UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K405/A
AMENDMENT NO. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 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)
4101 LAKE BOONE TRAIL, SUITE 418
RALEIGH, NORTH CAROLINA 27607
(Address of principal executive offices, including zip code)
(919) 788-8550
(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
Common Share Purchase Rights 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, 2000 (based on the closing sale
price of US $1.67 of the Registrant's Common Shares, as reported on The Toronto
Stock Exchange on such date) was approximately U.S. $11,858,456. 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,
2000 was 10,708,838.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement to be filed for
its 2000 Annual Meeting of Shareholders to be held June 14, 2000 are
incorporated by reference into Part III of this report.
<PAGE>
SALIX PHARMACEUTICALS, LTD.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
PART I
<S> <C> <C>
Item 1. Business ............................................................................................1
Item 2. Properties......................................................................................... 16
Item 3. Legal Proceedings ..................................................................................16
Item 4. Submission of Matters to a Vote of Security Holders ................................................16
Executive Officers of the Registrant................................................................17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.............................. 18
Item 6. Selected Consolidated Financial Data............................................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ..............21
Item 7A. Quantitative and Qualitative Disclosures about Market Risk .........................................30
Item 8. Financial Statements and Supplementary Data........................................................ 31
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............... 31
PART III
Item 10. Directors and Executive Officers of the Registrant ....................................................32
Item 11. Executive Compensation ................................................................................32
Item 12. Security Ownership of Certain Beneficial Owners and Management........................................ 32
Item 13. Certain Relationships and Related Transactions........................................................ 32
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ..................................33
SIGNATURES.......................................................................................................36
</TABLE>
<PAGE>
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
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.
PART I
ITEM 1. BUSINESS
OVERVIEW
The Company's objective is to be a market-driven specialty
pharmaceutical company focussed on the needs of physicians specializing in
gastroenterology. The Company intends to establish a small direct sales force to
promote its products to this specialist audience. The Company's strategy is to
identify and acquire products that have near-term commercial potential and apply
its regulatory and 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 this 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,
Sweden and Denmark under the brand names COLAZIDE(R), COLAZID(R) and PREMID(R),
respectively, and rifaximin, will demonstrate the Company's ability to execute
this strategy.
The Company was incorporated in the British Virgin Islands in December
1993 as Salix Holdings, Ltd. In March 1998, the Company changed its name to
Salix Pharmaceuticals, Ltd. Prior to December 1993, the business of the Company
was conducted by Salix Pharmaceuticals, Inc., a California corporation,
incorporated in 1989, and Glycyx Pharmaceuticals, Ltd., a Bermuda corporation,
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 licensed its first product, balsalazide disodium, from
Biorex Laboratories Limited in exchange for participation in future milestone
revenues and profits. The Company outlicensed balsalazide, which is manufactured
by third parties under contract with the Company, to Astra AB (throughout the
world excluding Japan, Taiwan, Korea, Italy, Spain, Portugal and Greece) and
Menarini Pharmaceutical Industries s.r.l. (Italy, Spain, Portugal and Greece),
in return for a combination of milestone payments, participation in research and
development costs, and sales of product at an agreed formula price. The Company
received approval in July 1997 to market balsalazide in the United Kingdom for
the treatment of acute ulcerative colitis. Astra began the commercial launch of
balsalazide under the brand name COLAZIDE(R) in October 1997 in the United
Kingdom. In MaY 1998, the Company received notification of additional approvals
for balsalazide in Austria, Belgium, Denmark, Italy, Luxembourg and Sweden
through the mutual recognition process of the European Union. Astra and Menarini
withdrew marketing applications from other European Union countries that had
questions that could not be addressed within the time constraints of the review
period required by the mutual recognition process. (See "Regulation of Drug
Compounds outside of the United States"). These countries are Finland, France,
Germany, Greece, Ireland, Netherlands, Portugal, and Spain. Resubmission in
these countries will primarily be the responsibility of our licensees and there
can be no assurance that they will pursue such applications or, if they do, that
they will be successful. In March 1999 following receipt of pricing approval,
Astra launched balsalazide in Sweden and Denmark. The Company expects Menarini
to receive pricing approval and launch balsalazide in Italy during 2000. In July
1999 Astra and Menarini received approval from the seven EU countries that had
previously granted approval for the acute indication to market balsalazide for
the maintenance of remission of ulcerative colitis. The Company recognized its
initial product revenues from Astra's sales of balsalazide in the United Kingdom
in 1997. The selling price of balsalazide
<PAGE>
outside of the United Kingdom, Sweden and Denmark 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 sales outside the United
States. In addition, the Company anticipates product costs to remain high until
volumes increase allowing the Company to benefit from economies of scale.
In June 1997, the Company submitted a new drug application, or NDA, to
the FDA for balsalazide as a therapy for acute ulcerative colitis. In June 1998,
the FDA issued an "approvable" letter for balsalazide. 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. The Company responded to the approvable
letter in September 1999 and received notice from the FDA that its responses to
the approvable letter were considered complete. In March 2000, the Company
received a second approvable letter indicating that Company's application may be
approved upon satisfactory completion of product labeling and final resolution
of the product brand name. While the Company believes that it can successfully
fulfilled the FDA requirements contained in the second approvable letter to
obtain marketing approval, there can be no assurance that its efforts in this
regard, in whole or in part, will be successful. Failure to obtain marketing
approval for balsalazide from the FDA could have a material adverse impact on
the Company's financial condition and future results of operations.
In October 1998 the Company signed an agreement with Astra under which
the Company was to receive additional research and development funding of $3.0
million related to a then ongoing clinical trial comparing balsalazide to
mesalamine, the current leading treatment for ulcerative colitis and Crohn's
disease. Under the agreement, the Company received $1.0 million in October 1998
and $1.0 million in April 1999. The final $1.0 million payment was received in
December 1999 as part of the settlement relating to the termination of the
Company's collaborative agreements with Astra as noted below.
In 1999 Astra AB merged with Zeneca PLC, a British pharmaceutical
company, to create AstraZeneca PLC. In December 1999 the Company and AstraZeneca
signed an agreement under which the marketing and distribution rights for
balsalazide disodium previously licensed by the Company to Astra would return to
the Company. Under the agreement AstraZeneca will continue to distribute
balsalazide in those countries where it is currently being sold, namely the
United Kingdom, Sweden and Denmark, while the Company pursues alternatives for
marketing and distribution in those countries. AstraZeneca will return all
rights, intellectual property and information relating to balsalazide to the
Company and future milestone payments from AstraZeneca were terminated. The
Company received $1.0 million relating to previously earned research and
development funding, and AstraZeneca agreed to make a loan to the Company of up
to $500,000 under certain conditions. The Company intends to out-license
balsalazide in all former Astra territories except for the United States.
However, there is no guarantee that the Company will be successful in this
endeavor and failure to secure a new distribution partner, or partners, could
have a material adverse impact on the Company's financial condition and future
results of operations. If successful in obtaining regulatory approval for
balsalazide from the FDA the Company intends to establish its own direct sales
force to market balsalazide in the United States. Although the creation of an
independent sales organization will require a substantial investment by the
Company, the Company anticipates that the financial returns from balsalazide,
rifaximin and future products, if approved, will be more favorable to the
Company than those anticipated from the indirect sale of product through
marketing partners. The Company had planned for the establishment of a direct
sales force on the approval of rifaximin, however the return of balsalazide
rights allows the Company to establish itself as a direct sales and marketing
organization earlier than it had anticipated. Menarini will distribute
balsalazide in Italy, Spain, Portugal and Greece.
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. 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.
The Company intends to pursue development of rifaximin for bacterial infections
of the lower gastrointestinal tract and expects to complete a Phase III trial
for the treatment of bacterial infectious diarrhea in travelers during 2000. The
Company believes there are opportunities to develop rifaximin for
-2-
<PAGE>
other indications, including antibiotic associated colitis and hepatic
encephalopathy and intends to pursue such opportunities as financial resources
will allow. In February 1998, the Company received Orphan Drug Designation from
the FDA for rifaximin to treat hepatic encephalopathy and has recently filed for
an orphan drug grant to investigate the use of rifaximin in this indication.
Orphan Drug Designation can entail advantages in the testing and approval
process for the drug. If regulatory approvals are obtained, the Company intends
to market rifaximin in the United States through its own direct sales force and
to out-license the marketing and distribution rights in Canada.
