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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________.
COMMISSION FILE NUMBER: 000-23265
--------------------------
SALIX PHARMACEUTICALS, LTD.
(Exact name of Registrant as specified in its charter)
BRITISH VIRGIN ISLANDS 94-3267443
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3600 WEST BAYSHORE ROAD, SUITE 205
PALO ALTO, CALIFORNIA 94303
(Address of principal executive offices, including zip code)
(650) 856-1550
(Registrant's telephone number, including area code)
--------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
The number of shares of the Registrant's Common Stock outstanding as of
May 12, 1999 was 10,208,837.
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SALIX PHARMACEUTICALS, LTD.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO
<S> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1999
(unaudited) and December 31, 1998 ........................ 1
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 1999 and 1998 (unaudited) ......... 2
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1999 and 1998 (unaudited) ......... 3
Notes to Condensed Consolidated Financial Statements ........ 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ....................................... 5
Item 3. Quantitative and Qualitative Disclosures About Market Risk ..... 15
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds ...................... 15
Item 6. Exhibits and Reports on Form 8-K ............................... 16
Signatures ............................................................. 17
</TABLE>
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SALIX PHARMACEUTICALS, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- -----------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 933 $ 2,763
Short term investments ............................................. 4,511 4,500
Accounts receivable ................................................ 62 --
Inventory, net ..................................................... 443 615
Prepaids and other current assets .................................. 132 105
-------- --------
Total current assets ............................................ 6,081 7,983
Property and equipment, net ................................................ 206 222
Other assets ............................................................... 51 51
-------- --------
$ 6,338 $ 8,256
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current liabilities ..................... $ 1,129 $ 1,430
-------- --------
Commitments ................................................................ -- --
Shareholders' equity:
Preferred stock, issuable in series, no par value;
5,000,000 shares authorized; none outstanding ................... -- --
Common stock, no par value; 40,000,000 shares authorized; 10,208,837
shares issued and outstanding at March 31, 1999
and December 31, 1998 .......................................... 27,626 27,626
Accumulated deficit ................................................ (22,417) (20,800)
-------- --------
Shareholders' equity ............................................ 5,209 6,826
-------- --------
$ 6,338 $ 8,256
======== ========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
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SALIX PHARMACEUTICALS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
-------- --------
<S> <C> <C>
Revenues:
Product revenue ..................................................... $ 74 $ --
Revenue from collaborative agreements and other ..................... 484 --
-------- --------
Total revenues ................................................... 558 --
-------- --------
Expenses:
Cost of products sold ............................................... 261 46
License fees ........................................................ 197 --
Research and development ............................................ 1,171 1,580
General and administrative .......................................... 583 766
-------- --------
Total expenses ................................................... 2,212 2,392
-------- --------
Loss from operations ........................................................ (1,654) (2,392)
-------- --------
Interest and other income, net .............................................. 37 170
-------- --------
Net loss......................................................... $ (1,617) $ (2,222)
======== ========
Net loss per share, basic and diluted ....................................... $ (0.16) $ (0.22)
======== ========
Shares used in computing net loss per share, basic and diluted .............. 10,209 10,171
======== ========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
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SALIX PHARMACEUTICALS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ...................................................... $ (1,617) $ (2,222)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization .............................. 23 20
Changes in assets and liabilities:
Accounts receivable, inventory and other current assets ... 83 (301)
Accounts payable and other current liabilities ............. (301) 364
-------- --------
Net cash used in operating activities .................. (1,812) (2,139)
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in short term investments ............................ (11) --
Purchases of property and equipment ........................... (7) (70)
-------- --------
Net cash used in investing activities ...................... (18) (70)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock ........................ -- 72
-------- --------
Net cash provided by financing activities .................. -- 72
Net decrease in cash and cash equivalents ............................. (1,830) (2,137)
Cash and cash equivalents at beginning of period ...................... 2,763 15,173
-------- --------
Cash and cash equivalents at end of period ............................ $ 933 $ 13,036
======== ========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
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SALIX PHARMACEUTICALS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
1. Organization and Basis of Presentation
Salix Pharmaceuticals, Ltd. (the "Company") was incorporated in the
British Virgin Islands in December 1993 for the purpose of acquiring all
of the outstanding capital stock of Salix Pharmaceuticals, Inc., a
California corporation ("Salix California"), and Glycyx Pharmaceuticals,
Ltd., a Bermuda corporation ("Glycyx"). Salix California was incorporated
in California in 1989 and Glycyx was incorporated in Bermuda in 1992. The
Company is developing new pharmaceuticals, primarily focused in the area
of gastrointestinal disease. The Company conducts its business within one
industry segment.
The condensed consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated. These
statements are stated in United States dollars.
The accompanying unaudited condensed consolidated financial statements
include all adjustments (consisting only of normal recurring items) which,
in the opinion of management, are necessary for a fair presentation of
financial position, results of operations and cash flows. These financial
statements should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations included
elsewhere in this Report and with the audited financial statements for the
fiscal year ended December 31, 1998 included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998 filed with
the Securities and Exchange Commission. The results of operations for
interim periods are not necessarily indicative of results to be expected
for a full year.
