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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-28434
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DIATIDE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3078258
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
NINE DELTA DRIVE, LONDONDERRY, NH 03053
(Address of principal executive offices) (Zip Code)
603-437-8970
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
The number of shares outstanding of each of the issuer's classes of common
stock as of
<TABLE>
<CAPTION>
OUTSTANDING AT MAY 7,
CLASS 1999
- ------------------------------------- -------------------------
<S> <C>
Common Stock, $0.001 par value 10,587,575
</TABLE>
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DIATIDE, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
----------
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS (Unaudited)
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998....................... 3
Condensed Statements of Operations for the three months ended March 31, 1999 and 1998, and
for the period from February 6, 1990 (date of inception) to March 31, 1999................ 4
Condensed Statements of Cash Flows for the three months ended March 31, 1999 and 1998, and
for the period from February 6, 1990 (date of inception) to March 31, 1999................ 5
Notes to Condensed Financial Statements................................................... 6
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations...
8
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk.............................. 11
PART II OTHER INFORMATION
ITEM 2 Changes in Securities and Use of Proceeds............................................... 12
ITEM 6 Exhibits and Reports on Form 8-K........................................................ 12
SIGNATURES............................................................................................ 13
EXHIBIT INDEX......................................................................................... 14
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
DIATIDE, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEETS
ITEM 1 FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DECEMBER 31, 1998
MARCH 31, 1999 -----------------
--------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 8,947,646 $ 6,663,654
Marketable securities....................................................... -- 1,000,000
Accounts receivable......................................................... 669,083 555,861
Inventories................................................................. 671,007 477,740
Other current assets........................................................ 267,908 207,405
-------------- -----------------
Total current assets.......................................................... 10,555,644 8,904,660
Property and equipment, at cost............................................... 3,676,855 3,619,520
Less: accumulated depreciation and amortization............................... 2,415,646 2,262,220
-------------- -----------------
1,261,209 1,357,300
Other assets.................................................................. 10,783 10,783
-------------- -----------------
Total assets.................................................................. $ 11,827,636 $10,272,743
-------------- -----------------
-------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses....................................... $ 1,831,502 $ 2,226,514
Accrued clinical expenses................................................... 404,500 674,765
Accrued promotion and royalty expenses--related party....................... 1,003,368 807,527
Current portion of long-term debt........................................... 187,388 187,388
-------------- -----------------
Total current liabilities..................................................... 3,426,758 3,896,194
Long-term debt, less current portion.......................................... 217,978 250,572
Stockholders' equity:
Preferred stock, $0.01 par value
Authorized shares--10,591,874
Series A convertible preferred stock:
Authorized shares--1,300,000
Issued and outstanding shares--1,210,256................................ 12,103 12,103
(Liquidation value of $11,800,000)
Series B convertible preferred stock:
Authorized shares--830,000
Issued and outstanding shares--825,309 (none in 1998)................... 8,253 --
(Liquidation value of $5,999,996)
Common stock, $0.001 par value
Authorized shares--50,000,000
Issued shares--10,587,575 (10,585,216 in 1998)............................ 10,588 10,585
Additional paid-in capital.................................................. 67,722,414 61,731,596
Deferred compensation....................................................... (207,222) (241,272)
Deficit accumulated during the development stage............................ (59,363,212) (55,387,011)
-------------- -----------------
8,182,924 6,126,001
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Less: 4,800 shares of common stock in treasury, at cost..................... (24) (24)
-------------- -----------------
Total stockholders' equity.................................................... 8,182,900 6,125,977
-------------- -----------------
Total liabilities and stockholders' equity.................................... $ 11,827,636 $10,272,743
-------------- -----------------
-------------- -----------------
</TABLE>
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Note: The balance sheet at December 31, 1998 has been derived from audited
financial statements at that date but does not include all of the
financial information and footnotes required by generally accepted
accounting principles for complete financial statements.
See Notes to Condensed Financial Statements.
