666) ($5,011)
Pro forma net loss per common share
Basic ($0.75) ($0.66)
Diluted ($0.75) ($0.66)
</TABLE>
F-15
<PAGE> 57
SALIX PHARMACEUTICALS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
(EXPRESSED IN U.S. DOLLARS)
8. Shareholders' Equity, continued
Future pro forma net income (loss) and earnings (loss) per share
results may be materially different from actual amounts reported.
9. Income Taxes
As of December 31, 1998, the Company has a U.S. federal net
operating loss carryforward of approximately $13,700,000 related to its
U.S. subsidiary, Salix California. This will expire on various dates
beginning in 2004 through 2018, if not utilized.
Significant components of the Company's deferred tax assets and
liabilities for federal and state income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Deferred Tax Assets:
Net Operating Loss Carryforwards $ 4,900 $ 3,150
Capitalized Research and Development Expenses 500 290
Other 100 100
------- -------
Total Deferred Tax Assets 5,500 3,540
Valuation Allowance (5,500) (3,540)
------- -------
Net Deferred Taxes -- --
======= =======
</TABLE>
Because of the Company's lack of earnings history, the deferred tax
asset has been fully offset by a valuation allowance. The valuation
allowance increased by $1,240,000 during the year ended December 31,
1997.
Utilization of the federal net operating loss and credit carryforwards
may be subject to a substantial annual limitation due to the "change in
ownership" provisions of the Internal Revenue Code of 1986. The annual
limitation may result in the expiration of net operating losses and
credits before utilization.
F-16
<PAGE> 58
SALIX PHARMACEUTICALS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
(EXPRESSED IN U.S. DOLLARS)
9. Income Taxes, Continued
The Company's Bermuda subsidiary, Glycyx, has a cumulative loss
of approximately $4,800,000. Because Glycyx is domiciled in Bermuda
where the effective tax rate is zero, the Company expects to receive no
future tax benefit from these net operating losses.
10. Promissory Notes and Warrants
On January 12, 1996 and February 2, 1996, the Company completed
the private placement of an aggregate principal amount of $3,379,500 of
10% convertible secured debentures maturing on December 31, 1998 to
certain new and existing investors. As part of the financing, holders of
outstanding convertible promissory notes and other promissory notes
converted the principal and accrued interest on such notes into
debentures. In addition, $100,000 owed by the Company to a licensor as
of December 31, 1995 was converted into debentures as part of this
financing.
Upon the completion of the initial public offering in May 1996,
the debentures were converted at the option of the holder into units
comprised of one share of common stock and one-half of one common stock
purchase warrant, as referred to in Note 3. The conversion price for
such units was Cdn. $4.00 (U.S. $3.00 at the May 15, 1996 exchange
rate).
At December 31, 1998, 602,331 shares of common stock were
reserved for issuance upon the exercise of the warrants at an exercise
price of $3.00 per share. Warrants to purchase 202,332 shares expire in
2000 and warrants to purchase 399,999 shares expire in 2003.
11. Significant Customers and Vendors
In June 1997, Statement of Financial Accounting Standard No.
131, "Disclosure about Segments of an Enterprise and Related
Information" was issued by the Financial Accounting Standards Board and
adopted by the Company in 1998. SFAS 131 establishes standards for the
way that public business enterprises report information about operating
segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
interim financial reports issued to stockholders. It also establishes
standards for related disclosures about products and services,
geographic areas and major customers. The Company operates and tracks
its results in one segment. The Company's chief operating decision maker
believes that management decisions regarding products, geographic areas
and customers can be made with Company wide data at the current time.
Accordingly, there are no additional disclosure requirements involved
with the Company's adoption of SFAS 131.
Revenues from two customers represented the following percentages of
total revenues during fiscal 1998, 1997 and 1996:
<TABLE>
<CAPTION>
CUSTOMER 1998 1997 1996
<S> <C> <C> <C>
A 100.0% 100.0% 32.8%
B --% --% 65.2%
</TABLE>
All revenue is associated with the development of a single product,
Colazide. The Company has contracted with one manufacturer and one
encapsulator. All product is manufactured through these sources. Both
customers and the manufacturer are overseas companies.
12. 401(k) Plan
In 1996, the Company adopted the Salix Pharmaceuticals, Inc.
401(k) Retirement Plan. Eligible participants may elect to defer a
percentage of their compensation. The Company matches up to 25% of such
participant deferrals, provided that such deferrals do not exceed 6% of
the participant's compensation. The Company's total matching
contribution for all participants in fiscal 1998 was approximately
$11,000. Additional discretionary employer contributions may be made on
an annual basis.
F-17
<PAGE> 59
<TABLE>
<CAPTION>
Exhibit No. Exhibit Index
----------- -------------
<S> <C>
3.1(a) Memorandum of Association of Salix Holdings, Ltd.
3.1.1(c) Notice of Amendment to Memorandum and Articles of
Association dated March 3, 1998
3.2(a) Articles of Association of Salix Holdings, Ltd.
4.1(a) Form of Common Share Certificate.
4.2(a) Form of Warrant to purchase Common Shares.
4.3(a) Form of Warrant to purchase Common Shares.
10.1(a) Form of Indemnification Agreement between the
Registrant and each of its officers and directors.
10.2(a) Form of 1994 Stock Plan for Salix Holdings, Ltd.
and form of Stock Option and Restricted Stock
Purchase Agreements thereunder.
10.3(d) Form of 1996 Stock Plan for Salix Holdings, Ltd.
and form of Notice of Stock Option Grant and Stock
Option Agreement thereunder.
10.4(b) Amendment Agreement effective as of September 17,
1992 by and among Glycyx Pharmaceuticals, Ltd.,
Salix Pharmaceuticals, Inc. and Biorex
Laboratories, Inc.
10.5(b) License Agreement, dated September 17, 1992
between Biorex Laboratories Limited and Glycyx
Pharmaceuticals Limited and letter agreement
amendments thereto.