In February 1999 the Company signed a letter of intent with Fujirebio
Inc. of Tokyo, Japan to negotiate a license agreement for lafutidine, a third
generation anti-ulcer treatment. Following the results of a Company funded pilot
study in the treatment of ulcers induced by non-steroidal anti-inflammatory
drugs, the Company decided not to pursue the in-licensing of lafutidine.
The Company's collaborative research and licensing agreements provided
for payments in support of the Company's research activities, as well as
additional payments for licensing fees 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.
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 balsalazide, the Company has
entered into manufacturing arrangements with Akzo Nobel, formerly Courtaulds
Chemicals (Holdings) Limited, and Anabolic, Inc. In addition, the Company is in
the process of establishing agreements with UCB SA, a Belgian pharmaceutical
manufacturer, for the purpose of manufacturing balsalazide for European
distribution, and Omnichem, SA, a Belgian chemical manufacturer, for the purpose
of manufacturing the bulk active ingredient balsalazide.
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 and hepatic encephalopathy.
INFLAMMATORY BOWEL DISEASE/ULCERATIVE COLITIS
Inflammatory bowel disease, or 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.
-3-
<PAGE>
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 $825 million in 1999 and have been
increasing at a compound annual growth rate of approximately 20% since 1987.
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, or 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, 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). Sulfasalazine is effective in reaching the colon with only
low absorption rates in the bloodstream. However, sulfasalazine also contains a
carrier molecule (sulfapyridine) which is toxic and results in a high incidence
of side effects such as nausea, headache, dizziness, anemia, 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
sulfasalazine. These drugs, including mesalamine, first appeared in the United
States market in the early 1990s. While the new drugs are generally better
tolerated than sulfasalazine, 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 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.
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. Orphan Drug Designation,
which is available for therapies addressing indications affecting less than
200,000 people, might allow
-4-
<PAGE>
the drug to receive a priority review by the FDA and provides the product seven
years of market exclusivity for the orphan indication regardless of the drug's
patent status.
ANTIBIOTIC ASSOCIATED COLITIS
Antibiotic associated colitis, or 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, or 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.
Vancomycin-resistant genes can 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 that 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, metronidazole has not been approved
by the FDA as being safe and effective in the treatment of AAC.
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 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.
-5-
<PAGE>
PRODUCTS
The following table summarizes Salix's current products and their stage
of development.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PRODUCT INDICATION STATUS
Balsalazide Treatment of mild to moderate o Approved in Argentina, Austria, Belgium, Czech
disodium(1) active ulcerative colitis Republic, Denmark, Iceland, Italy, Luxembourg,
Norway, Sweden, Switzerland and the United Kingdom
o Approvable letter received from FDA in March 2000
requiring completion of product labeling and resolution
of product brand name
Balsalazide Ulcerative colitis maintenance of o Approved in Austria, Belgium, Czech Republic,
disodium(1) remission Denmark, Iceland, Italy, Luxembourg, Sweden, and
the United Kingdom
Rifaximin Infectious diarrhea o Phase III clinical trial completed(3)
o Phase III clinical trial commenced Q-1 1999(2)
Rifaximin Hepatic encephalopathy o Phase III clinical completed(3)
o Orphan Drug Designation granted by FDA in
February 1998
Rifaximin Antibiotic associated colitis o IND submitted and cleared
(1) Under termination agreements dated December 1999, the exclusive commercial
rights previously granted to Astra in all countries excluding Italy, Spain,
Portugal, Greece, Japan, Taiwan, and Korea., reverted to the Company.
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 Glycyx. The data obtained in this
trial might be used in support of an NDA filing
(3) These trials were conducted by Alfa Wassermann. The data obtained in these
trials might be used in partial support of an NDA filing depending upon the
data collection procedures and methodology established by Alfa Wassermann,
as well as the outcome of the trial.
--------------------------------------------------------------------------------------------------------------
</TABLE>
BALSALAZIDE
Licensed from Biorex, Balsalazide is an orally administered,
anti-inflammatory drug designed to act in the gastrointestinal tract and
specifically in the colon. The Company has obtained several authorizations (see
table) to market balsalazide for the treatment of acute ulcerative colitis and
the maintenance of remission of ulcerative colitis. The Company believes that
balsalazide is also a potential treatment for other inflammatory bowel disease
conditions. Sales of drugs used to treat IBD worldwide totaled approximately
$825 million in 1999 and have reflected a compound annual growth rate of
approximately 20% since 1987.
Balsalazide, an orally administered drug therapy that has been shown in
well controlled clinical trials to be effective in delivering the therapeutic
agent directly to the colon, was developed after evaluation of the benefits and
side effects of existing therapies.
-6-
<PAGE>
Balsalazide 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 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. The Company responded to
the approvable letter in September 1999 and subsequently received notice from
the FDA that its responses to the approvable letter were considered complete.
In March 2000, the Company received a second approvable letter indicating that
the Company's application will be approved upon satisfactory completion of
product labeling and final resolution of the product brand name.
The Company submitted its NDA following completion of five
double-blind, randomized, controlled, safety and efficacy studies evaluating
balsalazide 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 balsalazide was
compared to a lower dose of balsalazide (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 balsalazide 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 balsalazide and mesalamine, symptom improvement was noticeably favorable
for balsalazide. Secondary measures of study-end symptom scores were also
significantly more favorable for balsalazide 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 twelve-week
treatment period at multiple centers in the United Kingdom. The primary study
endpoint measured patient tolerance of balsalazide versus mesalamine. While only
one patient in each group withdrew due to intolerance, patients treated with
balsalazide had statistically significantly fewer side effects than those
treated with mesalamine. The secondary endpoint of the trial measured the
efficacy of balsalazide relative to mesalamine and included primary measures of
complete remission, symptomatic remission and median time to complete relief of
symptoms. Balsalazide 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 balsalazide 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
balsalazide to demonstrate its full therapeutic effect and no significant
difference between placebo and balsalazide for the primary efficacy endpoint was
found. However, patients treated with balsalazide 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.
In June 1999 the Company completed a Phase III/IV clinical study in the
United States comparing balsalazide to mesalamine in the treatment of acute mild
to moderate ulcerative colitis. The study evaluated 175 patients over an
eight-week treatment period with 42% newly diagnosed patients. The conclusions
drawn from the study are that balsalazide is well tolerated and is superior to
mesalamine in the time to improvement of signs and symptoms of acute, mild to
moderate ulcerative colitis. Improvement in balsalazide patients was observed
12-14 days ahead of mesalamine patients, with greatest benefit observed in newly
diagnosed patients with left-sided disease.
RIFAXIMIN
-7-
<PAGE>
Rifaximin belongs to the rifamycin class of antibiotics. Rifaximin has
a broad spectrum of activity 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 acute
and chronic intestinal infections as well as for prophylactic use prior to
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. The Company intends to establish a 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 and has plans to develop rifaximin for other potential
indications. The Company is currently conducting a Phase III multi-center,
placebo-controlled trial to evaluate the use of rifaximin in the treatment of
infectious bacterial diarrhea in travelers. Depending upon the outcome of the
study, the Company believes that, in conjunction with supportive studies
performed by Alfa-Wassermann, it will be sufficient to support an NDA submission
for the use of rifaximin as a treatment of infectious bacterial diarrhea. The
Company expects to complete the study during 2000.
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 allows for 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 allows the FDA to permit approval of
an NDA based on a single pivotal Phase III trial. As part of its agreement with
Alfa Wassermann, the Company obtained clinical trial data for the use of
rifaximin in hepatic encephalopathy that it believes may be used as supportive
data for an NDA submission.
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 IN-VITRO studies and small clinical trials conducted by Alfa
Wassermann, the Company believes that rifaximin 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.
STRATEGIC ALLIANCES
The Company has and will continue to enter 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, a new chemical entity, and all its
salts, including the Company's first product, balsalazide disodium, from Biorex,
a private, independent drug company headquartered in England. Biorex developed
balsalazide and completed limited Phase III clinical trials. Under its
agreements with the Company, Biorex will participate in future milestone
revenues and profits from balsalazide.
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 its 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
-8-
<PAGE>
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 sales of balsalazide outside the United
States. Under these agreements, the Company undertook to complete preclinical
testing, perform clinical trials and obtain 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.