3
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DIATIDE, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD
FEBRUARY 6, 1990
(DATE OF INCEPTION)
THREE MONTHS ENDED MARCH 31, TO
---------------------------- MARCH 31,
1999 1998 1999
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<S> <C> <C> <C>
Revenues:
Product sales............................................... $ 293,809 $ -- $ 470,989
Sponsored research.......................................... -- 500,000 6,778,388
License fees................................................ -- -- 7,300,000
Research grants............................................. 17,500 33,840 920,477
------------- ------------- -------------------
Total revenues................................................ 311,309 533,840 15,469,854
Costs and expenses:
Cost of products sold....................................... 88,367 -- 176,984
Research and development.................................... 2,465,497 2,765,941 55,903,483
Selling, general and administrative......................... 1,840,583 1,056,190 21,516,383
------------- ------------- -------------------
Total costs and expenses...................................... 4,394,447 3,822,131 77,596,850
Loss from operations.......................................... (4,083,138) (3,288,291) (62,126,996)
Other income (expense):
Interest income............................................. 121,468 206,124 3,028,818
Interest expense............................................ 14,531 (372) (265,034)
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Total other income (expense).................................. 106,937 205,752 2,763,784
------------- ------------- -------------------
Net loss...................................................... $ (3,976,201) $ (3,082,539) $ (59,363,212)
------------- ------------- -------------------
------------- ------------- -------------------
Net loss per share............................................ $ (0.38) $ (0.29)
------------- -------------
------------- -------------
Shares used in computing net loss per share................... 10,581,508 10,546,610
</TABLE>
See Notes to Condensed Financial Statements.
4
<PAGE>
DIATIDE, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD
FEBRUARY 6, 1990
THREE MONTHS ENDED (DATE OF INCEPTION)
MARCH 31, TO
---------------------- MARCH 31,
1999 1998 1999
---------- ---------- -------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss........................................................... $(3,976,201) $(3,082,539) $ (59,363,212)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation and amortization................................ 153,426 112,765 2,454,501
Cancellation of accrued interest............................. -- -- 111,438
Amortization of deferred compensation........................ 34,050 34,164 868,747
Compensation associated with stock option grants............. 26,980 30,300 407,065
Changes in operating assets and liabilities.................. (836,428) (311,154) 1,581,734
---------- ---------- -------------------
Cash used in operating activities........................ (4,598,173) (3,216,464) (53,939,727)
INVESTING ACTIVITIES:
Additions to property and equipment................................ (57,335) (32,820) (3,198,799)
Purchases of marketable securities................................. -- (996,837) (36,620,986)
Proceeds from sales of marketable securities....................... 1,000,000 4,550,000 36,620,986
---------- ---------- -------------------
Cash provided by (used in) investing activities.......... 942,665 3,550,343 (3,198,799)
FINANCING ACTIVITIES:
Sale of preferred stock, net....................................... 5,959,996 -- 45,768,910
Issuance of convertible notes...................................... -- -- 3,508,464
Repayment of convertible notes..................................... -- -- (315,000)
Issuance of long-term debt......................................... -- -- 900,518
Repayment of long-term obligations................................. (32,594) (941) (973,208)
Sale of common stock............................................... 12,098 42,576 17,196,512
Repurchase of common stock......................................... -- -- (24)
---------- ---------- -------------------
Cash provided by financing activities.................... 5,939,500 41,635 66,086,172
---------- ---------- -------------------
Net increase (decrease) in cash and cash equivalents............... 2,283,992 (375,514) 8,947,646
Cash and cash equivalents at beginning of period................... 6,663,654 3,857,973 --
---------- ---------- -------------------
Cash and cash equivalents at end of period......................... $8,947,646 $4,233,487 $ 8,947,646
---------- ---------- -------------------
---------- ---------- -------------------
Noncash transactions:
Acquisition of equipment through capital lease obligation.... $ -- $ -- $ 478,056
Conversion of convertible notes and accrued Interest to
preferred stock............................................ $ -- $ -- $ 3,304,902
Deferred compensation associated with stock options issued at
less than fair value....................................... $ -- $ -- $ 1,075,969
</TABLE>
See Notes to Condensed Financial Statements.
5
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DIATIDE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. NATURE OF BUSINESS
Diatide, Inc. (the "Company") was founded in 1990 and is a development stage
specialty pharmaceutical company engaged in the discovery, development, and
commercialization of patented, disease-specific imaging agents and therapeutics
for life-threatening conditions.
2. BASIS OF PRESENTATION
The accompanying unaudited financial statements for the three months ended
March 31, 1999 and 1998 and for the period February 6, 1990 (date of inception)
to March 31, 1999 have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the accompanying financial statements include all adjustments of a
normal recurring nature necessary for a fair presentation of results for these
interim periods. The results of operations for the three months ended March 31,
1999 are not necessarily indicative of the results to be expected for the year
ending December 31, 1999.