These statements have been prepared in accordance with accounting
principles generally accepted in the United States. The application of
these principles conforms in all material respects with financial
statements prepared using accounting principles generally accepted in
Canada. The Company's Common Shares are traded on The Toronto Stock
Exchange.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
2. Net Loss Per Common Share
Basic and diluted net losses per common share have been computed using
the weighted-average number of common shares outstanding during each
period. Options and warrants were outstanding during both quarters ended
March 31, 1999 and March 31, 1998 but have been excluded from the
computation, as their effect is anti-dilutive.
3. Commitments
At March 31, 1999, the Company had a binding purchase order commitment
for inventory purchases aggregating approximately $1.1 million to be
delivered in 1999.
4. Inventory
All inventories at December 31, 1998 and March 31, 1999 have been
classified as raw materials.
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SALIX PHARMACEUTICALS, LTD.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical results or anticipated results, including those set forth under
"Factors that May Affect Future Results" under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in, or
incorporated by reference into, this report. The following discussion should be
read in conjunction with the Company's Condensed Consolidated Financial
Statements and notes thereto included elsewhere in this report.
Unless otherwise indicated, all references to "dollars" or "$" refer to
United States dollars. The Company's Common Shares trade on The Toronto Stock
Exchange and are quoted in Canadian dollars.
OVERVIEW
The Company's principal focus is to identify and acquire
gastrointestinal products that have near-term commercial potential and to apply
its product development expertise to commercialize these products. The Company
selects products that it believes serve a gastrointestinal disease in need of
new treatments, have the potential for rapid regulatory approval, and are
marketable to a small group of specialized physicians. The Company believes this
strategy will reduce the expense, time and risk normally associated with
pharmaceutical development. The Company believes that its first two products,
balsalazide disodium, presently marketed in the United Kingdom under the brand
name Colazide and in Sweden as Colazid, 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
remain at current levels or increase as the Company continues its balsalazide
disodium commercialization efforts and continues its product development and
clinical programs for other products. As of March 31, 1999, the Company had
accumulated losses of approximately $22.4 million. Furthermore, the Company
currently expects operating losses to continue at least through 2002. Since
1992, the Company has financed its operations principally through reimbursement
payments, license fees and milestone revenues, totaling approximately $17.3
million under collaborative research and licensing agreements, and sales of
equity and convertible debt securities totaling approximately $27.6 million.
Over the same period, the Company has recorded expenses totaling $32.0 million,
of which $18.9 million were in research and development expenses and $1.5
million in license fees to licensors. The Company's alliances with Astra AB
("Astra") and a division of Menarini Pharmaceutical Industries s.r.l.
("Menarini") have allowed it to fund the development of balsalazide disodium, to
in-license other gastrointestinal products, and to help establish itself with a
relatively small amount of outside capital.
In October 1998 the Company signed an agreement with Astra under which
the Company will receive additional research and development funding of $3.0
million from Astra related to an ongoing clinical trial comparing balsalazide
disodium to mesalamine, the current leading treatment for ulcerative colitis and
Crohn's disease. Under the agreement the Company will receive the funds in three
installments: $1.0 million within 15 days of signing the agreement, $1.0 million
upon completion of treatment of the last patient in the trial, and $1.0 million
upon delivery of the study results report. The Company received the first
payment in October 1998 and the second payment in April 1999. The Company
anticipates that the last event will occur in the second half of 1999.
In exchange for the $3.0 million payment, Astra will receive rights to
the trial results for use throughout the territories in which it has a license
to market balsalazide disodium. In addition, the Company will transfer to Astra
the balsalazide disodium New Drug Application ("NDA") for balsalazide disodium,
which the Company filed in June 1997 with the United States Food and Drug
Administration ("FDA"), although the transfer will occur only after FDA
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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.
The Company's collaborative research and licensing agreements provide
for payments in support of the Company's research activities, as well as
additional payments for licensing fees and upon the attainment of specified
milestones. Research reimbursements under these agreements are recorded when
earned based on contract costs incurred to date compared with total estimated
contract costs. License fees and milestone revenues are recognized according to
contract terms. Amounts received in advance of the applicable research
activities are deferred as unearned revenue. Amounts received that are
refundable until the milestones are achieved are deferred as advances from
licensees until earned.
The Company licensed balsalazide from Biorex Laboratories Limited
("Biorex") in exchange for participation in future milestone revenues and
profits. The Company will sell balsalazide disodium, the disodium salt of
balsalazide, which is manufactured by third parties under contract with the
Company, to its distribution partners, Astra and Menarini, at a formula price.
The Company received approval in July 1997 to market balsalazide disodium in the
United Kingdom for the treatment of acute ulcerative colitis. Astra began the
commercial launch of balsalazide disodium under the brand name Colazide in
October 1997 in the United Kingdom. In May 1998, the Company received
notification of additional approvals for balsalazide disodium in Austria,
Belgium, Denmark, Italy, Luxembourg, and Sweden, through the mutual recognition
process of the European Union ("EU"). 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. In December 1998 Astra received approval to
market balsalazide disodium in Switzerland and Argentina. In March 1999 Astra
launched balsalazide disodium in Sweden, under the brand name Colazid. The
Company expects Astra and Menarini to undertake additional commercial launches
of balsalazide disodium in approved countries throughout 1999. In January 1999
Astra and Menarini submitted an application to market balsalazide disodium for
the maintenance of remission of ulcerative colitis in the seven EU countries for
which marketing approval for the acute indication had been received. The outcome
of this application is not expected to be known until June 1999, at the
earliest. The Company recognized its initial product revenues from Astra's sales
of balsalazide disodium in the United Kingdom in 1997 and will recognize product
revenues from sales of balsalazide disodium outside the United Kingdom in 1999.