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 (1) 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 (2) 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
the breaching party to remedy the 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 that indication or territory
shall cease.
ASTRA AB
Pursuant to contracts between the Company and Astra, the two companies
agreed to collaborate in developing and obtaining regulatory approval of
balsalazide 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 balsalazide 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 balsalazide in
the United States market. In return, Astra was obligated to provide the Company
with certain milestone, license and development payments such that the Company's
alliance with Astra partially funded the development of balsalazide. Through
December 31, 1999, Salix had received revenues for milestone payments and
product development funding of approximately $16.1. The remaining milestones,
relating to European marketing approvals and FDA approval of the NDA, were
cancelled as part of a December 1999 agreement under which Astra returned all
rights to balsalazide to Salix. Under the terms of the original licensing
agreements between the Company and Astra, the Company sold encapsulated
balsalazide to Astra for marketing and distribution in its territories at a
price based on a percentage of Astra's average ex-factory
-9-
<PAGE>
sales price. Astra launched balsalazide in the United Kingdom in October 1997
and in Sweden and Denmark in March 1999. Under the terms of the December 1999
agreement, Astra will continue to distribute balsalazide while the Company
pursues alternatives for marketing and distribution in those countries.
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
balsalazide in Italy, Spain, Portugal and Greece. Through December 31, 1999 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 balsalazide. Under the terms of its agreements, Salix will sell
the bulk active ingredient balsalazide 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 (1) the patents
relating to the product or (2) 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 owns no manufacturing facilities. 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, the Company is using bulk active ingredient balsalazide
manufactured for the Company by Akzo Nobel in Scotland. The Company's
balsalazide is being encapsulated by Anabolic in Irvine, California. The Company
has recently obtained approval of a second manufacturer of bulk balsalazide
capsules for sale to European countries and intends to submit the manufacturer
for approval to manufacture capsules for the United States pending additional
process validation. In addition the Company is in negotiations to secure
additional sources of commercial quantities of the bulk active ingredient
balsalazide.
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.
MARKETING AND SALES
The Company plans to establish its own marketing and sales organization
in the United States. The Company intends to establish a small, specialized
sales force to market balsalazide, rifaximin and future products to the
approximately 10,000 gastroenterologists in the United States who are
responsible for treating most gastrointestinal disease. The Company recognizes
that there are risks involved in trying to build its own sales force. However,
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. The Company plans to implement future United
States product sales and marketing based on the direct sales force model. For
territories outside of the United States, the Company intends to continue to
out-license distribution rights to companies with
-10-
<PAGE>
experience in the target therapeutic area and the territory. The Company
believes that this combination of out-licensing distribution rights in the
non-U.S. territories and establishing a direct sales force in the United States
will provide maximum return to shareholders from development of the Company's
products.
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.
BALSALAZIDE
The new chemical entity balsalazide and the method of treating
ulcerative colitis with balsalazide are the subject of composition of matter
patents issued to Biorex in the United States (expiring July 2001), the United
Kingdom (expiring July 2006), France (expiring May 2002), Italy (expiring July
2006) and Germany (expiring April 2002). The Company holds exclusive worldwide
rights under the issued patents, excluding Japan, Korea and Taiwan. The patents
claim balsalazide as well as several variant molecules.
The Company has filed additional patent applications in 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.
AstraZeneca has filed patent applications covering certain finished
dosage formulations of balsalazide. As part of the termination agreement
AstraZeneca assigned the rights to these patent applications to the Company. One
patent has been issued in the Netherlands. However, there can be no assurance
that these patent applications do not infringe upon existing patents, that the
Company will pursue these patent applications, that any additional patents will
be issued or, if issued, that they will provide protection against similar or
competing products.
RIFAXIMIN
Rifaximin is covered by substance of matter patents 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 these 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
-11-
<PAGE>
applicant did not act with due diligence are subtracted from the regulatory
review period. Under this law, the balsalazide patent in the United States could
be extended by up to five years, giving 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 addition, the Company intends to seek patent extensions
under similar laws in effect in the European Union, which could give balsalazide
extended patent protection until as late as 2006. Under these laws the Company
has received Supplemental Protection Certificates from both the United Kingdom
Patent Office and the Italian Patent and Trademark Office extending the
expiration date of patents in both countries by five years until 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: (1) preclinical laboratory tests,
preclinical studies in animals and formulation studies; (2) 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;
(3) adequate and well-controlled clinical human trials to establish the safety
and efficacy of the drug for each indication; (4) the submission of an NDA to
the FDA; and (5) 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 (1) assess the
efficacy of the drug in specific, targeted indications, (2) assess dosage
tolerance and optimal dosage and (3) 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
-12-
<PAGE>
filing. Once the submission is accepted for filing, the FDA begins an in-depth
review of the NDA. Under the FDC 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 balsalazide 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 balsalazide as a therapy
for acute ulcerative colitis. The Company responded to that approvable letter
and, in March 2000, the Company received a second approvable letter indicating
that Company's application may be approved upon satisfactory completion of
product labeling and final resolution of the product brand name. 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. If regulatory approval of balsalazide 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
-13-
<PAGE>
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
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 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.
Implemented in January 1995, a mutual recognition procedure is
available at the request of the applicant for all medicinal products that are
not subject to the centralized procedure under the so-called "decentralized
procedure". The decentralized procedure, which began in January 1998, created a
new system for mutual recognition of national approval decisions, made changes
to then existing procedures for national approvals and established procedures
for co-ordinated 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 concerns
over the mutual recognition of the initial national approval. Lack of objection
of a given country within 90 days automatically results in approval of that EU
country. If concerns cannot be resolved within the 90 day period provided for
review, and the applicant doesn't withdraw the application from those countries
that have unresolved concerns, the application will be subject to a binding
arbitration procedure. If the applicant loses the arbitration then all approvals
are lost, including the original approval upon which the mutual recognition was
sought. 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.
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
-14-
<PAGE>
approvals or approvals of the Company's chosen product indications. Furthermore,
the Company must obtain pricing approval 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.
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 balsalazide, 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, 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, 1999, the Company had 11 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.
-15-
<PAGE>
ITEM 2. PROPERTIES
The Company's headquarters are located in Palo Alto, California, where
it occupies approximately 5,500 square feet of office space under a lease
extending through August 31, 2001. The Company also holds the head lease on a
further 2,000 square-feet, which is sub-let until the expiration of the head
lease on August 31, 2001. In addition, the Company leases approximately 200
square feet of office space in Hamilton, Bermuda and approximately 100 square
feet of office space in West Sussex, England. The Company has plans to establish
an executive and sales office in Raleigh, North Carolina during 2000.
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 shareholders during
the fourth quarter of the year ended December 31, 1999.
-16-
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the
Company's executive officers as of March 1, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
-------------------------------- --- ------------------------------------------------------------------
<S> <C> <C>
Randy W. Hamilton............... 45 Chairman
Robert P. Ruscher............... 39 President and Chief Executive Officer
John Brough..................... 46 Chief Financial Officer and President, Glycyx Pharmaceuticals, Ltd.
Alvaro E. Carvajal.............. 55 Vice President, Information Systems (Salix California)
Lorin K. Johnson, Ph.D.......... 47 Vice President, Research and Development (Salix California)
Lise Riopel, Ph.D. 44 Vice President, Clinical Affairs (Salix California)
</TABLE>
RANDY W. HAMILTON is a co-founder of the Company and has served as
Chairman of its Board of Directors since December 1993. From December 1993 until
November 1999 he also served as President and Chief Executive Officer. From
November 1989 to November 1999, Mr. Hamilton 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.
ROBERT P. RUSCHER was elected President and Chief Executive Officer and
a director of the Company in November 1999. He was also elected as President and
Chief Executive Officer of Salix Pharmaceuticals, Inc. From February 1996 until
November 1999 he served as the Company's Vice President, Corporate Development.
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. From April 1994 until November 1999, Mr. Ruscher was
associated with the law firm of Wyrick Robbins Yates & Ponton LLP 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.
JOHN BROUGH has served as Chief Financial Officer since November 1999
and 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, 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.
LORIN K. JOHNSON, PH.D. is a co-founder of the Company and has served
as the Company's Vice President, Research and as a member of its Board of
Directors since December 1993. From November 1989 to December 1993, Dr. Johnson
held the same positions at 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.