10.6(b) Research and Development Agreement dated September
21, 1992 between Glycyx Pharmaceuticals, ltd. and
AB Astra and letter agreement amendments thereto.
10.7(b) Distribution Agreement dated September 21,
1992 between Glycyx Pharmaceuticals, Ltd. and AB
Astra.
10.8(b) Amended and Restated License Agreement by and
between Salix Pharmaceuticals, Inc. and Biorex
Laboratories, Limited, dated April 16, 1993.
10.9(b) Co-Participation Agreement, dated April 30, 1993
between Salix Pharmaceuticals, Inc. and AB Astra
as amended by Amendment No. 1 thereto effective
September 30, 1993.
10.9.1(c) Letter Agreement dated October 16, 1998 to
Co-Participation Agreement dated April 30, 1993 by
and between Salix Pharmaceuticals, Inc. and AB
Astra.
10.10(b) Manufacturing Agreement, dated September 15, 1993
between Courtaulds Chemicals Limited and Glycyx
Pharmaceuticals, Limited.
10.7(b) Distribution Agreement dated September 21,
1992 between Glycyx Pharmaceuticals, Ltd. and AB
Astra.
10.8(b) Amended and Restated License Agreement by and
between Salix Pharmaceuticals, Inc. and Biorex
Laboratories, Limited, dated April 16, 1993.
</TABLE>
<PAGE> 60
<TABLE>
<CAPTION>
Exhibit No. Exhibit Index
----------- -------------
<S> <C>
10.9(b) Co-Participation Agreement, dated April 30, 1993
between Salix Pharmaceuticals, Inc. and AB Astra
as amended by Amendment No. 1 thereto effective
September 30, 1993.
10.9.1(c) Letter Agreement dated October 16, 1998 to
Co-Participation Agreement dated April 30, 1993 by
and between Salix Pharmaceuticals, Inc. and AB
Astra.
10.10(b) Manufacturing Agreement, dated September 15, 1993
between Courtaulds Chemicals Limited and Glycyx
Pharmaceuticals, Limited.
10.11(b) Distribution Agreement, dated September 23, 1994
between Glycyx Pharmaceuticals, Ltd. and Menarini
International Operations Luxembourg SA and
amendments thereto.
10.12(b) License Agreement, dated June 24, 1996, between
Alfa Wassermann S.p.A. and Salix Pharmaceuticals,
Ltd.
10.13(b) Supply Agreement, dated June 24, 1996, between
Alfa Wassermann S.p.A. and Salix Pharmaceuticals,
Ltd.
10.14(a) Lease dated January 1, 1992 by and between
Kontrabecki Mason Developers and Salix
Pharmaceuticals, Inc., as amended.
10.15(d) Consulting Agreement dated July 31, 1998 between
Salix Pharmaceuticals, Ltd. and James Shook.
10.16(e) Severance Agreement and Mutual Release dated
January 6, 1999 between Salix Pharmaceuticals,
Ltd. and David Boyle.
10.17(e) Letter Agreement dated February 5, 1999 between
Glycyx Pharmaceuticals, Ltd. and Fujirebio, Inc.
21.1(a) Subsidiaries of the Registrant.
23.1(e) Consent of Ernst & Young LLP, Independent
Auditors.
24.1(e) Power of Attorney (see page 39).
27.1(e) Financial Data Schedule
</TABLE>
(a) Incorporated by reference to the exhibit bearing the same number filed
with the Registrant's Registration Statement on Form S-1 (Registration
No. 333-33781), which the United States Securities and Exchange
Commission declared effective on October 16, 1997.
(b) Incorporated by reference to the exhibit bearing the same number filed
with the Registrant's Registration Statement on Form S-1 (Registration
No. 333-33781), which the United States Securities and Exchange
Commission declared effective on October 16, 1997. The Registrant has
received confidential treatment with respect to certain portions of this
exhibit. Such portions have been omitted from this exhibit and have been
filed separately with the United States Securities and Exchange
Commission.
(c) Incorporated by reference to exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the three months ended September 30,
1998.
(d) Incorporated by reference to exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the three months ended June 30, 1998.
(e) Filed herewith.
<PAGE> 1
Exhibit 10.16
SEVERANCE AGREEMENT AND MUTUAL RELEASE
This Severance Agreement and Mutual Release ("Agreement") is made by and
between SALIX PHARMACEUTICALS, INC. and SALIX PHARMACEUTICALS, LTD. (the
"Company") and David Boyle ("Employee").
WHEREAS, Employee was employed by the Company;
WHEREAS, the Company and Employee have entered into a Employment,
Confidential Information, Invention Assignment and Arbitration Agreement (the
"Confidentiality Agreement"); and
WHEREAS, the Company and Employee have mutually agreed to terminate the
employment relationship and to release each other from any claims arising from
or related to the employment relationship.
NOW THEREFORE, in consideration of the mutual promises made herein, the
Company and Employee (collectively referred to as "the Parties") hereby agree as
follows:
1. Consideration. The Company agrees to continue Employee's current base
salary, less applicable withholdings, in accordance with the Company's payroll
practices through the earlier of: (a) April 11, 1999 or (b) the date Employee
obtains other Employment (the "payment period"). Employee shall remain an
employee and officer of the Company during the payment period subject to all of
the standard terms and conditions of employment. Employee will resign effective
the earlier of April 11, 1999 or when Employee begins other employment. Employee
agrees to notify the Company immediately after obtaining other employment.
2. Duties. During the payment period, Employee must perform transitional
and other duties during regular business hours as reasonably requested by Randy
W. Hamilton or any other designated person. Employee understands that the
payments in Paragraph 1, above, are in excess of that which the Company would
normally owe Employee for the performance of transitional and other duties.