These financial statements should be read in conjunction with the audited
financial statements and notes thereto for the year ended December 31, 1998
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998.
3. SALE OF PREFERRED STOCK
On January 19, 1999, the Company completed the sale of 825,309 shares of the
Company's Series B Convertible Preferred Stock (the "Series B Preferred Stock")
to two investors in a private transaction for $6.0 million, net of issuance
costs. The Series B Preferred Stock is convertible into the Company's Common
Stock on a one-for-one basis, subject to adjustment for certain events. Each
share of Series B Preferred Stock is entitled to the same number of votes as
each share of Common Stock into which it is convertible and will vote together
with the Common Stock. Dividends on the Common Stock, if and when declared by
the Board of Directors, are payable to the holders of the Series B Preferred
Stock based on the number of shares of Common Stock into which the Series B
Preferred Stock is convertible before any distribution to the holders of the
Common Stock. The Series B Preferred Stock holders are entitled to priority
liquidation rights of an amount equal to $7.27 per share, as adjusted for
certain events, plus any declared but unpaid dividends.
The Company also issued Common Stock Purchase Warrants (the "Warrants") to
the investors to purchase in the aggregate 123,795 shares of Common Stock at an
exercise price of $8.72 per share. The Warrants will expire on January 19, 2001.
The Company has allocated $11,142 of the net proceeds to the Warrants to reflect
the fair value of such warrants relative to the fair value of the Series B
Preferred Stock. This amount is included in additional paid-in capital in the
accompanying financial statements.
Under the terms of a Registration Rights Agreement, dated as of January 19,
1999, the investors holding in the aggregate at least 51% of the Stockholder
Registrable Shares (as defined) have the right to require the Company to
register the Common Stock issuable upon the conversion of the Series B Preferred
Stock or the exercise of the Warrants at any time after January 19, 2000. The
Series B Preferred Stock is
6
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DIATIDE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. SALE OF PREFERRED STOCK (CONTINUED)
redeemable solely at the Company's option after January 19, 2002 and,
accordingly, is classified as equity in the accompanying financial statements.
4. RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1999, the Company adopted Financial Accounting
Standards Board Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities." ("Statement No. 133") The Company has not engaged in
hedging activities or purchased derivative instruments; accordingly, the
adoption of Statement No. 133 had no material impact on the results of
operations of the Company.
5. INVENTORIES
Inventories at March 31, 1999 are as follows:
<TABLE>
<S> <C>
Raw Materials..................................................... $ 363,247
Finished Goods.................................................... 307,760
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$ 671,007
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---------
</TABLE>
6. RECLASSIFICATIONS
Certain reclassifications were made to prior year statements to conform to
the current year presentation.
7
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Diatide is a specialty pharmaceutical company engaged in the discovery,
development and commercialization of patented imaging and therapeutic drugs. In
September 1998, we received marketing approval from the FDA of our
Techtide-Registered Trademark- AcuTect-TM-. We began marketing AcuTect in the
U.S. in October 1998 with our corporate partner Nycomed. In June 1998, we
submitted to the FDA an NDA for NeoTect-TM- (formerly P829), for diagnosing
malignancy of lung masses, which was assigned priority review status. In
December 1998 we received a letter from the FDA stating that the NDA for NeoTect
is approvable, subject to Diatide clarifying certain details and formally
agreeing to conduct certain phase 4 studies. However, the FDA has not yet
granted marketing approval for NeoTect, and there can be no assurance that such
approval will be granted or as to the timing of such approval.
All revenues received by Diatide from inception through March 31, 1999 have
resulted from research and development support payments and the option exercise
payments and the milestone fees for AcuTect and NeoTect from Nycomed under the
Company's collaborative agreements with Nycomed, research grants from the
National Institutes of Health ("the NIH") and the Department of Defense, fees
received for entering into option agreements with a pharmaceutical company and,
beginning in the fourth quarter of 1998, product sales of AcuTect.