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 Director, Clinical Operations at Xoma Corporation. From April 1994 to
February 1996, Ms. Riopel served as the Senior Director, Project Management-East
for iBRD - Rostrum Global.
-17-
<PAGE>
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 that
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, 1999, The Bank
of Canada noon rate of exchange for United States Dollars into Canadian Dollars
was Cdn. $1.442 = U.S. $1.00.
<TABLE>
<CAPTION>
SHARES TRADED UNDER SYMBOL "SLX.S" SHARES TRADED UNDER SYMBOL "SLX"
---------------------------------- --------------------------------
SHARE SHARE
HIGH (CDN.$) LOW (CDN.$) VOLUME HIGH (CDN.$) LOW (CDN.$) VOLUME
------------ ----------- ------ ------------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Fiscal Year ended December 31, 1999
Fourth Quarter 1999.................... 0.95 0.18 1,914,030
Third Quarter 1999..................... 0.45 0.20 1,690,800
Second Quarter 1999.................... 0.90 0.43 1,358,900
First Quarter 1999...................... 1.50 0.82 421,100
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.................. 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.................. 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>
On December 31, 1999, the closing price for the Common Shares as
reported on The Toronto Stock Exchange was Cdn. $0.73. As of March 28, 2000,
there were approximately 52 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.
-18-
<PAGE>
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.
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.
-19-
<PAGE>
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, 1999, and the
balance sheet data as of December 31, 1999, and 1998, 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, 1996 and 1995 and the
balance sheet data as of December 31, 1997, 1996 and 1995 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,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
( IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
<S> <C> <C> <C> <C> <C>
Product revenue..................... $ 491 $ 559 $ 245 $ -- $ --
Revenues from collaborative agreements 2,602 1,000 1,821 1,820 1,990
--------- --------- --------- --------- ---------
and other......................
Total revenues.................. 3,093 1,559 2,066 1,820 1,990
Expenses:
Cost of products sold............... 878 926 827 -- --
License fees........................ 297 78 461 605 100
Research and development............ 4,787 5,967 3,516 2,053 2,888
General and administrative.......... 1,932 2,569 2,430 1,731 1,334
--------- --------- --------- --------- ---------
Total expenses.................. 7,894 9,540 7,234 4,389 4,322
--------- --------- --------- --------- ---------
Loss from operations.................... (4,801) (7,981) (5,168) (2,569) (2,332)
Interest income......................... 216 502 400 290 18
Other income and expense, net........... (26) 70 (22) (172) (106)
--------- --------- ---------- ---------- ---------
Net loss . $ (4,611) $ (7,409) $ (4,790) $ (2,451) $ (2,420)
========= ========= ========= ========== =========
Net loss per share, basic and diluted (1) $ (0.45) $ (0.73) $ (0.63) $ (0.46) $ (0.77)
========== ========= ========== ========= =========
Shares used in computing net loss per
share(1) 10,209 10,208 7,613 5,365 3,149
========== ========= ========== ========== =========
<CAPTION>
-------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
CONSOLIDATED BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents............. $ 2,402 $ 2,763 $ 15,173 $ 5,624 $ 188
Short term investments................ -- 4,500 -- -- --
Working capital (deficit)............. 2,013 6,553 13,884 4,438 (3,432)
Total assets.......................... 3,659 8,256 15,878 5,858 433
Long-term liabilities................. -- -- -- -- 2,005
Accumulated deficit................... (25,411) (20,800) (13,391) (8,601) (6,150)
Shareholders' equity (net capital deficiency) 2,215 6,826 14,129 4,593 (5,226)
</TABLE>
(1) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of shares used in computing net loss per share.
-20-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
UNLESS OTHERWISE INDICATED, ALL REFERENCES IN THIS ITEM 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 objective is to be a market-driven specialty
pharmaceutical company focussed on the needs of physicians specializing in
gastroenterology. The Company intends to establish a small direct sales force to
promote its products to this specialist audience. The Company's strategy is to
identify and acquire products that have near-term commercial potential and apply
its regulatory and 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 this 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,
Sweden and Denmark under the brand names COLAZIDE(R), COLAZID(R) and PREMID(R),
respectively, 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 both
sales revenues and operating expenses to increase as the Company expands upon
its balsalazide commercialization efforts and continues product development and
clinical programs for rifaximin. As of December 31, 1999, the Company had
accumulated losses of approximately $25.4 million. Since 1992, the Company has
financed its operations principally through reimbursement payments, license fees
and milestone revenues, totaling approximately $19.4 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 $37.7 million, of which $22.5 million
were in research and development expenses and $1.6 million in license fees to
licensors. The Company's alliances with Astra AB and a division of Menarini
Pharmaceutical Industries s.r.l. have allowed Salix to fund the development of
balsalazide, 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 in
exchange for participation in future milestone revenues and profits. The Company
out-licensed balsalazide, which is manufactured by third parties under contract
with the Company, to Astra AB and Menarini at a formula price. In 1999 Astra AB
merged with Zeneca PLC, a British pharmaceutical company, to create AstraZeneca
PLC. In December 1999 the Company and AstraZeneca signed an agreement under
which the marketing and distribution rights for balsalazide disodium previously
licensed by the Company to Astra would return to the Company. Under the
agreement AstraZeneca will continue to distribute balsalazide in those countries
where it is currently being sold, namely the United Kingdom, Sweden and Denmark,
while the Company pursues alternatives for marketing and distribution in those
countries. AstraZeneca will return all rights, intellectual property and
information relating to balsalazide to the Company and future milestone payments
from AstraZeneca are terminated. The Company received $1.0 million relating to
previously earned research and development funding, and AstraZeneca agreed to
make a loan to the Company of up to $500,000 under certain conditions. The
Company intends to out-license balsalazide in all former Astra territories
except for the United States, on favourable terms. However, there is no
guarantee that the Company will be successful in this endeavor and failure to
secure a new distribution partner, or partners, could have a material adverse
impact on the Company's financial condition and future results from operations.
If successful in obtaining regulatory approval for balsalazide from the FDA the
Company intends to establish its own direct sales force to market balsalazide in
the United States. Although the creation of an independent sales
-21-
<PAGE>
organization will require a substantial investment by the Company, the Company
anticipates that the financial results from balsalazide, rifaximin and future
products, if approved, will be more favorable to the Company than those
anticipated from the indirect sale of product through marketing partners. The
Company had planned for the establishment of a direct sales force on the
approval of rifaximin, however the return of balsalazide rights allows the
Company to establish itself as a direct sales and marketing organization earlier
than it had anticipated. 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 received approval in July 1997 to market balsalazide in the
United Kingdom for the treatment of acute ulcerative colitis and Astra launched
balsalazide under the brand name COLAZIDE(R) in October 1997. Following receipt
of pricing approvals Astra launched balsalazide in Sweden and Denmark in March
1999. Balsalazide will be distributed in Italy, Spain, Portugal, and Greece by
Menarini. The Company expects Menarini to obtain pricing approval in Italy and
launch balsalazide in Italy during 2000.
The Company recognized its initial product revenues from Astra's sales
of balsalazide in 1997 and recognized nominal product revenues from sales of
balsalazide to Menarini in 1998. The selling price of balsalazide outside the
United Kingdom, Sweden and Denmark 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 sales outside the United States. In addition,
the Company anticipates product costs to remain high until volumes increase
allowing the Company to benefit from economies of scale.
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. 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.
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 is currently sponsoring a
Phase III trial for the treatment of infectious bacterial diarrhea in travelers,
which is expected to complete during 2000. 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 advantages in the testing and approval process for
the drug.
Results of Operations
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Revenues for the year ended December 31, 1999 included product revenues
of $0.5 million and revenues from collaborative agreements with Astra of $2.6
million, of which $2.0 million related to the completion of a clinical trial and
the termination of the Company's collaborative agreements with Astra and $0.5
million to the launch of balsalazide in Sweden. Revenues for the year ended
December 31, 1998 included product revenues of $0.6 million and revenues from
collaborative agreements of $1.0 million from Astra in connection with an
on-going clinical trial. Product revenues during 1999 were lower than expected
due to a disruption in the supply of bulk active ingredient from the Company's
vendors, which resulted in the Company being unable to deliver sufficient
finished product to meet patient demand and caused an out-of-stock situation in
the Company's markets. As of December 1999 the Company had back-orders of 2.9
million capsules which the Company expects to fill during the first quarter of
2000. Revenues for the year ended December 31, 1997 included the Company's
initial revenues from balsalazide product sales of $245,000 and milestone
revenues of $1.8 million relating to the approval of balsalazide in the United
Kingdom and the filing of the NDA for balsalazide in the United States. Revenues
totaled $3.1 million, $1.6 million, and $2.1 million for 1999, 1998, and 1997,
respectively. Product revenues are recorded net of credits to AstraZeneca for
past research and development funding equal to twenty percent of invoiced sales.