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 anticipates product costs to remain high due to
manufacturing scale-up.
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. 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
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that the Company intends to adopt for future product development and
commercialization. Although the creation of an independent sales organization
will require a substantial investment by the Company, the Company anticipates
that the financial results from rifaximin and future products will be more
favorable to the Company than those anticipated from the sale of balsalazide
disodium by Astra and Menarini since the Company has retained the distribution
rights to rifaximin, whereas Astra and Menarini have the distribution rights for
balsalazide. In the case of balsalazide disodium, the Company granted exclusive
distribution rights in certain territories in exchange for funding needed to
complete late-stage development of balsalazide disodium, to in-license other
gastrointestinal products and to help establish the Company as a viable
gastrointestinal pharmaceutical company. The Company is currently unable to
provide a meaningful estimate of the investment required to create an
independent sales organization because such investment is dependent on a number
of contingencies, including receipt of necessary regulatory approvals for
specific indications.
The Company intends to pursue development of rifaximin for bacterial
infections of the lower gastrointestinal tract. The Company plans to develop
rifaximin for other possible indications, including antibiotic associated
colitis and hepatic encephalopathy as financial resources will allow. In
February 1998, the Company received Orphan Drug Designation from the FDA for
rifaximin to treat hepatic encephalopathy. Orphan Drug Designation can entail
certain possible advantages in the testing and approval process for the drug.
See "Factors That May Affect Future Results".
RESULTS OF OPERATIONS
Three Month Periods Ended March 31, 1999 and 1998
For the three month period ended March 31, 1999, the Company recognized
product revenue of $74,000 and received revenue from collaborative agreements of
$484,000 in relation to the launch of balsalazide disodium by Astra in Sweden.
Due to a short-term manufacturing delay during the first quarter of 1998,
shipments of balsalazide disodium were delayed and no revenues were recognized
during the first quarter of 1998.
Operating expenses for the three months ended March 31, 1999 and 1998
were $2.2 million and $2.4 million, respectively. The slight decrease in
operating expenses in the three month period was the result of lower
administrative and research and development costs partially offset by higher
cost of goods and license fees paid to licensors as noted below.
Cost of products sold for the three months ended March 31, 1999 were
$261,000. Although no product was shipped during the three months ended March
31, 1998, the Company incurred ongoing manufacturing related overhead costs of
$46,000. Product costs are expected to remain high due to manufacturing
scale-up.
License fees totaled $197,000 for the three months ended March 31, 1999.
These license fees were due in connection with the Company's recognition of
revenue from collaborative agreements resulting from the approval of balsalazide
disodium for sale in Sweden. There were no license fees paid in the three months
ended March 31, 1998.
Research and development expense was $1.2 million and $1.6 million for
the three months ended March 31, 1999 and 1998, respectively. The decrease in
research and development expenses in 1999 is due primarily to reduced spending
related to an ongoing balsalazide disodium clinical trial initiated in late 1997
in the United States and management initiatives to reduce overall spending.
Management expects research and development spending to remain constant or
increase due to additional planned clinical trial activities.
General and administrative expenses were $583,000 and $766,000 for the
three months ended March 31, 1999 and 1998, respectively. The decrease was due
mainly to cost reduction initiatives including a reduction in headcount.
Interest income was $37,000 in the three months ended March 31, 1999
down from $170,000 in the three months ended March 31, 1998. The reduction was
mainly attributable to lower average cash balances in 1999. See "Liquidity and
Capital Resources".
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The Company experienced net losses of $1.6 million and $2.2 million for
the three months ended March 31, 1999 and 1998, respectively. The lower net loss
for the current three month period is attributable to higher revenues and lower
expenses as noted above.
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.
LIQUIDITY AND CAPITAL RESOURCES
Since 1992 and through March 31, 1999, the Company has financed its
operations principally through reimbursement payments, license fees and
milestone revenues, totaling approximately $17.3 million under collaborative
research and licensing agreements, and sales of equity and convertible debt
securities totaling approximately $27.6 million.
At March 31, 1999, the Company had approximately $5.4 million in cash,
cash equivalents, and short-term investments as compared to $7.3 million at
December 31, 1998. The decrease of $1.9 million from December 31, 1998 was due
to cash used in operating activities (see "Results of Operations").
As of March 31, 1999, the Company had no long-term obligations. The
Company has non-cancelable purchase order commitments for inventory purchases of
approximately $1.1 million to be delivered in 1999. The Company anticipates
capital expenditures will total approximately $100,000 in 1999.
The Company's purchases of raw materials and its product sales to its
European distribution partners are denominated in British Pound Sterling.
Translation into the Company's reporting currency, the United States dollar, has
not historically had a material impact on the Company's financial position.