Diatide has incurred cumulative net losses since its inception through March
31, 1999 of $59,363,000. We expect to incur additional significant operating
losses over the next 12 to 24 months. We also expect cumulative net losses to
increase during the initial marketing of AcuTect and as the Company's research
and development and clinical trial efforts continue. We expect that research and
development expenses during 1999 will be less than 1998 levels as we have
reassessed our research priorities. We have taken actions, including a reduction
in workforce subsequent to March 31, 1999, to reduce research and development
expenses by more than $4.0 million from planned levels for 1999. We expect
manufacturing, marketing, sales, and distribution costs will increase in the
future to support the commercialization of AcuTect and NeoTect. Patent costs
also would increase if Diatide became involved in litigation or administrative
proceedings involving its patents or those of third parties.
This Quarterly Report on Form 10-Q contains forward-looking statements that
involve a number of risks and uncertainties. All statements, trends, analyses
and other information contained in this report, as well as other statements,
including words such as "anticipate," "believe," "plan," "estimate," "expect,"
and "intend" and other similar expressions, constitute forward-looking
statements. There are a number of important factors that could cause our actual
results to differ materially from those indicated by such forward-looking
statements. These factors include, without limitation, those set forth in "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations--Risk Factors" of the Company's Annual Report on Form 10-K as of
December 31, 1998, which are expressly incorporated by reference herein.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
REVENUES. Diatide had revenues of $311,000 and $534,000 in the three months
ended March 31, 1999 and 1998, respectively. Revenues in the three months ended
March 31, 1999 were comprised of $294,000 of AcuTect product sales and $17,000
of contract revenues received under research grants from the NIH. Revenues in
the three months ended March 31, 1998 were comprised of $34,000 of contract
revenues received under research grants from the NIH, and $500,000 received by
Diatide as research and development support payments under its collaborative
agreements with Nycomed. In August 1998, Nycomed terminated its obligation to
make further research and development support payments to Diatide, effective
December 31, 1998.
8
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RESEARCH AND DEVELOPMENT. During the three months ended March 31, 1999 and
1998, Diatide expended $2,465,000 and $2,766,000, respectively, on research and
development activities. The $301,000 decrease in the three months ended March
31, 1999 over the same period in 1998 reflects higher clinical and regulatory
costs associated with the preparation and filing of an NDA for NeoTect in 1998
offset by increased research activity for therapeutic programs in 1999.
SELLING, GENERAL AND ADMINISTRATIVE. Diatide's selling, general and
administrative expenses were $1,841,000 and $1,056,000 in the three months ended
March 31, 1999 and 1998, respectively. The $785,000 increase in 1999 from 1998
resulted from increases in promotional costs, including staffing and consulting
services, shared with Nycomed under our co-promotional agreements, to support
the marketing of AcuTect.
INTEREST. Interest income was $121,000 in the three months ended March 31,
1999 compared with $206,000 in the three months ended March 31, 1998, reflecting
a decrease in the level of cash, cash equivalents and marketable securities
during the first quarter of 1999 compared to the same period in 1998.
NET LOSS. As a result of the above factors, Diatide incurred net losses of
$3,976,000 and $3,083,000 in the three months ended March 31, 1999 and 1998,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
In January 1999, Diatide issued 825,309 shares of Series B convertible
preferred stock and warrants to purchase 123,795 shares of common stock to two
institutional investors in a private offering, raising $6.0 million of net
proceeds. In September 1997, we issued 1,210,256 shares of Series A convertible
preferred stock and warrants to purchase 181,538 shares of Common Stock to three
institutional investors in a private offering, raising $11.6 million of net
proceeds. Diatide completed its initial public offering of 2,200,000 shares of
Common Stock in June 1996, raising approximately $16.4 million of net proceeds.
As of March 31, 1999, we had $8,948,000 of cash, cash equivalents and marketable
securities and working capital of $7,130,000.
During the three months ended March 31, 1999, Diatide's capital expenditures
totaled $57,000, primarily for the acquisition of certain laboratory equipment
and software.
Our future capital requirements will depend on many factors, including:
- revenues and margins on sales of AcuTect;
- continued progress in our research and product development programs, as
well as the magnitude of these programs;
- the scope and results of preclinical studies and clinical trials;
- the time and costs involved in obtaining regulatory approvals;
- competing technological and market developments;
- our ability to establish and maintain collaborative academic and
commercial research, development and marketing relationships;
- the costs and success of commercialization activities and arrangements;
- the costs involved in preparing, filing, prosecuting,maintaining and
enforcing patent claims and other patent-related costs, including
litigation costs; and
- the costs of obtaining any required licenses of third parties'
technologies.