These credits amounted to $92,000, $102,000, and $30,000 in 1999, 1998 and 1997,
respectively. Operating expenses were $7.9 million, $9.5 million, and $7.2
million
-22-
<PAGE>
for 1999, 1998, and 1997, respectively. The decrease in operating expenses from
1998 is primarily a result of cost saving initiatives and headcount reductions
as noted below.
The Company recognized cost of products sold of $0.9 million for the
year ended December 31, 1999. Cost of products sold in 1998 and 1997 were $0.9
million and $0.8 million, respectively. Prior to 1997, the Company had no
product revenues. The Company expects costs of products to continue to exert
pressure on sales margins until such time, if at all, that the Company receives
additional approvals for balsalazide, including approval in the United States,
and is able to benefit from reduced costs due to higher volumes. License fee
expenses of $0.3 million, $0.08 million, and $0.5 million in 1999, 1998, and
1997, respectively relate primarily to payments made to Biorex and
Alfa-Wassermann under the terms of the respective license agreements.
Research and development expense was $ 4.8 million, $6.0 million , and
$3.5 million for 1999, 1998, and 1997, respectively. The decrease in research
and development expenses in 1999 is due primarily to cost saving initiatives
implemented by management, and the completion during 1999 of a balsalazide
clinical trial in the United States, partially offset by increased expenditures
relating to a clinical trial for rifaximin started in 1999 and the cost of a
feasibility study for lafutidine. The increase in research and development
expense in 1998 as compared to 1997 was 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. Unless regulatory authorities request additional clinical data on
balsalazide, research and development expense is expected to be lower in 2000 as
spending on balsalazide diminishes and the rifaximin clinical trial for
infectious diarrhea reaches completion. Thereafter research and development
costs are expected to increase as additional indications for balsalazide and
rifaximin are pursued and new products in-licensed.
General and administrative expenses were $1.9 million, $2.6 million,
and $2.4 million for 1999, 1998, and 1997, respectively. The decrease in 1999
was primarily due to cost saving initiatives including headcount reductions. The
small increase in 1998 over 1997 was due mainly to additions of key personnel
and the increased administrative costs related to being a public company in
Canada.
Interest income was lower in 1999 due to lower average cash balances
than during 1998. 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. The Company has experienced net losses of $ 4.6
million, $7.4 million, and $4.8 million for 1999, 1998, and 1997, respectively.
At December 31, 1999, the Company had federal net operating loss
carryforwards of approximately $14.0 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
The Company was well prepared for the changeover to the year 2000 and
all of the Company's critical systems handled the rollover to the new millennium
seamlessly. Many people believed that the ability of some installed computer
systems and software products to accept only two digit entries in the date code
field would have a devastating effect due to the inability of such products to
distinguish between the year 1900 and the year 2000. The Company did not suffer
from, nor is the Company aware of, any problems experienced by its primary
vendors, suppliers and financial institutions related to the year 2000. However,
there can be no assurance that year 2000 problems will not arise in the future.
The Company estimates that the cost of ensuring Y2K compliance was less than
$20,000.
LIQUIDITY AND CAPITAL RESOURCES
-23-
<PAGE>
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 31, 1999 the Company had approximately $2.4 million in
cash and cash equivalents. As of December 31, 1998, the Company had
approximately $7.3 million in cash, cash equivalents and short-term investments.
The decrease of $4.9 million was due primarily to cash used to fund the
operating activities of the Company.
As of December 31, 1999, the Company had no long-term obligations. As
of December 31, 1999 the Company had non-cancelable purchase order commitments
for inventory purchases of approximately $0.9 million. The Company has not
quantified, but anticipates significant capital expenditures in 2000 related to
establishing a direct sales and marketing organization.
The Company has sustained continuing operating losses and has an
accumulated deficit of $25.4 million as of December 31, 1999. The Company
expects to incur substantial and increasing operating losses until product
approvals are obtained and product revenues reach a sufficient level to support
ongoing operations. In addition, in the year ended December 31, 1999 the Company
had negative cash flows from operations of approximately $4.8 million. The
Company believes its cash and investment balances at December 31, 1999 should be
sufficient to satisfy the cash requirements of the Company through at least the
first six months of 2000. However, the Company's actual cash requirements might
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 believes that it is well
positioned to enter into a collaborative arrangement with a corporate partner or
partners for the distribution rights to balsalazide outside of the United States
which will provide the Company with additional funding in the form of licensing,
milestone and/or royalty payments. However, there can be no assurance of
obtaining this funding. The Company anticipates that this funding will enable
the Company to continue its operations through 2000 and until such time, if at
all, that it needs 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 might also enter into additional
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. Further, as the Company does not have a
definitive funding agreement in place there can be no assurance as to the
Company's ability to continue as a going concern.
FACTORS THAT MAY AFFECT FUTURE RESULTS
LACK OF SALES AND MARKETING EXPERIENCE. The Company has no experience
in marketing and selling of its products either directly or through its
relationships with licensees. The Company's sales and marketing strategy for
balsalazide outside of the United States relies on its third-party licensees, to
whom the Company has granted, or forsees granting, exclusive marketing rights.
There can be no assurance that either Menarini or new licensees will market
balsalazide 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 balsalazide, rifaximin and other future products in
the United States. There can be no assurance that the Company's marketing and
direct sales efforts will be successful.
-24-
<PAGE>
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 an
agreement relating to the development, commercialization, manufacture and
marketing of balsalazide with Menarini, and is actively seeking a new corporate
partner to replace AstraZeneca for the distribution of balsalazide outside of
the United States.
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 1998, the FDA issued an
"approvable" letter to the Company for the balsalazide 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. In September 1999 the Company submitted its responses to the
approvable letter and subsequently received notice from FDA that its responses
to the approvable letter were considered complete. In March 2000, the Company
received a second approvable letter indicating that Company's application may be
approved upon satisfactory completion of product labeling and final resolution
of the product brand name. While the Company believes that it can successfully
fulfill the FDA requirements contained in the second approvable letter to obtain
marketing approval, there can be no assurance that its efforts in this regard,
in whole or in part, will be successful. 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 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.
The Company and its partners, Astra and Menarini, received in May 1998
notification of approval of balsalazide 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. Resubmission in these
countries will primarily be the responsibility of our licensees 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 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 for the approved indications, or
that the Company's marketing partners will launch balsalazide in the countries
where the marketing application has been approved.
With respect to rifaximin, Alfa Wassermann recently completed 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. The
Company has initiated a Company-sponsored trial for the indication of bacterial
infectious diarrhea that is expected to complete during 2000. 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
-25-
<PAGE>
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 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.
HISTORY OF OPERATING LOSSES; EXPECTATION OF FUTURE LOSSES. The
Company's operations have consisted 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 and limited
product sales of Colazide(R) in the United Kingdom. As of December 31, 1999, the
Company had incurred cumulative losses since inception of approximately $25.4
million. The Company currently expects operating losses to continue until
product approvals are obtained and product revenues reach a sufficient level to
support ongoing operations. The Company's future operating performance will
depend on the timing of regulatory approvals of balsalazide and rifaximin,
particularly the timing of FDA approval, and, if such approvals can be obtained,
will also depend on market acceptance, and the Company's ability to secure
manufacture of those products at an acceptable cost.