3. Vesting of Stock. The Parties agree that for purposes of determining
the number of shares of the Company's common stock which Employee is entitled to
purchase from the Company, Employee will be entitled to continue vesting of
stock until April 11, 1999. Employee agrees that the exercise of any vested
options must be pursuant to the terms and conditions of the Company's Stock
Option Plan and the Stock Option Agreement(s) between Employee and the Company.
4. Benefits. Employee will be entitled to accrual of employee benefits,
including health benefits, until April 11, 1999. Employee shall have the right
to convert his health insurance benefits to individual coverage pursuant to
COBRA at the end of the payment period.
5. Conditions to Payment of Salary and Benefits. The payments, stock
vesting, and benefits set forth in Paragraphs 1, 3 and 4, above, will cease
immediately if Employee begins working or consulting elsewhere, regardless of
the salary or job duties being performed by Employee elsewhere.
<PAGE> 2
6. Confidential Information. Employee shall continue to maintain the
confidentiality of all confidential and proprietary information of the Company
and shall continue to comply with the terms and conditions of the
Confidentiality Agreement between Employee and the Company. Employee shall
return all the Company property and confidential and proprietary information in
his possession to the Company within three business days of the earlier of (a)
the request of the Company or (b) his resignation.
7. Payment of Salary. Employee acknowledges and represents that the
Company has paid all salary, wages, accrued vacation, commissions and any and
all other benefits due to Employee.
8. Release of Claims. The Parties agree that the foregoing consideration
represents settlement in full of all outstanding obligations owed by either one
to the other. Employee and the Company, on behalf of themselves, and their
respective heirs, family members, executors, officers, directors, employees,
investors, shareholders, administrators, affiliates, divisions, subsidiaries,
predecessor and successor corporations, and assigns, hereby fully and forever
release each other and their respective heirs, family members, executors,
officers, directors, employees, investors, shareholders, administrators,
affiliates, divisions, subsidiaries, predecessor and successor corporations, and
assigns, from, and agree not to sue concerning, any claim, duty, obligation or
cause of action relating to any matters of any kind, whether presently known or
unknown, suspected or unsuspected, that any of them may possess arising from any
omissions, acts or facts that have occurred up until and including the Effective
Date of this Agreement including, without limitation,
(a) any and all claims relating to or arising from Employee's
employment relationship with the Company and the termination of that
relationship;
(b) any and all claims relating to, or arising from, Employee's right
to purchase, or actual purchase of shares of stock of the Company, including,
without limitation, any claims for fraud, misrepresentation, breach of fiduciary
duty, breach of duty under applicable state corporate law, and securities fraud
under any state or federal law;
(c) any and all claims for wrongful discharge of employment; breach
of contract, both express and implied; breach of a covenant of good faith and
fair dealing, both express and implied; negligent or intentional infliction of
emotional distress; negligent or intentional misrepresentation; negligent or
intentional interference with contract or prospective economic advantage;
defamation; negligence; personal injury; assault; battery; invasion of privacy;
false imprisonment; and conversion;
(d) any and all claims for violation of any federal, state or
municipal statute, including, but not limited to, Title VII of the Civil Rights
Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment
Act of 1967, the Americans with Disabilities Act of 1990, the Fair Labor
Standards Act, the California Fair Employment and Housing Act, and Labor Code
section 201, et seq.;
2
<PAGE> 3
(e) any and all claims arising out of any other laws and regulations
relating to employment or employment discrimination; and
(f) any and all claims for attorneys' fees and costs.
The Company and Employee agree that the release set forth in this section
shall be and remain in effect in all respects as a complete general release as
to the matters released. This release does not extend to any obligations
incurred under this Agreement.
9. Acknowledgment of Waiver of Claims under ADEA. Employee acknowledges
that he is waiving and releasing any rights he may have under the Age
Discrimination in Employment Act of 1967 ("ADEA") and that this waiver and
release is knowing and voluntary. Employee and the Company agree that this
waiver and release does not apply to any rights or claims that may arise under
ADEA after the Effective Date of this Agreement. Employee acknowledges that the
consideration given for this waiver and release agreement is in addition to
anything of value to which Employee was already entitled. Employee further
acknowledges that he has been advised by this writing that (a) he should consult
with an attorney prior to executing this Agreement; (b) he has at least
forty-five (45) days within which to consider this Agreement; (c) upon request,
he will be advised in writing of the class, unit, or group of individuals
covered by the voluntary retirement program by the Company, and the job titles
and ages of all individuals who participated and did not participate in the
program; (d) he has at least seven (7) days following the execution of this
Agreement by the parties to revoke the Agreement; and (e) this Agreement shall
not be effective until the revocation period has expired.
10. Civil Code Section 1542. The Parties represent that they are not aware
of any claim by either of them other than the claims that are released by this
Agreement. Employee and the Company acknowledge that they have been advised by
legal counsel and are familiar with the provisions of California Civil Code
Section 1542, which provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE,
WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE
DEBTOR.
Employee and the Company, being aware of said code section, agree to
expressly waive any rights they may have thereunder, as well as under any other
statute or common law principles of similar effect.
11. Application for Employment. Except as provided for herein, Employee
understands and agrees that, as a condition of this Agreement, he shall not be
entitled to any employment with the Company, its subsidiaries, or any successor,
and he hereby waives any right, or alleged right, of
3
<PAGE> 4
employment or re-employment with the Company. Employee further agrees that he
will not apply for employment with the Company, its subsidiaries or related
companies or any successor.
12. Confidentiality. The Parties hereto each agree to use their best
efforts to maintain in confidence the existence of this Agreement, the contents
and terms of this Agreement, and the consideration for this Agreement
(hereinafter collectively referred to as "Settlement Information"). Each Party
hereto agrees to take every reasonable precaution to prevent disclosure of any
Settlement Information to third parties, and each agrees that there will be no
publicity, directly or indirectly, concerning any Settlement Information. The
Parties hereto agree to take every reasonable precaution to disclose Settlement
Information only to those employees, officers, directors, attorneys,
accountants, governmental entities, and family members who have a reasonable
need to know of such Settlement Information.