9
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Based upon our current operating plan, we anticipate that our existing
capital resources, together with anticipated product revenues from sales of
AcuTect, will be adequate to satisfy our capital requirements through 1999.
However, the timing and extent of our capital requirements will be materially
dependent on the actual level of product sales and the margin on such sales. In
the future, we may be required to raise additional funds, including through
collaborative relationships and public or private financings. Such additional
financing may not be available to us or may not be available on acceptable
terms.
With the termination of the research and development relationship with
Nycomed, Diatide has no committed external sources of capital, and as noted
above, expects to incur significant operating losses over the next 12 to 24
months. We intend to seek additional equity, debt and lease financing to fund
future operations, depending upon the terms on which such sources of funding may
be available from time to time. In addition, Diatide intends to seek additional
collaborative development and commercialization relationships with potential
corporate partners in order to fund certain of its programs, including the
future development and commercialization of its Techtide programs (other than
the programs covered by Nycomed's options), its Sn-117m DTPA program and its
Theratide program. If we are unable to obtain adequate funding on a timely
basis, we may be required to further curtail one or more of our research or
product development programs or reduce our marketing and sales initiatives, or
we also could be required to seek funds through arrangements with collaborative
partners or others that may require us to relinquish rights to certain of our
technologies, product candidates or products which we would otherwise pursue on
our own.
Impact of Year 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This includes our scientific and manufacturing equipment containing
computer-related components. This could result in a system failure or
miscalculations causing disruptions of operations or inaccuracies in computer
output.
We have developed a strategy to address the potential exposures related to
the impact of our computer systems and equipment for the year 2000 and beyond.
Our plan to resolve the Year 2000 Issue involves the following four phases:
assessment, remediation, testing, and implementation. In 1998 we completed the
implementation of enterprise-wide business information systems to support
commercial operations at a cost of approximately $512,000 to date. These systems
are Year 2000 compliant. To date, we have completed our assessment of other
information and operational systems, including scientific and manufacturing
control systems and equipment, that could be significantly affected by the Year
2000. That assessment indicated that software and hardware (embedded chips) used
in certain scientific equipment could be significantly affected by the Year
2000. We are 40% complete on the remediation phase for this equipment. We expect
to complete remediation efforts no later than September 30, 1999. Testing and
implementation of affected equipment is expected to be complete by November 30,
1999.
Because Diatide has relationships with, and is to varying degrees dependent
upon, a large number of third parties that provide information, goods and
services to Diatide, we are also subject to risks associated with such third
parties' Year 2000 issues. These third parties include financial institutions,
customers, distributors, suppliers, vendors, research partners and governmental
entities. If significant numbers of these third parties experience failures on
their computer systems or equipment due to Year 2000 non-compliance, it could
affect our ability to process transactions, manufacture products, or engage in
similar normal business activities. We have instituted programs, including
internal records review and use of external questionnaires, to identify key
third parties, assess their level of Year 2000 compliance, update contracts and
address any non-compliance issues. To date, we are not aware of any third party
Year 2000 issue that would materially impact Diatides' results of operations,
liquidity or capital resources. However, Diatide has no means of ensuring that
external agents will be Year 2000 ready. The inability of external
10
<PAGE>
agents to complete their Year 2000 resolution process in a timely fashion could
materially impact Diatide. The effect of non-compliance by external agents is
not determinable. We have contingency plans for certain critical applications
provided by third parties and are working on such plans for others. These
contingency plans involve, among other actions, manual workarounds, increasing
inventories, and adjusting staffing strategies.
The total cost of the Year 2000 systems assessments and conversions,
excluding the recently implemented business information systems, is funded
through operating cash flows. Diatide is expensing or capitalizing these costs
as appropriate in accordance with generally accepted accounting principles. We
currently expect such amount to be less than $100,000. The actual financial
impact could, however, exceed this estimate.
Our plans to complete the Year 2000 modifications are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events including the continued availability of certain resources, and other
factors. Estimates on the status of completion and the expected completion dates
are based on costs incurred to date compared to total expected costs. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those plans. Specific factors that might
cause such material differences include, but not limited to, the availability
and cost of personnel trained in this area, the ability to locate and correct
all relevant computer codes, and similar uncertainties.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Diatide is exposed to changes in interest rates primarily from its
investments in certain available-for-sale securities and long term obligations
under capital leases. Under our current policies, we do not use interest rate
derivative instruments to manage exposure to interest rate changes.