DEPENDENCE ON COLLABORATIVE PARTNERS/NEW COLLABORATIVE PARTNER. The
commercialization of balsalazide outside of the United States is entirely
dependent on Menarini and new collaborative partner or partners, in their
respective territories. Under the terms of the December 1999 agreement with
AstraZeneca, AstraZeneca will continue to distribute balsalazide in those
countries in which it is currently being marketed while the Company pursues
alternatives for marketing and distribution. Should the Company be unsuccessful
in securing a new distribution partner, AstraZeneca may after an agreed date
cease to distribute balsalazide. There can be no assurance that the Company will
be successful in securing a new distribution partner for balsalazide in those
countries or if it is that it will be able to negotiate terms for the
distribution rights on equivalent or more favourable terms than those under
which the Company originally licensed the rights to AstraZeneca. Should the
Company fail to secure an alternative for the distribution of balsalazide, and
should AstraZeneca cease to distribute balsalazide it could have a material
adverse effect on the Company's business, financial condition, and results of
operations. The Company intends also to seek a new partner or partners for those
countries where balsalazide is currently approved but not yet marketed and those
countries where balsalazide is not currently approved, including those E.U.
countries where the application was withdrawn by Astra. There can be no
assurance that the Company will be able to find a new distribution partner for
these countries, or if it is that approvals in those countries will be granted.
Although Menarini 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 Menarini to maintain its
exclusivity. The Company's agreement with Menarini provides for a term of not
less than 10 years from first launch. Although Menarini has advised the Company
that it intends to seek approval in the countries for which marketing
applications were withdrawn, the responsibility to complete the approval process
lies with Menarini and not the Company. There can be no assurance that Menarini
will seek such approvals, or it does, that approval 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 agreement with 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, 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 and rifaximin, and, therefore, is dependent on contract
-26-
<PAGE>
manufacturers for the production of such products for development and commercial
purposes. The Company has experienced supply problems due to its dependence upon
a limited number of contract manufacturers which have manifested in shortages of
finished product in the market place. 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, and price, 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 agreement with Menarini, the obligations of
Menarini 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 Menarini is granted a temporary license to manufacture
balsalazide. Under certain situations, such manufacturing license may become
permanent, in which case the Company's revenues from the arrangements could be,
depending on the circumstances, severely reduced or eliminated. The Company
anticipates that future agreements with new distribution partners will contain
similar clauses. 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 balsalazide 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 balsalazide 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 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 payers 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.
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 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
-27-
<PAGE>
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 balsalazide composition of matter and
method of treating ulcerative colitis with balsalazide expire in July 2001 in
the United States, July 2006 in the United Kingdom, May 2002 in France, July
2006 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. The Company has been successful in obtaining
patent extensions of five years in both Italy and the United Kingdom, and 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. However, there can be no assurance that any
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, 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.
-28-
<PAGE>
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 balsalazide, 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, 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 AND EXPANSION. The Company expects to experience
significant growth in the number of its employees and the scope of its
operations. The Company intends to establish an executive and sales office in
Raleigh, North Carolina. This growth and expansion 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, including
Randy Hamilton, Chairman, Lorin Johnson, Vice President, Research (Salix
California), Robert Ruscher, President and Chief Executive Officer, John Brough,
Chief Financial Officer and President (Glycyx Pharmaceuticals, Ltd.), Lise
Riopel, PhD., Vice President, Clinical Affairs (Salix California), and Alvaro
Carvajal, Vice President, Information Systems. Because the loss of the services
of one or
-29-
<PAGE>
more of these key employees could have a material adverse effect on the Company,
the Company has entered into employment agreements with each of these key
personnel to provide for an extended transition period in the event of
resignation. 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 balsalazide and rifaximin in the United States, it
intends to sell those products 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
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.
Due to the nature and maturity of the Company's short-term investments
the Company does not believe such investments present significant market risk.
-30-
<PAGE>
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.
-31-
<PAGE>
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 2000 Annual Meeting of
Shareholders scheduled to be held on June 14, 2000, which will be filed by the
Company with each of the Canadian provincial securities commissions in
accordance with applicable Canadian securities legislation and 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 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.
-32-
<PAGE>
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
Statements of Operations............................................................................F-4
Statements of Shareholders' Equity .................................................................F-5
Statements 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
Exhibit No. Exhibit Title
----------- -------------
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
-33-
<PAGE>
Exhibit No. Exhibit Title
----------- -------------
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 of Intent dated March 5, 1999 between
Glycyx Pharmaceuticals, Ltd. and Fujirebio.
10.18 (f) Employment Agreement effective May 6, 1999
between Salix Pharmaceuticals, Ltd and Randy
W. Hamilton
10.19 (f) Employment Agreement effective May 6, 1999
between Salix Pharmaceuticals, Ltd and Dr.
Lorin K. Johnson
10.20 (f) Employment Agreement effective May 6, 1999
between Salix Pharmaceuticals, Ltd and Robert
P. Ruscher
10.21 (f) Employment Agreement effective May 6, 1999
between Salix Pharmaceuticals, Ltd and John
Brough
10.22 (g) Termination and Settlement Agreement dated as
of December 22, 1999, by and between Astra AB
and Salix Pharmaceuticals Inc. (a wholly owned
subsidiary of Salix Pharmaceuticals, Ltd.)
10.23 (g) Agreement dated December 22, 1999, between
Glycyx Pharmaceuticals, Ltd (a wholly owned
subsidiary of Salix Pharmaceuticals, Ltd.) and
Astra AB.
10.24 (h) Shareholder Protection Rights Agreement, dated
as of January 13, 2000 between Salix
Pharmaceuticals, Ltd. and Montreal Trust
Company of Canada.
21.1 (a) Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent
Auditors.
24.1 (i) Power of Attorney.
27.1 (i) Financial Data Schedule
-34-
<PAGE>
-------------
(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) Incorporated by reference to exhibits filed with the Registrant's Annual
report on Form 10K for the twelve months ended December 31, 1998.
(f) Incorporated by reference to exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the three months ended June 30, 1999
(g) Incorporated by reference to exhibits filed with the Registrant's Current
Report on Form 8-K dated December 28, 1999.
(h) Incorporated by reference to exhibits filed with the Registrant's Current
Report on Form 8-K dated January 13, 2000.
(i) Incorporated by reference to the exhibit bearing the same number filed
with the Registrant's Annual Report on Form 10-K for the twelve months
ended December 31, 1999.
(B) REPORTS ON FORM 8-K.
The Registrant filed a Current Report on Form 8-K on December
28, 1999 voluntarily reporting its Termination and Settlement
Agreement with Astra.
(C) EXHIBITS
See Item 14(a)(3) above.
(D) FINANCIAL STATEMENT SCHEDULES
See Item 14(a)(1) above.
-35-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K/A to be
signed on its behalf by the undersigned, thereunto duly authorized in the City
of Raleigh, North Carolina.
SALIX PHARMACEUTICALS, LTD.
Date: October 6, 2000 By: /s/ Robert P. Ruscher
----------------------
Robert P. Ruscher, President
and Chief Executive Officer
-36-
<PAGE>
SALIX PHARMACEUTICALS, LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
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............................................. F-5
Consolidated Statements of Cash Flows...................................................... F-6
Notes to Consolidated Financial Statements................................................. F-7
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors
Salix Pharmaceuticals, Ltd.
We have audited the accompanying balance sheets of Salix Pharmaceuticals, Ltd.
as of December 31, 1999 and 1998, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1999. 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.
Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report thereon dated March 9, 2000, which
report contained an explanatory paragraph regarding the company's ability to
continue as a going concern, the Company, as described in Note 12, has signed an
agreement with Shire Pharmaceuticals Group resulting in net proceeds of $11.7
million. Therefore, the conditions that raised substantial doubt about whether
the Company will continue as a going concern no longer exist.