Additionally, the Company's net assets denominated in currencies other than the
functional currency have not exposed the Company to material risk associated
with fluctuations in currency rates. Given these facts, the Company has not
considered it necessary to use foreign currency contracts or other derivative
instruments to manage changes in currency rates.
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The Company has sustained continuing operating losses and expects to
incur further substantial losses until product approvals are obtained and
product revenues reach a sufficient level to support ongoing operations. The
Company believes that the Company's cash reserves at March 31, 1999 and the
projected milestones from Astra and Menarini should be sufficient to satisfy the
cash requirements of the Company's product development programs through at least
the end of 1999. The Company's actual cash requirements may vary materially from
those now planned because of a number of factors, including the results of
research and development activities, FDA and foreign regulatory processes,
establishment of and changes in relationships with strategic partners,
technological advances by the Company and other pharmaceutical companies, the
terms of the Company's collaboration arrangements with strategic partners, and
the status of competitive products. The Company's ability to execute its
business plan, fund future development efforts, and secure future licensing
arrangements, as well as fund the commercialization of rifaximin and other new
potential products will require the Company to raise additional funds in the
form of debt or equity financing in 1999. The Company may also enter into
collaborative arrangements with corporate partners that could provide the
Company with additional funding in the form of equity, debt, licensing,
milestone and/or royalty payments. The Company is also investigating other
strategic options including mergers and acquisitions as a means of securing
funding for the Company's operations. 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, if at all.
FACTORS THAT MAY AFFECT FUTURE RESULTS
This report, including this Management's Discussion and Analysis of
Financial Condition and Results of Operations, contains forward-looking
statements and other prospective information relating to future events. These
forward-looking statements and other information are subject to certain risks
and uncertainties that could cause actual results to differ materially from
historical results or anticipated results, including the following:
Dependence on Currently Licensed Products; Uncertainty of Regulatory
Approval of Company's Products. The Company's future success will depend, among
other factors, on its ability to in-license, develop, and commercialize new
pharmaceutical products. The Company currently licenses two pharmaceutical
products, balsalazide and rifaximin, and the Company's prospects over the next
three to five years are substantially dependent on regulatory approval and
successful commercialization of these products. The Company has in-licensed
certain rights to balsalazide and rifaximin in certain markets from Biorex and
Alfa Wassermann, respectively. In addition, the Company has entered into
agreements relating to the development, commercialization, manufacture, and
marketing of balsalazide disodium with Astra and Menarini. In February 1999, the
Company signed a letter of intent with Fujirebio Inc. of Tokyo, Japan to
negotiate a license agreement under which the Company would obtain exclusive
rights to Lafutidine, a third generation anti-ulcer treatment, throughout the
world, excluding Japan, Taiwan, Korea, Brazil and Argentina.
Development, manufacture, and marketing of balsalazide, rifaximin and
lafutidine are subject to extensive regulation by governmental authorities in
the United States and other countries. The FDA has not approved either
balsalazide, rifaximin or lafutidine 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,
9
<PAGE> 12
identification of certain side effects after a drug is on the market or the
occurrence of manufacturing problems could cause subsequent withdrawal of
approval, reformulation of the drug, additional preclinical testing or clinical
trials and changes in labeling of the product.
In July 1997, the Medicines Control Agency in the United Kingdom
approved balsalazide disodium under the brand name Colazide as a treatment for
acute ulcerative colitis in the United Kingdom. The Company and its partners,
Astra and Menarini, received in May 1998 notification of approval of balsalazide
disodium as at treatment for acute ulcerative colitis in Austria, Belgium,
Denmark, Italy, Luxembourg, and Sweden through the mutual recognition process of
the EU. Astra and Menarini withdrew marketing applications from certain other EU
countries that had questions that could not be addressed within the time
constraints of the review period required by the mutual recognition process.
These countries are Finland, France, Germany, Greece, Ireland, Netherlands,
Portugal, and Spain. The application procedure for approval in these countries
is the responsibility of Astra and Menarini and there can be no assurance that
they will pursue such applications, or if they do, that they will be successful.
There can be no assurance that balsalazide disodium will receive approval from
regulatory agencies in any member country of the European Union where the
marketing application was withdrawn. Even if such approvals are ultimately
received, there can be no assurance as to the timing of such approvals or market
acceptance of balsalazide disodium for the approved indications, or that the
Company's marketing partners will launch balsalazide disodium in the countries
where the marketing application has been approved.
With respect to rifaximin, Alfa Wassermann has recently completed
patient enrollment in a clinical trial in Spain relating to the drug as a
therapy for hepatic encephalopathy. The Company determined through discussions
with the FDA that this study is not sufficient support for the filing of an NDA
with the FDA. Therefore, the Company 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.
With respect to lafutidine, there can be no assurance that the Company
will successfully conclude a license agreement with Fujirebio Inc., nor that
even if the Company is successful in obtaining a license to lafutidine it will
be successful in obtaining marketing approval in the United States or any other
country.