13. Non-Disparagement.The Parties agree to refrain from any defamation,
libel or slander of the other and agree not to interfere with the other's
relationships with third parties.
14. No Admission of Liability. The Parties understand and acknowledge that
no action taken by the Parties hereto, or either of them, either previously or
in connection with this Agreement shall be deemed or construed to be (a) an
admission of the truth or falsity of any claims heretofore made or (b) an
acknowledgment or admission by either party of any fault or liability whatsoever
to the other party or to any third party.
15. Arbitration. The Parties agree that any and all disputes arising out
of the terms of this Agreement, their interpretation, and any of the matters
herein released, shall be subject to binding arbitration in Santa Clara County
before the American Arbitration Association under its California Employment
Dispute Resolution Rules, or by a judge to be mutually agreed upon. The Parties
agree that the prevailing party in any arbitration shall be entitled to
injunctive relief in any court of competent jurisdiction to enforce the
arbitration award. The Parties agree that the prevailing party in any
arbitration shall be awarded its reasonable attorney's fees and costs.
16. Authority. The Company represents and warrants that the undersigned
has the authority to act on behalf of the Company and to bind the Company and
all who may claim through it to the terms and conditions of this Agreement.
Employee represents and warrants that he has the capacity to act on his own
behalf and on behalf of all who might claim through him to bind them to the
terms and conditions of this Agreement. Each Party warrants and represents that
there are no liens or claims of lien or assignments in law or equity or
otherwise of or against any of the claims or causes of action released herein.
17. No Representations. Neither party has relied upon any representations
or statements made by the other party hereto which are not specifically set
forth in this Agreement.
18. Severability. In the event that any provision hereof becomes or is
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision. 19.
4
<PAGE> 5
19. Entire Agreement. This Agreement represents the entire agreement and
understanding between the Company and Employee concerning Employee's separation
from the Company, and supersedes and replaces any and all prior agreements and
understandings concerning Employee's relationship with the Company and his
compensation by the Company.
20. No Oral Modification. This Agreement may only be amended in writing
signed by Employee and the President of the Company.
21. Governing Law. This Agreement shall be governed by the laws of the
State of California.
22. Effective Date. This Agreement is effective seven days after it has
been signed by both Parties.
23. Counterparts. This Agreement may be executed in counterparts or by
facsimile, and each counterpart or facsimile copy shall have the same force and
effect as an original and shall constitute an effective, binding agreement on
the part of each of the undersigned.
24. Voluntary Execution of Agreement. This Agreement is executed
voluntarily and without any duress or undue influence on the part or behalf of
the Parties hereto, with the full intent of releasing all claims. The Parties
acknowledge that:
(a) They have read this Agreement;
(b) They have been represented in the preparation, negotiation, and
execution of this Agreement by legal counsel of their own choice or that they
have voluntarily declined to seek such counsel;
(c) They understand the terms and consequences of this Agreement and
of the releases it contains; and
(d) They are fully aware of the legal and binding effect of this
Agreement.
IN WITNESS WHEREOF, the Parties have executed this Agreement on the
respective dates set forth below.
SALIX PHARMACEUTICALS, INC. and
SALIX PHARMACEUTICALS, LTD.
Dated: January 6, 1999 By /s/ Randy Hamilton
-----------------------------
Randy W. Hamilton
David Boyle, an individual
Dated: January 6, 1999 By /s/ David Boyle
-----------------------------
David Boyle
5
<PAGE> 1
Glycyx Pharmaceuticals, Ltd.
Armoury Building, 2nd Floor
37 Reid Street
Hamilton, Bermuda HM12
February 5, 1999
Fujirebio Inc.
FR Bldg., 62-5,
Nihonbashi-hamacho 2-chome
Chuo-ku, Tokyo 103-0007
Japan
Gentlemen:
This letter (the "Letter of Intent") is intended to confirm our agreement
concerning a license arrangement between Fujirebio Inc. ("Fujirebio") and Glycyx
Pharmaceuticals, Ltd. ("Glycyx") with respect to compounds covered by the
patents and patent applications listed on Exhibit A hereto, including without
limitation the compound {(+)-2-(furfurylsulfinyl)-N-[4-[4-(piperidinomethyl)-2-
pyridyl]oxy-(z)-2-butenyl]acetamide}, and prodrugs, analogs, isomers, salts
and/or metabolites thereof (hereinafter collectively referred to as
"Lafutidine"), together with (i) the inventions described in the patents and
patent applications listed on Exhibit A hereto together with any other patents
and patent applications worldwide relating to Lafutidine which are owned or
controlled by, or licensed together with a right to sublicense to, Fujirebio
during the term of the agreement (collectively, the "Patent Rights"), and (ii)
all related improvements, inventions, derivatives, formulation data,
specifications, manufacturing procedures and technology, technical information,
know-how, trade secrets, tradenames, trademarks, pharmacology, toxicology and
other pro-clinical data, clinical data, regulatory information, marketing data
and other intellectual property rights relating thereto owned or controlled by,
or licensed together with a right to sublicense to, Fujirebio during the term of
the agreement (collectively, the "Technology Rights"), on the terms and
conditions set forth below.
1. The parties shall proceed promptly and in good faith to negotiate the
terms of, and when agreement is reached, to execute, deliver and perform, a
definitive license agreement (the "License Agreement") regarding the grant by
Fujirebio to Glycyx of an exclusive license (with right to grant and authorize
sublicense) to Lafutidine, the Patent Rights and Technology Rights in order to
develop, make, have made, use, import, have imported, offer for sale, sell and
have sold pharmaceutical preparations containing Lafutidine (collectively, the
"Product") for all indications throughout the world, excluding Japan, Taiwan,
Korea, Brazil and Argentina (the "Territory"). The License Agreement shall be
consistent with the terms set forth in Exhibit B attached hereto, and shall
contain such other covenants, conditions, indemnities, representations and
warranties as are usual and customary in a license arrangement of this type.
CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 2
2. In consideration of Fujirebio's obligations hereunder and in an effort
to obtain additional information necessary to determine the economic terms of
the License Agreement and to promptly commercialize Lafutidine, Glycyx agrees to
perform the tasks set forth in Exhibit C and Glycyx further agrees to make the
following payments to Fujirebio as provided in Exhibit B, II.1.(1) and (2):
(i) US Dollars *** upon signing of this Letter of Intent, namely, at
latest, within one week after the date on which Glycyx signed this Letter of
Intent and,
(ii) US Dollars *** within one week after Fujirebio's delivery to
Glycyx of the first package of the Information which includes all the available
documents regarding technical, manufacturing, preclinical matters and some
clinical documents (excluding an English translation of the clinical tests) as
specified in Exhibit B, I.8.(I).
Such payments shall be made by cable transfer to Fujirebio's bank account in
Japan without holding any tax.
3. Fujirebio represents and warrants that it has not entered into any
other agreement or understanding concerning Lafutidine, the Patent Rights and/or
the Technology Rights in any part of the Territory. In consideration of the
significant effort to be incurred by Glycyx in fulfilling its obligations
hereunder, Fujirebio agrees that neither it nor any of its agents or employees
shall, for six months from signing of this Letter of Intent (the "Exclusivity
Period"), directly or indirectly, encourage, initiate, engage in or enter into
solicited or unsolicited discussions, negotiations, arrangements or
understandings with any other party regarding the license of Lafutidine and/or
any Patent Rights and/or the Technology Rights in the Territory. In the event
that the parties have not executed the License Agreement prior to the end of the
Exclusivity Period, this Letter of Intent shall terminate and Fujirebio shall
have the right to negotiate and enter into such an arrangement with a third
party; provided, that Fujirebio has negotiated in good faith with Glycyx during
the Exclusivity Period.
4. During the Exclusivity Period, Fujirebio will provide Glycyx with all
information reasonably requested by Glycyx and available to Fujirebio regarding
Lafatidine, the Patent Rights and the Technology Rights. Further, Fujirebio
agrees to provide Glycyx with a reasonable quantity of Product and/or its
placebo that have been already manufactured at its own manufacturing site free
of charge for the purpose of a human pharmacology study mentioned in Exhibit C
if Glycyx wishes to receive such products.
5. Glycyx agrees that any human study mentioned in Exhibit C shall be
performed in accordance with terms and conditions mentioned in Exhibit B III R&D
Works, Article 2, 3, 4, 6, 7 and 8. Further, Glycyx agrees to hold Fujirebio
harmless from any damage, loss, cost or expenses arising out of any third
person's claim relating to any human study mentioned in Exhibit C, except due to
negligence or willful misconduct of Fujirebio.
6. The parties hereto acknowledge that the secrecy agreement executed on
June 10, 1997 between Fujirebio and Salix Holding, Ltd., Glycyx's parent company
(the "Secrecy
CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 3
Agreement") shall remain effective as it is, and the same secrecy obligations as
set forth in the Secrecy Agreement shall be applicable to and binding Glycyx.
Glycyx shall use neither Lafutidine nor Product for any other purpose than those
set forth herein, and shall keep in confidence any information, results and data
arising from the tasks set forth in Exhibit C.
7. This Letter of Intent shall be governed by and construed in accordance
with the laws of Japan, without giving effect to any conflict of laws, principle
or rules. In the event that a dispute hereunder cannot be settled through a good
faith discussion among the parties hereto within a reasonable period, such a
dispute shall be finally settled by an arbitration in accordance with the United
States -- Japan Trade Arbitration Agreement of September 16, 1962. The
arbitration shall be held in San Francisco, CA if initiated by Fujirebio, and in
Tokyo, Japan if initiated by Glycyx. All correspondence and proceedings
hereunder shall be in English.
8. Each party shall use its good faith efforts to promptly carry out the
terms of this Letter of Intent. If either party fails to perform a material
obligation of this Letter of Intent, the other party may terminate this Letter
of Intent upon written notice to the defaulting party if the nondefaulting party
has notified the other party in writing of such failure and such failure has not
been corrected within thirty (30) days after receipt of such notice.
9. Upon the termination hereof, Glycyx shall return to Fujirebio all the
information on Lafutidine provided from Fujirebio under this Letter of Intent or
that provided by Fujirebio to Salix Holdings, Ltd. under the Secrecy Agreement
and all unused Sample and/or its placebo, if any, and Glycyx agrees that data
from a human study to be performed in accordance with Exhibit C shall be
transferred to Fujirebio free of charge and Fujirebio has the right to use such
data in any country for obtaining governmental approvals and commercialization
of the Product and Compound. The terms of Article 5 (Glycyx's obligation to hold
Fujirebio harmless) and the Article 6 survive the termination of this Letter of
Intent. Unless it is necessary for Fujirebio's filing for approval and
commercialization, Fujirebio agrees not to disclose to any third party any
Glycyx's trade secret received from Glycyx during the Exclusivity Period without
prior written consent of Glycyx, which shall not be withheld unreasonably, and
this clause survives the termination of this Letter of Intent.
10. Notices and all other communications in connection with this Letter of
Intent shall be in writing (in English language) sent to the addresses set forth
above or as otherwise specified by the parties, and shall be sent simultaneously
by air express service and by facsimile to the other party. Such notices shall
be deemed given when received.
11. This Letter of Intent shall constitute a binding agreement between the
parties, contains the entire agreement between Fujirebio and Glycyx concerning
the subject matter hereof, and supersedes all prior agreements (except for the
Secrecy Agreement) and understandings concerning the subject matter hereof. No
amendment, modification or waiver of this Letter of Intent shall be valid or
binding unless set forth in writing signed by both parties. This Letter of
Intent may not be assigned or otherwise transferred by a party without the prior
written consent of the other party. This Letter of Intent may be executed in
counterparts, all of which when taken together shall constitute one agreement
binding on all parties.
CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 4
If the above correctly reflects our mutual agreement, please sign and
return one copy of this Letter of Intent. We look forward to a long and mutually
beneficial relationship between Fujirebio and Glycyx.
Very truly yours,
GLYCYX PHARMACEUTICALS, LTD.
/s/ JOHN BROUGH
John Brough, President
Accepted and agreed this
9th Day of February, 1999
FUJIREBIO INC.
By: /s/ KOICHIRO FUJITA
---------------------------------
Koichiro Fujita, M.D., Ph.D.
Title: President
------------------------------
CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 5
EXHIBIT A
LIST OF LAFUTIDINE PATENTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Application Number Patent Number
(date) (date) Countries
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Substance Patent US166022 US4912101 USA
(Mar. 9, 1988) (Mar. 27, 1990)
- --------------------------------------------------------------------------------
Substance Patent EP88103890.5 EP282077 CH, DE, FR, GB, IT,
(Mar. 11, 1988) (Nov. 11, 1993) NL
- --------------------------------------------------------------------------------
Process Patent US08/102819 US5616711 USA
(Aug. 6, 1993) (Apr. 1, 1997)
- --------------------------------------------------------------------------------
Process Patent EP93112595.9 EP582304 AT, BE, CH, DE, DK,
(Aug. 5, 1993) (Apr. 1, 1998) ES, FR, GB, GR, IE,
IT, LI, LU, MC, NL,
PT, SE
- --------------------------------------------------------------------------------
</TABLE>
CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 6
EXHIBIT B
SUMMARY OF LICENSE TERMS
The parties acknowledge and agree that, during the Exclusivity Period, they will
work together to gather additional information to determine and negotiate in
good faith the elements of the License Agreement. The parties agree that such
terms will be subject to the following general parameters:
<TABLE>
<S> <C>
I. OVERVIEW
- -----------
1. SUBJECT: Lafutidine and related Patent Rights and Technology
Rights
2. LICENSOR: Fujirebio Inc.
LICENSEE: Glycyx Pharmaceuticals, Ltd.
3. TERRITORY: All territories outside of Brazil, Argentina, Japan,
Taiwan and Korea.
4. PRINCIPAL MARKETS: USA, United Kingdom, Germany and France.
5. COMPOUND: Active ingredient (Lafutidine)
PRODUCT: Pharmaceutical/therapeutic and/or prophylactic
preparations containing COMPOUND
6. INDICATIONS: All indications
7. GRANT OF LICENSE: An exclusive license to Lafutidine, the Patent Rights
and Technology Rights in order to develop, make, have
made, use, import, have imported, offer for sale, sell
and have sold Products within TERRITORY. LICENSEE
shall have right to grant and authorize sublicenses
with prior consent of LICENSOR, not to be unreasonably
withheld (use of a distributor shall not be considered
a sublicense). LICENSEE shall have option to obtain a
royalty free license to applicable trademark of
LICENSOR.
8. INFORMATION TRANSFER: LICENSOR (i) to provide, within thirty (30) days after
the date of Letter of Intent, LICENSEE with (at
LICENSOR's costs without charge) ENGLISH translation
of all then available documents regarding
</TABLE>
CONFIDENTIAL TREATMENT REQUESTED
-1-
<PAGE> 7
<TABLE>
<S> <C>
technical, manufacturing, pre-clinical matters and
some clinical documents necessary for the tasks
mentioned in Exhibit C as the first package (except
for an ENGLISH translation of the clinical test
documents) and, (ii) to provide LICENSEE with
remaining ENGLISH translation of documents regarding
clinical tests and regulatory filings prior to
LICENSEE's FDA consultation during the period of
Letter of Intent, and thereafter from time to time as
developed by LICENSOR or its licensees. LICENSEE's
license shall include right to use any such documents
to support LICENSEE's regulatory filings. LICENSOR to
provide reasonable technical assistance requested by
LICENSEE. LICENSOR to procure and maintain all export
and other licenses and permits required to transfer
the technology and to grant the license, and shall
comply with all other laws, regulations and
governmental directives relating thereto.
9. R&D WORKS: Additional works, at LICENSEE's risk, sole
discretion (after consulting with LICENSOR) and
expense, necessary for registration.
10. NET SALES: ***
11. UNIT: One tablet (which means Product) containing 10mg of
Compound
12. Net Sales Price: Net Sales divided by Unit sold on a country-by-country
basis
II. ECONOMICAL CONDITIONS
- -------------------------
1. LICENSE FEES (US$): The following License Fees are non-creditable and
non-refundable in any case.
***
</TABLE>
CONFIDENTIAL TREATMENT REQUESTED
-2-
<PAGE> 8
<TABLE>
<S> <C>
***
2. ROYALTY (US$)
a) Countries of exclusive license
(1) Patented Countries: ***
(2) Other Countries: ***
b) Countries of non-exclusive
license: ***
c) Launch obligations in LICENSEE to launch Product within 9 months
exclusive-license Principal following receipt of all necessary marketing and
Markets pricing approvals in a given Principal Market.
d) Failure to launch in Failure to launch within specified period shall,
Principal Market if not cured within Market 60 days notice to
LICENSEE, cause license in such Principal Market
to become non-exclusive.
3. SUPPLY
- ---------
a) Exclusive Purchase LICENSEE shall purchase Compound or Product
exclusively from LICENSOR for sale in Territory;
provided LICENSOR can supply same under
applicable GMP for sale in a given country (and
meeting all applicable regulatory requirement)
and
</TABLE>
CONFIDENTIAL TREATMENT REQUESTED
-3-
<PAGE> 9
<TABLE>
<S> <C>
for so long as patent exists preventing others
from manufacturing Compound for sale or until
the tenth anniversary of the sales of Product,
whichever is longer, on a country-by-country
basis, provided that if any generic product is
launched in a given country, the parties shall
reconsider the export price for such country.