11
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PART II. OTHER INFORMATION
ITEM 2 CHANGES IN SECURITIES
On January 19, 1999, the Company issued and sold 825,309 shares of
convertible preferred stock to two of the Company's existing investors for an
aggregate purchase price of $6.0 million pursuant to Section 4(2) of the
Securities Act of 1933, as amended. The convertible preferred stock is
convertible into the Company's Common Stock on a one-for-one basis, subject to
adjustment for certain events. The Company also issued to such investors
two-year Common Stock Purchase Warrants to purchase in the aggregate 123,795
shares of Common Stock at an exercise price of $8.72 per share pursuant to
Section 4(2) of the Securities Act. The Warrants will expire on January 19,
2001.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K:
<TABLE>
<S> <C>
(a) Exhibits................. The Exhibits listed in the Exhibit Index immediately
preceding such Exhibits are filed as part of this
Quarterly Report on Form 10-Q.
(b) Reports on Form 8-K...... On January 25, 1999, the Company filed a current report
on Form 8-K to report the sale of $6.0 million of
convertible preferred stock and the issuance of common
stock purchase warrants on January 19, 1999.
</TABLE>
12
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DIATIDE, INC.
FORM 10-Q
MARCH 31, 1999
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
DIATIDE, INC.
BY: /s/ DANIEL F. HARRINGTON
-----------------------------------------
Daniel F. Harrington
VICE PRESIDENT, CHIEF FINANCIAL OFFICER
AND TREASURER (PRINCIPAL FINANCIAL
DATE: May 14, 1999 OFFICER)
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION SEQUENTIAL NUMBER
- ------------------- ----------------------------------------------------------------------------- -----------------------
<C> <S> <C>
27 Financial Data Schedule (EDGAR)..............................................
99 Pages 39 through 49 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 as filed with the SEC (which is not deemed filed
except to the extent that portions thereof are expressly incorporated by
reference herein). ..........................................................
</TABLE>
<TABLE> <S> <C>
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DIATIDE,
INC. FORM 10-K FOR THE PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
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<SECURITIES> 0
<RECEIVABLES> 669,083
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<INVENTORY> 671,007
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<PP&E> 3,676,855
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<CURRENT-LIABILITIES> 3,426,758
<BONDS> 217,978
0
20,356
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<OTHER-SE> 8,151,956
<TOTAL-LIABILITY-AND-EQUITY> 11,827,636
<SALES> 293,809
<TOTAL-REVENUES> 311,309
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<PAGE>
RISK FACTORS
WE ARE AT AN EARLY STAGE OF DEVELOPMENT
We were founded in February 1990 and only introduced our first product into
the market in October 1998. All but two of our products are in research or
development. The products that we have not yet completed developing will require
additional research and development, extensive preclinical studies and clinical
trials and regulatory approval prior to any commercial sales.
WE ARE SUBJECT TO TECHNOLOGICAL UNCERTAINTY IN OUR DEVELOPMENT EFFORTS
We must successfully address a number of technological challenges to
complete the development of certain of our potential products. These products
may not be efficacious or may prove to have undesirable or unintended side
effects, toxicities or other characteristics that may prevent or limit
commercial use. The use of synthetic peptides in radiopharmaceuticals, which is
central to our technology, is new to nuclear medicine. We believe that the FDA
has granted marketing approval of only two imaging products, including AcuTect,
based on this scientific approach and has not approved any therapeutic products
based on this approach.
THERE ARE UNCERTAINTIES RELATED TO CLINICAL TRIALS
In order to obtain regulatory approvals for the commercial sale of any of
our products under development, we will be required to demonstrate through
preclinical testing and clinical trials that the product is safe and
efficacious. We currently are conducting preclinical tests and clinical trials
of a number of potential products. The results from preclinical testing and
early clinical trials of a product that is under development may not be
predictive of results that will be obtained in large-scale later clinical
trials. We may not be able successfully to complete those clinical trials that
we initiate. In addition, we may not be able to complete such trials on a timely
basis.
Two examples of ways in which the results of early clinical trial can affect
development of product candidates are:
- In Phase I clinical trials of one of our Techtides, P483H for medical
imaging of infection due to inflammation, the compound concentrated in
patients' stomachs at unexpectedly high levels. As a result, we conducted
additional preclinical testing of this compound and alternative compounds
in animals to determine the cause of this phenomenon. We recently
initiated a Phase I clinical trial of a new formulation of P483H.