The Company expects that a significant portion of its potential revenues
for the next few years will depend on regulatory approval and sales of these
products. Failure to obtain regulatory approvals, delays in obtaining regulatory
approvals, obtaining regulatory approvals for balsalazide disodium or rifaximin
in only limited markets or for limited uses, or lack of market acceptance for
either product, to the extent regulatory approvals are obtained, would have a
material adverse effect on the Company's business, financial condition, and
results of operations.
Limited Operating History; History of Operating Losses; Expectation of
Future Losses. The Company has only a limited history of operations consisting
primarily of development of its products and sponsorship with third parties of
research and clinical trials. The Company has had no earnings to date and has
not realized any material operating revenues from product sales, either directly
by the Company or indirectly through its development and distribution partners.
Substantially all of the Company's revenues to date have been derived from
milestone payments from the Company's collaborative partners related to the
development of balsalazide disodium and limited product sales of Colazide in the
United Kingdom. As of March 31, 1999, the Company had incurred cumulative losses
since inception of approximately $22.4 million. Furthermore, the Company
currently expects operating losses to continue at least through 2002. The
Company's future operating performance will depend on the timing of regulatory
approvals of balsalazide disodium and rifaximin, particularly the timing of FDA
approval, and, if such approvals can be obtained, will depend on market
acceptance.
Dependence on Collaborative Partners. The initial commercialization of
balsalazide disodium in the United Kingdom and, to the extent regulatory
approval is obtained, in other countries in which the Company has commercial
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
10
<PAGE> 13
distribution rights to Menarini, and with the exception of Japan, Taiwan, and
Korea, where the Company does not have rights to balsalazide disodium. Although
Astra has agreed to use its best endeavors to promote, market, and sell
balsalazide disodium in its exclusive markets, there are no specified financial
thresholds that must be achieved for Astra to maintain its exclusivity. The
Company's agreements with Astra provide for, with respect to Europe, a term of
15 years and, with respect to the United States, a term ending on the later to
occur of the expiration date of the last expiring patent and the date nine years
from the first commercial launch date of balsalazide disodium but, in either
event, the agreements may be terminated earlier by either party upon the
occurrence of specified events, including a material breach.
The Company received marketing approval for balsalazide disodium in the
United Kingdom from the Medicine Controls Agency in July 1997 and Astra launched
balsalazide disodium commercially in the United Kingdom in October 1997, based
on a selling price set by Astra. Following regulatory approval of balsalazide
disodium in each country in Europe where Astra has exclusive distribution
rights, the Company and Astra must agree on the balsalazide disodium sales price
for such country, which may be less than the selling price in the United
Kingdom. The agreed sales price for balsalazide disodium will directly affect
the Company's revenues because the parties' agreement obligates Astra to
purchase balsalazide disodium from the Company, and the Company to supply
balsalazide disodium to Astra, at a transfer price equal to a percentage of
Astra's selling price. The Company does not anticipate significant margins from
balsalazide disodium sales to Astra in the United Kingdom or Sweden, 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. In January 1999, Astra and
Menarini submitted an application to market balsalazide disodium for the
maintenance of remission of ulcerative colitis in the seven EU countries for
which marketing approval for the acute indication had been received. There can
be no assurance that approval will be granted or if approval is not granted that
Astra and Menarini will seek to re-submit the application.
There can be no assurance that the Company will be able to negotiate
acceptable collaborative arrangements in the future, or that its current or
future collaborative arrangements, including the agreements with Astra or
Menarini, will be successful or will not be terminated by the other party.
Although the Company believes that parties to any collaborative arrangements
would have an economic motivation to succeed in performing their contractual
responsibilities, the amount and timing of resources to be devoted to these
activities in most instances will not be within the control of the Company.
Failure of the Company and its collaborative partners to develop, commercialize,
manufacture or market products, including balsalazide disodium, would have a
material adverse effect on the Company's business, financial condition, and
results of operations.
Dependence on Third Parties for Manufacturing. The Company currently
does not manufacture its potential pharmaceutical products, including
balsalazide disodium and rifaximin, and, therefore, is dependent on contract
manufacturers for the production of such products for development and commercial
purposes. In the event that the Company is unsuccessful in obtaining or
retaining third-party manufacturing or if the Company's manufacturers experience
production difficulties, delays or disruptions or fail to comply with regulatory
requirements, the Company may not be able to obtain adequate supplies of
products in a timely fashion or at acceptable quality, quantity, timing or
prices, or to commercialize its potential products as planned. No assurances can
be given that the Company, or its contract manufacturers, will be able to
manufacture balsalazide disodium (or other future developed products) in
commercial quantities that would enable the Company to meet its business
objectives. Under the terms of the Company's distribution agreements with Astra
and Menarini, the obligations of such companies to purchase product will
terminate under certain circumstances in which the Company is unable or
unwilling to adequately supply them with product. In such circumstances, Astra
or Menarini, as the case may be, is granted a temporary license to manufacture
balsalazide disodium. Under certain situations, such manufacturing licenses may
become permanent, in which case the Company's revenues from the arrangements
could be, depending on the circumstances, severely reduced or eliminated.