LICENSOR shall provide at least one regulatory
certified site to supply each of Compound and/or
Product, as applicable, and shall make its best
effort to secure the second regulatory certified
site. Notwithstanding such effort, if LICENSOR
fails to find any candidate of the second site
one year before the estimated date of the first
New Drug Application of the Product in a given
country of the Principal Markets, LICENSEE may
secure it with LICENSOR's prior consent which
shall not be unreasonably withheld.
b) Price (FOB Tokyo): *** on a country-by-country basis, or bottom
(1) In case of Compound: price (which shall be agreed upon during the
license agreement negotiation), whichever is
higher.
(2) In case of Product: *** on a country-by-country basis, or bottom
price (which shall be agreed upon during the
license agreement negotiation), whichever is
higher.
4. MINIMUM PURCHASE The parties shall decide the Minimum Annual
Purchase Quantity of Product or Compound during
the license agreement negotiation.
5. SUBLICENSE PAYMENTS LICENSEE to pay LICENSOR *** of upfront license
fees received by LICENSEE from third parties for
sublicense right hereunder (excluding payments
paid by third parties for research/development
funding and/or reimbursement of expenses, or
payments which relate to the issuance of debt or
equity securities of LICENSEE or its affiliate).
III. R & D WORKS
- ---------------- LICENSEE to be responsible for all aspects of
R&D Works within Territory in accordance with
the following terms and conditions.
</TABLE>
CONFIDENTIAL TREATMENT REQUESTED
-4-
<PAGE> 10
<TABLE>
<S> <C>
1. TIMETABLE: LICENSEE shall submit to LICENSOR proposed
development timetables including estimated
milestones of each steps in Principal Markets
for LICENSOR's review. LICENSOR may give
comments on it and LICENSEE shall take into
account such comments as far as it is
practically feasible. LICENSEE further agrees to
discuss from time to time with LICENSOR possible
timetables for Product launch in other countries
than Principal Markets.
2. PROTOCOL: LICENSEE shall submit to LICENSOR for its review
of the protocol of each study in R&D Work, and
LICENSOR may give comments on it and LICENSEE
shall take into account such comments as far as
it is practically feasible, and LICENSEE
reserves the right to make a final decision on
the protocol.
3. INDICATIONS: Initial indication proposed to be for
NSAID-induced ulcers. Additional indications to
be determined by LICENSEE after discussion
between LICENSOR and LICENSEE.
4. PERFORMANCE: LICENSEE (or its sublicensees) shall be fully
responsible for studies of R&D Works at
LICENSEE's own risk and expense.
5. CLINICAL SUPPLIES: LICENSOR shall provide LICENSEE free of charge
with EU and US cGMP grade Product or Compound
sufficient to enable LICENSEE to perform R&D
Works as agreed between LICENSOR and LICENSEE,
currently estimated to be equivalent to 120,000
10mg tablets or 2 kilograms of Compound, which
shall be solely used for the clinical trials in
order to obtain the approval of the first
indication in the Territory, and any extra
quantity for other purposes, e.g. the validation
manufacturing for sample sales or other
commercial sales, etc., shall be supplied with a
price to be agreed.
6. ADVERSE EVENTS: LICENSEE shall perform and shall have its
sublicensee or its partner for clinical trials
of Lafutidine perform the Adverse Drug Event
(ADE)
</TABLE>
CONFIDENTIAL TREATMENT REQUESTED
-5-
<PAGE> 11
<TABLE>
<S> <C>
monitoring in Territory and shall send written
report to LICENSOR in accordance with the ICH
guidelines. LICENSOR agrees to provide LICENSEE
with safety information on Lafutidine in
accordance with the same. Details of method and
procedure to be described in a separate
agreement.
7. WITHDRAWAL: Except as required by applicable law or
regulatory authority, LICENSEE shall not
withdraw any Product approval without first
discussing same with LICENSOR.
8. RESULTS AND DATA: LICENSEE shall provide LICENSOR with written
report of each study of R&D Works. LICENSOR may
use such data without any payment to LICENSEE in
any countries other than those where LICENSEE
retains exclusive license.
9. DELAY IN R&D WORK: Subject of Force Majeure or fault of LICENSOR,
unreasonable delay in R&D Works beyond
LICENSEE's development timetable (unless
relating to issues of safety or efficacy) may,
if not cured within 90 days of notice to
LICENSEE, be cause of early termination in a
given Principal Market.
10. COOPERATION: LICENSEE, LICENSOR and LICENSOR's other
development partners/licensees for Lafutidine
will keep each other informed regarding clinical
trials and development plans, commercial
activities and similar matters.
IV. IMPROVEMENT Each party to promptly disclose to the other in
- --------------- writing improvements to subject matter covered
by Patent Rights.
1. LICENSOR's IMPROVEMENT: LICENSEE may use it in TERRITORY without
additional payment to LICENSOR.
2. LICENSEE's IMPROVEMENT: LICENSOR may use it without any payment outside
TERRITORY.
</TABLE>
CONFIDENTIAL TREATMENT REQUESTED
-6-
<PAGE> 12
<TABLE>
<S> <C>
V. MARKETING AND DISTRIBUTIONS
- ------------------------------
1. COMPETING PRODUCTS: Prohibition of directly competing products by
LICENSEE. If LICENSOR or an affiliate launches a
competing product in a country in the Territory,
the exclusive purchase obligation and minimum
obligation will be deleted on a
country-by-country basis where a competing
product is launched by LICENSOR or its
affiliate, sublicensee or distributor.
2. ADVERSE EVENTS: LICENSEE and LICENSOR shall perform safety
monitoring of Lafutidine in the same way as
mentioned in Article III-6 ADVERSE EVENTS.
VI. AUDITING AND INSPECTION
- ---------------------------
1. AUDITING: LICENSOR's right to audit LICENSEE's sales
records used to substantiate royalty payments,
including its Affiliate. LICENSEE shall audit
sales record of its sublicensee or distributors,
if applicable, and report the result to LICENSOR
for the same purpose.