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, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Raleigh, North Carolina
March 9, 2000,
except for Note 12, as to which the date is
May 17, 2000
F-2
<PAGE>
SALIX PHARMACEUTICALS, LTD.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1999 1998
------------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents (NOTE 2)............................................... $ 2,402 $ 2,763
Short term investments........................................................... -- 4,500
Accounts receivable.............................................................. 287 --
Inventory........................................................................ 378 615
Prepaid and other current assets................................................. 390 105
----------- -----------
Total current assets........................................................ 3,457 7,983
Property and equipment, net (NOTE 2).................................................. 151 222
Other assets ......................................................................... 51 51
----------- -----------
$ 3,659 $ 8,256
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current accounts payable and accrued liabilities...................................... $ 1,444 $ 1,430
Commitments -- --
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; 10,208,838 shares issued
and outstanding at December 31, 1999 and 1998.................................... 27,626 27,626
Accumulated deficit.............................................................. (25,411) (20,800)
------------------------
Shareholders' equity........................................................ 2,215 6,826
----------- -----------
$ 3,659 $ 8,256
========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
SALIX PHARMACEUTICALS, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
--------------------------------------
Revenues:
<S> <C> <C> <C>
Product revenue (NOTE 11)............................ $ 491 $ 559 $ 245
Revenue from collaborative agreements and other
(NOTE 6)..................................... 2,602 1,000 1,821
---------- ----------- -----------
Total revenues.................................. 3,093 1,559 2,066
---------- ----------- -----------
Expenses:
Cost of products sold................................ 878 926 827
License fees (NOTE 5)................................ 297 78 461
Research and development (NOTE 2).................... 4,787 5,967 3,516
General and administrative........................... 1,932 2,569 2,430
----------- ------------ -----------
Total expenses.................................. 7,894 9,540 7,234
----------- ------------ -----------
Loss from operations...................................... (4,801) (7,981) (5,168)
Interest income........................................... 216 502 400
Other income and expense, net............................. (26) 70 (22)
---------- ----------- ------------
Net loss........................................ $ (4,611) $ (7,409) $ (4,790)
=========== ============ ============
Net loss per share, basic and diluted..................... $ (0.45) $ (0.73) $ (0.63)
=========== ============ ============
Shares used in computing net loss per share, basic and
diluted 10,209 10,208 7,613
=========== ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
SALIX PHARMACEUTICALS, LTD.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
SHAREHOLDERS'
EQUITY
COMMON STOCK ACCUMULATED (NET CAPITAL
------------------ DEFICIT DEFICIENCY)
SHARES AMOUNT ---------- ------------
------ ------
<S> <C> <C> <C> <C>
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 and comprehensive 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.................. 88,265 106 -- 106
Net loss and comprehensive loss....... -- -- (7,409) (7,409)
---------- --------- -------- -------
Balance at December 31, 1998 10,208,838 27,626 (20,800) 6,826
Net loss and comprehensive loss....... -- -- (4,611) (4,611)
---------- --------- ---------- -------
Balance at December 31, 1999.......... 10,208,838 27,626 (25,411) 2,215
========== ========= =========== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
SALIX PHARMACEUTICALS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
-----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss ................................................. $ (4,611) $ (7,409) $ (4,790)
Adjustments to reconcile net loss to cash used in operating
Activities:
Depreciation and amortization............................. 88 91 70
Changes in assets and liabilities:
Accounts receivable.................................... (287) -- --
Inventory and other current assets..................... (48) (260) (422)
Accounts payable....................................... 14 (319) 484
------------ ------------ ------------
Net cash used in operating activities.......................... (4,844) (7,897) (4,658)
CASH FLOWS FROM INVESTING ACTIVITIES
Sale and maturity of short term investments................. 4,500 -- --
Purchases of property and equipment......................... (17) (119) (119)
Purchases of short term investments......................... -- (4,500) --
-------------- ------------ ------------
Net cash provided by (used in) investing activities............ 4,483 (4,619) (119)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock...................... -- 106 14,326
------------ ------------ ------------
Net cash provided by financing activities...................... -- 106 14,326
------------- ------------ ------------
Net (decrease) increase in cash and cash equivalents........... (361) (12,410) 9,549
Cash and cash equivalents at beginning of year................. 2,763 15,173 5,624
------------- ------------ ------------
Cash and cash equivalents at end of year....................... $ 2,402 $ 2,763 $ 15,173
============= ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
SALIX PHARMACEUTICALS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(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. In March 1994, Salix
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. The Company is developing new
pharmaceuticals, primarily focused in the area of gastrointestinal
disease, and intends to establish a direct sales and marketing
organization in the United States to promote these products to
physicians specializing in gastroenterology. The Company received its
first product approval in the United Kingdom in fiscal 1997 and
commenced product shipments in the third quarter of 1997.
These statements are stated in United States dollars and are
prepared under accounting principles generally accepted in the United
States. The accompanying consolidated financial statements include the
accounts of the Company and its domestic and foreign subsidiaries. All
significant intercompany balances and transactions have been
eliminated.
The Company has sustained continuing operating losses and has
an accumulated deficit of $25.4 million as of December 31, 1999. The
Company expects to incur substantial and increasing operating losses
until product approvals are obtained and product revenues reach a
sufficient level to support ongoing operations. In addition, in the
year ended December 31, 1999, the Company had negative cash flows from
operations of approximately $4.8 million and its remaining cash
balances were approximately $2.4 million. In May 2000, the Company
signed an agreement with Shire Pharmaceuticals Group under which Shire
purchased from Salix the exclusive rights to balsalazide, a treatment
for ulcerative colitis, for several European countries. Under the
agreement, Shire paid the Company a first payment of $11.7 million in
consideration for the prior development of balsalazide and the purchase
of the intellectual property related to balsalazide, and could pay an
aggregate of as much as $11.6 million consisting of several milestone
payments payable upon achievement of certain events. $3.0 million of
the first payment was deferred and will be recognized as revenue, if
and when expense is incurred for clinical trials necessary for
registration of balsalazide in France, Germany and the Netherlands. The
Company anticipates that this funding should be sufficient to satisfy
the cash requirements of the Company through 2000 and until such time,
if at all, that it needs to raise additional funds in the form of debt
or equity financing to fund future licensing, development and
commercialization of rifaximin and new products. However, the Company's
actual cash requirements might 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 collaborative arrangements with
strategic partners, and the status of competitive products. The Company
might also enter into additional 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.
F-7
<PAGE>
SALIX PHARMACEUTICALS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
(EXPRESSED IN U.S. DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USES OF ESTIMATES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States 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. Product
sales in 1999 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 reimbursement until the
point at which milestones are achieved are deferred as advances from
licensees, until earned.
In December 1999 the SEC issued Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements." SAB 101 requires
that license and other up-front fees from research collaborators be
recognized over the term of the agreement unless the fee is in exchange
for products delivered or services performed that represent the
culmination of a separate earnings process. The effect of this change
in accounting principle will not have a material effect on the
Company's prior period results.
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
December 31, 1999 and 1998, respectively.
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. The Company had no short-term investments at
December 31, 1999. For these short-term investments, the carrying value
approximates fair value at December 31, 1998. 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
available for sale.
F-8
<PAGE>
SALIX PHARMACEUTICALS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
(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):
1999 1998
-----------------------
Cost:
Furniture and equipment.......... $ 177 $ 174
Computer equipment............... 306 292
Laboratory equipment............. 105 105
--------- ---------
588 571
Accumulated depreciation:
Furniture and equipment.......... 137 115
Computer equipment............... 198 146
Laboratory equipment............. 102 88
--------- ---------
437 349
--------- ---------
Net property and equipment...... $ 151 $ 222
========= =========
INVENTORIES
Raw materials, work-in-process and finished goods inventories
are stated at the lower of cost (which approximates actual cost on a
first-in, first-out cost method) or market value. All inventories at
December 31, 1999 and 1998 were 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, 1999, 1998 and 1997, comprehensive loss was equal to net
loss.
F-9
<PAGE>
SALIX PHARMACEUTICALS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
(EXPRESSED IN U.S. DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
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 and losses
were not material for the years ended December 31, 1999, 1998 and 1997.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees under the
intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25),
and has adopted the disclosure-only alternative of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS 123).
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 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)
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.
3. INITIAL PUBLIC OFFERING AND FOLLOW-ON OFFERING
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. SUBSIDIARIES
Glycyx, a wholly owned subsidiary incorporated in Bermuda,
recognized net losses of $3,846,000, $1,813,000, and $1,031,000 in the
years ended December 31, 1999, 1998, and 1997, respectively. Salix, a
wholly owned subsidiary incorporated in the United States, recognized
net losses of $385,000, $4,982,000, and $3,119,000 in the years ended
December 31, 1999, 1998, and 1997, respectively.
F-10
<PAGE>
SALIX PHARMACEUTICALS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
(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 percentage of gross profit on the drug in one defined
territory and a sales-based royalty in another territory. 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 balsalazide disodium, the sodium salt of
balsalazide, proposed for the treatment of ulcerative colitis. At
December 31, 1999 and 1998, no amounts were due the licensor.
In December 1999, the Company and Astra signed an agreement whereby
all rights to balsalazide previously licensed to Astra under the
aforementioned agreements were returned to the Company.