Moreover, the contract manufacturers that the Company may use must adhere to
current Good
11
<PAGE> 14
Manufacturing Practices, which are regulations strictly enforced by the FDA
through its facilities inspection program. If these facilities cannot pass a
pre-approval plant inspection, the likelihood of the FDA's pre-market approval
of balsalazide disodium would be adversely affected. In its "approvable" letter
relating to the NDA for balsalazide disodium, the FDA identified certain
manufacturing deficiencies that need to be addressed by the Company and its
manufacturers if the NDA is to be approved. There can be no assurance that the
Company or its manufacturers will be able to the address the FDA's concerns.
Certain material manufacturing changes that may occur after approval are also
subject to FDA review and approval. There can be no assurance that the FDA or
other regulatory agencies will approve the processes or the facilities by which
any of the Company's products may be manufactured. In addition, if the
facilities cannot pass regular post-approval inspections, manufacturing and
distribution may be disrupted, recalls of distributed products may be necessary,
and other sanctions could be applied. Any disruption in the supply in
manufacturing and marketing of the Company's proposed products would have a
material adverse effect on the Company's business, financial condition, and
results of operations.
Dependence on In-Licensing and Acquisition of New Products for Future
Growth. Whether or not balsalazide disodium or rifaximin receives regulatory
approvals and is successfully marketed, the Company's ability to grow in the
future will depend on its success in in-licensing or acquiring additional
pharmaceutical products. The Company seeks to in-license or acquire
pharmaceutical products that have been developed beyond the initial discovery
phase and for which late-stage human clinical data is already available. There
can be no assurance that such pharmaceutical products will be available on
attractive terms for in-licensing or acquisition by the Company.
Uncertainty of Market Acceptance. The Company's future success will
depend in part on its ability to develop and commercialize new products,
including balsalazide disodium and rifaximin, or new formulations of, or
indications for current products. Assuming the Company can successfully develop
such products and obtain regulatory approvals, their future success will depend
upon their acceptance by the medical community and third-party payors as useful
and cost-effective. Market acceptance will depend upon several factors,
including the establishment of the safety, effectiveness, patient tolerance, and
cost of the Company's products relative to those of competitors. The Company and
its collaborative partners may be required to engage in extensive advertising,
educational programs or other means to market its products. Failure of any of
the Company's products to achieve market acceptance would have a material
adverse effect on the Company's business, financial condition, and results of
operations.
Lack of Sales and Marketing Experience. The Company has no experience
marketing and selling its products either directly or through distributors. The
Company's sales and marketing strategy for balsalazide disodium relies on its
third-party distributors, Astra and Menarini, to whom the Company has granted
exclusive marketing rights. There can be no assurance that either Astra or
Menarini will market balsalazide disodium successfully in any country in which
they have exclusive rights. The Company intends to establish its own direct
sales force for the purpose of achieving direct sales of rifaximin and other
future products. There can be no assurance that the Company's marketing and
direct sales efforts will be successful.
Dependence on Exclusive Licenses. The Company's rights to balsalazide
and rifaximin are derived from its license agreements with Biorex and Alfa
Wassermann, respectively. The Company's rights under these licenses are subject
to early termination by Biorex or Alfa Wassermann, as the case may be, under
certain circumstances, including material breach by the Company, the bankruptcy
or insolvency of the Company, or the Company's failure to satisfy its
manufacturing obligations under its agreements with distribution partners. In
the event that Biorex or Alfa Wassermann terminate their respective license
agreements, the Company would have no further rights to utilize their respective
patents or trade secrets to manufacture and market products based on balsalazide
or rifaximin, as the case may be. The Company's licenses for balsalazide and
rifaximin provide that the Company's royalty obligations may extend beyond the
expiration date of the underlying patents, which could have a material adverse
effect on the Company's business, financial condition, and results of operations
in the event a generic version of balsalazide or rifaximin, as the case may be,
were introduced. In addition, the Company's license agreement with Alfa
Wassermann also provides that the Company may not promote, distribute or sell
any antibiotic products that compete with rifaximin in its licensed territory
(the United States and Canada) for a period of five years after the first
commercial sale of rifaximin under the agreement, thereby limiting the Company's
ability to in-license, develop, or market such products.
Patents and Proprietary Rights; Expiration of Patents. Because of the
substantial length of time and expense associated with bringing new products
through development and regulatory approval to the marketplace, the
pharmaceutical industry places considerable importance on obtaining patent and
trade secret protection for new
12
<PAGE> 15
technologies, products and processes. Because the Company's strategy is to
in-license or acquire pharmaceutical products which typically have been
discovered and initially researched by others, such products may have limited or
no remaining patent protection due to the time elapsed since their discovery.
The patents for the balsalazide disodium composition of matter and method of
treating ulcerative colitis with balsalazide expire in July 2001 in the United
States, February 2002 in the United Kingdom, May 2002 in France, July 2001 in
Italy, and April 2002 in Germany. The patents for the method of treating colon
cancer using balsalazide expire in January 2014 in the United States and,
assuming patents issue from pending applications, in January 2015 in various
countries in Europe, Asia, and North America. The Company has received a
Supplemental Protection Certificate from the United Kingdom Patent Office
extending the United Kingdom patent from February 2002 until July 2006. 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.