2. INSPECTIONS: LICENSEE's right to inspect LICENSOR's
manufacturing facilities, including its
Affiliates and contract suppliers only for the
purpose of ensuring that Compound and/or Product
is manufactured under applicable GMP for sale in
a given country.
VII. TERM AND TERMINATION
- -------------------------
1. TERM: 10 years from starting sales in the first
launched country or the expiration of the
last-to-expire Patent in a given country,
whichever is longer. Thereafter, continue unless
LICENSEE's one (1) year prior written notice to
LICENSOR.
2. EARLY TERMINATION: Either party may terminate the License Agreement
in whole or in part upon 30 days notice, if
either of the following is not cured within 60
days from a
</TABLE>
CONFIDENTIAL TREATMENT REQUESTED
-7-
<PAGE> 13
<TABLE>
<S> <C>
written notice:
a) the other party's bankruptcy, liquidation.
b) the other party's defaults and no remedy.
LICENSOR may terminate the License Agreement in
whole or in part upon 30 days notice, if either
of the following is not cured within 60 days
from a written notice:
a) Unreasonable delay in R&D Works (The
mechanism for providing extension of time shall
be agreed in the License Agreement).
b) Cease or suspension of the Product sale for
six (6) months in a given country (unless
suspension caused by regulatory authorities or
applicable law).
If any difficulty in future commercialization
with Lafutidine is confirmed with the results of
R&D Works, LICENSEE may notify LICENSOR of an
intention to terminate the License Agreement in
whole or in part, with simultaneously submitting
a reasonable report in writing of the said
results. Upon the receipt of said notice,
LICENSOR and LICENSEE shall in good faith
negotiate and discuss the results of R&D Works
within 90 days. The termination by LICENSEE may
become effective upon LICENSOR's consent in
writing, which consent shall not be unreasonably
withheld.
3. POST TERMINATION: a) Terminate sales of the Product within 6
months.
b) Return Information and transfer data and the
Product Approval in Territory free of charge to
LICENSOR.
c) Obligations incurred prior to termination
shall remain.
VIII. GOVERNING LAW The provisions shall be set forth in the
- ------------------- License Agreement.
</TABLE>
CONFIDENTIAL TREATMENT REQUESTED
-8-
<PAGE> 14
<TABLE>
<S> <C>
IX. PRODUCT LIABILITY a) LICENSEE agrees to hold LICENSOR harmless
- --------------------- from, and undertakes the entire product
liability (including latent side effects) of,
damage, loss, cost or expenses arising out of
any third party's claims attributable to
LICENSEE's manufacture (if applicable), sale,
distribution, labeling and/or warning of the
Product and other activities, including those by
Affiliates, sublicensees, contract
manufacturers, and/or distributors, under the
License Agreement, except to the extent provided
in b) below.
b) LICENSOR agrees to hold LICENSEE harmless
from, and undertakes the entire product
liability, damages, loss, cost or expenses
arising out of any third party's claim
attributable to LICENSOR's workmanship or
materials of Compound or Product supplied by
LICENSOR to LICENSEE.
c) LICENSEE and LICENSOR shall each purchase
insurance policy for Product Liability to cover
their respective obligations mentioned above.
X. PATENT INFRINGEMENT
- ----------------------
1. INFRINGEMENT BY A THIRD The provision shall be set forth in the License
PARTY: Agreement.
2. INFRINGEMENT OF A THIRD The provision shall be set forth in
PARTY'S PATENTS: the License Agreement.
</TABLE>
CONFIDENTIAL TREATMENT REQUESTED
-9-
<PAGE> 15
EXHIBIT C
SUMMARY OF GLYCYX OBLIGATIONS
Glycyx will, at its sole expense and discretion, use its commercially reasonable
efforts to:
1. Conduct a human pharmacology study to evaluate the prevention of
NSAID-induced erosions by Lafutidine versus placebo, omeprazole and misoprostil.
2. Prepare a detailed background document on Lafutidine and an outline of
the studies required for a New Drug Application ("NDA") submission for one
indication for Lafutidine, and submit such outline to the US Food and Drug
Administration (the "FDA") for comment.
3. Based upon the comments received from the FDA, to prepare a
development plan for the first NDA submission for Lafutidine, including
anticipated costs and timelines.
4. Conduct GMP inspections of the existing Lafutidine chemical production
facility and the Lafutidine tablet production facility.
5. Based upon the outcome of the GMP inspections, prepare a detailed list
of items required to ensure that the Lafutidine chemical and tablet production
plants and processes meet GMP regulations for production of clinical trial
material.
CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under "Selected Consolidated Financial
Data" and to the incorporation by reference in the Registration Statements on
Form S-8 (Nos. 333-41801 and 333-61497) pertaining to the 1994 Stock Plan and
the 1996 Stock Option Plan of our report dated February 25, 1999, with respect
to the consolidated financial statements of Salix Pharmaceuticals, Ltd.
(formerly, Salix Holdings, Ltd.) included in the Annual Report (Form 10-K) for
the year ended December 31, 1998.
/s/ Ernst & Young LLP
Palo Alto, California
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,763
<SECURITIES> 4,500
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 615
<CURRENT-ASSETS> 7,983
<PP&E> 479
<DEPRECIATION> 257
<TOTAL-ASSETS> 8,256
<CURRENT-LIABILITIES> 1,430
<BONDS> 0
0
0
<COMMON> 27,626
<OTHER-SE> (20,800)
<TOTAL-LIABILITY-AND-EQUITY> 8,256
<SALES> 559
<TOTAL-REVENUES> 1,559
<CGS> 926
<TOTAL-COSTS> 1,004
<OTHER-EXPENSES> 8,536
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,409)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,409)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,409)
<EPS-PRIMARY> (0.73)
<EPS-DILUTED> (0.73)
</TABLE>