6. LICENSE REVENUE AND REVENUE FROM COLLABORATIVE AGREEMENTS
The Company recognized license fee income from Astra of $2,602,000 in
1999 of which $2,118,000 million related to a balsalazide clinical
trial in the United States and the termination of the Company's
collaborative agreements with Astra, and $484,000 related to the launch
of balsalazide in Sweden. In 1998, the Company received license fee
revenue of $1,000,000 related to the United States clinical trial. 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.
In December 1999 the Company and Astra signed an agreement whereby
all rights to balsalazide previously licensed to Astra under the
aforementioned agreements were returned to the Company. All future
milestone payments that would have been due from Astra were cancelled.
Under certain circumstances Astra has agreed to loan the Company up to
$500,000.
F-11
<PAGE>
SALIX PHARMACEUTICALS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
(EXPRESSED IN U.S. DOLLARS)
7. COMMITMENTS
The Company leases an office facility under an agreement expiring in
August 2001. In August 1999 the Company entered into a sub-lease for part
of its premises. Under this noncancellable sub-lease the Company will
receive $158,000 in future lease rentals as of December 31, 1999. Rent
expense for 1999 and future payments are shown net of sub-lease income.
Rent expense was approximately $228,000, $256,000, and $167,000 for the
years ended December 31, 1999, 1998, and 1997, respectively.
Future payments for operating leases at December 31, 1999 are as
follows (in thousands):
OPERATING
---------
LEASE
Years ending December 31, -----
2000............................. $ 213
2001............................. 180
------
Total minimum payments required....... $393
======
At December 31, 1999, the Company had a binding purchase order
commitment for inventory purchases aggregating $0.9 million to be delivered
in 2000.
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 or outstanding as of December 31, 1999 or 1998.
WARRANTS
At December 31, 1999, 602,331 shares of common stock were reserved for
issuance upon the exercise of warrants issued in relation to the Company's
initial public offering in May 1996, 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.
F-12
<PAGE>
SALIX PHARMACEUTICALS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
(EXPRESSED IN U.S. DOLLARS)
8. SHAREHOLDERS' EQUITY, Continued
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 non-statutory 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
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, 1999, the Company had reserved 2,110,376 shares of
common stock, 1,508,045 for issuance to eligible participants under two
option 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............... -- (106,417) $ 1.00
Options canceled................ 271,094 (271,094) $ 5.10
-------- ---------- ------------
Balance at December 31, 1998......... 514,365 993,680 $ 3.20
Options granted................. (593,000) 593,000 $ 0.34
Options exercised............... -- -- --
Options canceled................ 371,750 (371,750) $ 3.81
------- ---------- --------
Balance at December 31, 1999......... 293,115 1,214,930 $ 1.62
======= ========= ========
</TABLE>
F-13
<PAGE>
SALIX PHARMACEUTICALS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
(EXPRESSED IN U.S. DOLLARS)
8. SHAREHOLDERS' EQUITY, Continued
Exercise prices for options outstanding as of December 31, 1999 ranged
from $0.20 to $5.39 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>
$0.20 - 0.55 549,250 9.57 $ 0.30 89,208 $ 0.41
$0.81 - 1.81 351,780 6.89 0.90 266,977 0.90
$3.57 - 5.39 313,900 7.76 4.72 246,500 4.69
----- ---- ------- ---- ---- ------- ----
1,214,930 8.33 $ 1.62 602,685 $ 2.38
========= ==== ==== ======= ====
</TABLE>
At December 31, 1998, options were exercisable to purchase 557,245
shares at a weighted-average exercise price of $4.13 per share. At December 31,
1997, options were exercisable to purchase 445,805 shares at a weighted-average
exercise price of $2.85.
The weighted-average fair value of options granted in 1999, 1998 and 1997
was $0.19, $1.61 and $2.87, respectively.
F-14
<PAGE>
SALIX PHARMACEUTICALS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
(EXPRESSED IN U.S. DOLLARS)
8. 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.
The fair value of the Company stock-based awards to employees was
estimated using a Black-Scholes option pricing model. 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:
1999 1998 1997
--------------------------------------
Expected life (years) 5 5 5
Expected volatility 0.6 0.6 0.6
Risk-free interest rate 6.00% 5.40% 5.74%
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 years ended December 31, 1999, 1998 and
1997, respectively.
1999 1998 1997
---- ---- ----
Pro forma net loss (in thousands) $(5,056) $(7,666) $(5,011)
Pro forma net loss per common share
Basic and diluted $ (0.50) $ (0.75) $ (0.66)
F-15
<PAGE>
SALIX PHARMACEUTICALS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
(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, 1999, the Company has a U.S. federal net operating
loss carryforward of approximately $14,000,000 related to its U.S.
subsidiary, Salix Pharmaceuticals, Inc. This will expire on various dates
beginning in 2004 through 2019, if not utilized.
Significant components of the Company's deferred tax assets for federal
and state income taxes are as follows (in thousands):
1999 1998
---- ----
Net Operating Loss Carryforwards $ 5,000 $ 4,900
Capitalized Research and Development Expenses 600 500
Other 100 100
-------- -------
Total Deferred Tax Assets 5,700 5,500
Valuation Allowance (5,700) (5,500)
-------- -------
Net Deferred Taxes - -
======== =======
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 $1,960,000 during the year ended December 31, 1998.
Utilization of the federal net operating loss and credit
carryforwards might 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>
SALIX PHARMACEUTICALS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
(EXPRESSED IN U.S. DOLLARS)
9. INCOME TAXES, Continued
The Company's Bermuda subsidiary, Glycyx, has a cumulative loss of
approximately $8,900,000. 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. SIGNIFICANT CUSTOMERS AND VENDORS
Revenues from one customer represented 100%, 95% and 100% of total
revenues during each of fiscal 1999, 1998 and 1997, respectively. All
revenue is associated with the development of a single product,
balsalazide. The Company has contracted with one manufacturer and one
encapsulator. All product is manufactured through these sources. The
customers and the manufacturer are overseas companies.
11. 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 1999 was approximately $13,000. Additional
discretionary employer contributions may be made on an annual basis.
12. SUBSEQUENT EVENTS
On December 9th, 1999 the Board of Directors resolved, subject to the
approval of the Toronto Stock Exchange ("TSE"), to approve a private
placement of 500,000 shares of Common Stock to Mr. Robert P. Ruscher,
President and Chief Executive Officer of the Company. The placement was
effected on January 19, 2000 for total proceeds of approximately
$ 100,000.
On January 13th, 2000 the Board of Directors resolved to approve, for
the purpose of establishing a Shareholder Rights Plan, a dividend of one
Common Share purchase right for each share of the Company's Common Stock
outstanding on January 13th, 2000. The Shareholder Rights Plan is subject
to the approval of a majority of the Company's shareholders.
In May 2000, the Company signed an agreement with Shire
Pharmaceuticals Group under which Shire purchased from Salix the exclusive
rights to balsalazide, a treatment for ulcerative colitis, for Austria,
Belgium, Denmark, Finland, France, Germany, Iceland, Republic of Ireland,
Luxembourg, Norway, the Netherlands, Switzerland, Sweden and the United
Kingdom. Under the agreement, Shire paid the Company a first payment of
$11.7 million in consideration for the prior development of balsalazide
and the purchase of the intellectual property related to balsalazide, and
could pay an aggregate of as much as $11.6 million consisting of several
milestone payments payable upon achievement of certain events. $3.0
million of the first payment was deferred and will be recognized as
revenue, if and when expense is incurred for clinical trials necessary for
registration of balsalazide in France, Germany and the Netherlands. The
Company anticipates that this funding should be sufficient to satisfy the
cash requirements of the Company through 2000 and until such time, if at
all, that it needs to raise additional funds in the form of debt or equity
financing to fund future licensing, development and commercialization of
rifaximin and new products. However, the Company's actual cash
requirements might 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
collaborative arrangements with strategic partners, and the status of
competitive products. The Company might also enter into additional
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.
On April 11, 2000 the Board of Directors resolved to approve
establishing the Company's corporate headquarters in Raleigh, North
Carolina. The Company's selling, general and administrative functions will
be based in Raleigh, North Carolina effective June 1, 2000. The Company
will continue to conduct its research and development from the Palo Alto
location.
F-17