Notwithstanding the receipt of the Supplemental Protection Certificate in the
United Kingdom , although the Company believes it may be granted additional
extensions of up to five years in certain circumstances, based on patent term
restoration procedures established in Europe and in the United States under the
Waxman-Hatch Act for products that have received regulatory approval, there is
no assurance that such extensions will be granted. The Company has filed
applications for use patents for additional indications using balsalazide and
related chemical substances. There can be no assurance that any patents will be
issued. There can be no assurance that competitors will not develop products
based on the same active ingredients for marketing as soon as the applicable
patents expire or at any time thereafter or that competitors will not design
around existing patents. Sales of such generic versions could have an adverse
effect on the Company's business, financial condition, and results of
operations. The Company's success will depend in part on its ability to obtain
United States and foreign patent protection for its products and processes,
preserve its trade secrets, and operate without infringing on the proprietary
rights of third parties. There can be no assurance that patents will issue with
respect to, or that the claims allowed will provide sufficient protection to,
the Company's present or future technology.
There can be no assurance that any other patents will be issued on any
of the Company's patent applications or on patent applications licensed from
third parties. Moreover, there can be no assurance that claims allowed in the
patents or patent applications are or will be sufficiently broad to protect the
Company's technology or that the patents will provide protection against
competitive products or otherwise be commercially valuable.
Furthermore, as with any pharmaceutical company, the Company's patent
and other proprietary rights are subject to uncertainty. The Company's patent or
other proprietary rights related to its products might conflict with current or
future rights of others. For instance, there is no assurance that the use of the
Company's technology will not infringe the patent rights of others. For the same
reasons, the products of others could infringe the patent or other proprietary
rights of the Company. Litigation or patent interference proceedings, either of
which could result in substantial cost to the Company, may be necessary to
enforce any patents issued to and other proprietary rights of the Company or to
determine the scope and validity of other parties' proprietary rights. The
defense and prosecution of patent and intellectual property claims are both
costly and time-consuming, even if the outcome is favorable to the Company. Any
adverse outcome could subject the Company to significant liabilities to third
parties, require disputed rights to be licensed from third parties, or require
the Company to cease selling its products.
In addition to patent protection, the Company also relies on trade
secrets, proprietary know-how and technological advances which it seeks to
protect, in part, through confidentiality agreements with its collaborative
partners, employees and consultants. There can be no assurance that these
agreements will not be breached, that the Company will have adequate remedies
for any breach, or that the Company's trade secrets and proprietary know-how
will not otherwise become known or be independently developed by others.
There can be no assurance that the Company will be able to obtain a
license to any third-party technology that it may require to conduct its
business or that, if obtainable, such technology can be licensed at a reasonable
cost. Failure by the Company to obtain a license to any technology that it may
require for commercialization of its technologies or products will have a
material adverse effect on the Company. In addition, there can be no assurance
that others will not independently develop substantially equivalent proprietary
information or obtain access to the Company's know-how, or that others will not
be issued patents which prevent the manufacture or sale of Company products or
require licensing and the payment of significant fees or royalties by the
Company in order for it to be able
13
<PAGE> 16
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 balsalazide disodium, including
mesalamine (SmithKline Beecham plc, Dr. Falk Pharma GmbH, Pharmacia & Upjohn,
Inc., Solvay S.A., The Procter & Gamble Company, and Hoechst Marion Roussel,
Inc.), sulfasalazine (Pharmacia & Upjohn, Inc.), and olsalazine (Pharmacia &
Upjohn, Inc.). Technological developments by competitors, earlier regulatory
approval for marketing competitive products, or superior marketing capabilities
possessed by competitors could adversely affect the commercial potential of the
Company's products, including balsalazide disodium, and could have a material
adverse effect on the Company's business, financial condition, and results of
operations. In addition, manufacturers of generic drugs may seek to compete
directly with the Company's products in the absence of effective patent
protection or non-patent exclusivity protection.
Currency Fluctuations. A significant portion of the company's business
is conducted in currencies other than the United States dollar. Foreign currency
transaction gains and losses arising from normal business operations are
credited to or charged against earnings in the period incurred. As a result,
fluctuations in the value of the currencies in which the Company conducts its
business relative to the United States dollar have caused and will continue to
cause currency transaction gains and losses. Although translation into the
Company's reporting currency has not historically had a material impact on the
Company's financial position, due to the substantial volatility of currency
exchange rates, among other factors, the Company cannot predict the effect of
exchange rate fluctuations upon future operating results. There can be no
assurance that the Company will not experience currency losses in the future.
The Company has not previously undertaken hedging transactions to cover its
currency exposure but may hedge a portion of its currency exposure in the future
as management deems appropriate.
Management of Growth. The Company expects to experience significant
growth in the number of its employees and the scope of its operations. This
growth is expected to place a significant strain on the Company's management and
operations. The Company's ability to manage such growth effectively will depend
upon its ability to broaden its management team and its ability to attract,
hire, and retain skilled employees. The Company's success will also depend on
the ability of its officers and key employees to continue to implement and
improve its operational, management information and financial control systems
and to expand, train and manage its employee base. The Company's inability to
manage growth effectively could have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence on Key Personnel; Ability to Recruit Personnel. The Company
is dependent upon a number of key management and technical personnel, none of
whom is bound by an employment agreement with the Company, including Randy
Hamilton, Chairman, President and Chief Executive Officer, Lorin Johnson,
Ph.D.,Vice President, Research (Salix California), Robert Ruscher, Executive
Vice President and Chief Financial Officer (Salix California), and Lise Riopel,
Ph.D., 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
14
<PAGE> 17
retaining qualified personnel as necessary, and the failure to do so could have
a material adverse effect on the Company's business, operating results, and
financial condition.
Price Volatility; Limited Trading Volume; Foreign Exchange Risk. The
securities markets have from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies. In addition, the market prices of the common stock of many
publicly traded pharmaceutical and biotechnology companies have in the past and
can in the future be expected to be especially volatile. Announcements of
technological innovations or new products by the Company or its competitors,
developments or disputes concerning proprietary rights, publicity regarding
actual or potential medical results relating to products under development by
the Company or its competitors, regulatory developments in both the United
States and other countries, public concern as to the safety of pharmaceutical
products and economic and other external factors, as well as period-to-period
fluctuations in the Company's financial results, may have a significant impact
on the market price of the Company's Common Shares. The Company's Common Shares
have traded on The Toronto Stock Exchange since May 1996 and no public trading
market exists for the Common Shares in the United States. Trading volume in the
Common Shares on The Toronto Stock Exchange has been low and there can be no
assurances that an active trading market will develop or be sustained on The
Toronto Stock Exchange or any other exchange or dealer quotation system. In
addition, the performance of the Company's stock on The Toronto Stock Exchange
may increase the difficulty of raising capital and there can be no assurance
that the Company will be able to access the public capital markets in the event
it needs to raise capital.
The Common Shares trade on The Toronto Stock Exchange in Canadian
dollars. In addition to the general market risks associated with ownership of
equity securities and the more specific risks of ownership of the Common Shares
of the Company, U.S. holders of the Common Shares also bear exchange rate risks
resulting from fluctuations in the relative values of the Canadian dollar and
the U.S. dollar. The value of the Canadian dollar has fluctuated substantially
in the past relative to the United States dollar and other currencies and may
continue to do so in the future. As a result, for U.S. investors and other
non-Canadian investors, the value of the Common Shares in United States dollars
or other currencies may vary independently of changes in the trading price of
the Common Shares on The Toronto Stock Exchange and for reasons unrelated to the
Company or its business, results of operations, or financial condition.
ITEM 3. 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.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In October 1997, the Company completed the sale of 3,000,000 Common
Shares at a per share price of Cdn. $7.00 (U.S. $4.98) in a firm commitment
underwritten public offering. The offering was effected in Canada pursuant to
final receipts issued by each of the provincial securities commissions and in
the United States pursuant to a Registration Statement on Form S-1 (Registration
No. 333-33781), which the United States Securities and Exchange Commission
declared effective on October 14, 1997. Levesque Beaubien Geoffrion Inc.,
Yorkton Securities Inc., Marleau, Lemire Securities Inc., and Midland Walwyn
Capital Inc underwrote the offering. In the United States, the offering was made
by the United States broker-dealer affiliates of the underwriters, NBC Levesque
International Ltd., Yorkton Capital Inc., Marleau Lemire (USA), Inc., and
Midland Walwyn Capital Corporation, respectively. On October 16, 1997, the date
of the effectiveness of the Registration Statement covering the public offering,
the Bank of Canada noon rate of exchange for United States dollars into Canadian
dollars was Cdn. $1.3866 per U.S. $1.00.
Of the Cdn. $21,000,000 in aggregate proceeds raised in connection with
the October 1997 offering, (i) approximately Cdn. $1,365,000 was paid to the
underwriters in connection with underwriting discounts, and (ii) approximately
Cdn. $1,403,000 was paid by the Company in connection with offering expenses,
including legal,
15
<PAGE> 18
printing, and filing fees. There were no direct or indirect payments to
directors or officers of the Company or any other person or entity. None of the
offering proceeds have been used for the construction of plant, building or
facilities or the purchase or installation of machinery or equipment or for
purchases of real estate or the acquisition of other businesses. The Company is
currently investing the net offering proceeds for future use as additional
working capital. Such remaining net proceeds have been invested in short-term,
interest-bearing, investment grade securities. A portion of the net proceeds may
be used for the acquisition of technologies, businesses or products that are
complementary to those of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits
27.1 Financial Data Schedule
(b)Reports on Form 8-K
There were no reports on Form 8-K filed during the three month period
ended March 31, 1999.
16
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SALIX PHARMACEUTICALS, LTD.
Date: May 13, 1999 By: /s/Randy Hamilton
------------------------------------
Randy Hamilton, President and
Chief Executive Officer
Date: May 13, 1999 By: /s/Robert Ruscher
------------------------------------
Robert Ruscher, Executive Vice
President and Chief Financial
Officer
17
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 933
<SECURITIES> 4,511
<RECEIVABLES> 62
<ALLOWANCES> 0
<INVENTORY> 443
<CURRENT-ASSETS> 6,081
<PP&E> 486
<DEPRECIATION> 280
<TOTAL-ASSETS> 6,338
<CURRENT-LIABILITIES> 1,129
<BONDS> 0
0
0
<COMMON> 27,626
<OTHER-SE> (22,417)
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