- In a pilot study of a compound for medical imaging of atherosclerotic
plaque, we determined that the compound did not exhibit sufficient
sensitivity to warrant continuing development. We synthesized new
compounds for this indication and screened them in animal models.
The rate of completion of our clinical trials is dependent on the rate of
patient enrollment. Patient enrollment is a function of many factors, including
the size of the patient population, the nature of the protocol, the proximity of
patients to clinical sites and the eligibility criteria for the study. Delays in
planned patient enrollment may result in increased costs and program delays. For
example, patient enrollment in our Phase 2 clinical trial of Tin-117m DTPA has
been slower than anticipated because of the reluctance of prospective patients
who are suffering from pain due to metastatic cancer to the bone to receive a
placebo.
THERE IS NO CERTAINTY THAT WE WILL OBTAIN REGULATORY APPROVALS; THE APPROVAL
PROCESS IS COSTLY AND LENGTHY
The production and the marketing of our products and our ongoing research
and development activities are subject to extensive regulation by federal, state
and local governmental authorities in the
13
<PAGE>
United States and other countries. Clearing the regulatory process for the
commercial marketing of a pharmaceutical product takes many years and requires
the expenditure of substantial resources. We have had only limited experience in
filing and prosecuting applications necessary to gain regulatory approvals.
Thus, we may not be able to obtain regulatory approvals to conduct clinical
trials of or manufacture or market any of our potential products.
Factors that may affect the regulatory process for our product candidates
include:
- Our analysis of data obtained from preclinical and clinical activities is
subject to confirmation and interpretation by regulatory authorities,
which could delay, limit or prevent regulatory approval.
- We or the FDA may suspend clinical trials at any time if the participants
are being exposed to unanticipated or unacceptable health risks.
- Any regulatory approval to market a product may be subject to limitations
on the indicated uses for which we may market the product. These
limitations may limit the size of the market for the product.
If we fail to comply with applicable regulatory requirements, we may be
subject to fines, suspension or withdrawal of regulatory approvals, product
recalls, seizure of products, operating restrictions and criminal prosecutions.
As to products for which we obtain marketing approval, we, the manufacturer
of the product (if other than us) and the manufacturing facilities will be
subject to continual review and periodic inspections by the FDA. The subsequent
discovery of previously unknown problems with the product, manufacturer or
facility may result in restrictions on the product or manufacturer, including
withdrawal of the product from the market.
The FDA may change its policies as to regulatory matters in the future.
Also, additional statutes or regulations applicable to our business may be
adopted. Such policy changes or additional statutes or regulations impose
substantial additional costs or otherwise adversely affect our operations.
The Nuclear Regulatory Commission and state authorities regulate the use,
handling, storage and disposal of products containing radioisotopes, such as
Tin-117m DTPA and sources of technetium. We must comply with these regulations
in connection with the testing, manufacturing and marketing of or products and
product candidates.
We also are subject to numerous and varying foreign regulatory requirements
governing the design and conduct of clinical trials and the manufacturing and
marketing of our products. The approval procedure varies among countries. The
time required to obtain foreign approvals often differs from that required to
obtain FDA approval. Approval by the FDA does not ensure approval by regulatory
authorities in other countries. For example, although the FDA has granted an NDA
permitting us to market AcuTect in the United States, Nycomed withdrew the MAA
filed with the EMEA relating to AcuTect because of the unfavorable preliminary
response of the EMEA to such application.
We may not receive regulatory approvals to conduct clinical trials of our
products or to manufacture or market our products. In addition, regulatory
agencies may not grant such approvals on a timely basis or may revoke previously
granted approvals. All of these events may have a material adverse effect on our
business, financial condition and results of operations.
All of the foregoing regulatory matters also are applicable to development,
manufacturing and marketing undertaken by our licensees and other collaborators.
THERE IS UNCERTAINTY AS TO THE MARKET ACCEPTANCE OF OUR TECHNOLOGY AND PRODUCTS
The commercial success of our products that are approved for marketing by
the FDA will depend upon their acceptance by the medical community and third
party payors as clinically useful, cost-effective
14
<PAGE>
and safe. The synthetic peptide-based radiopharmaceutical and other peptide
based technology that we are developing is relatively new. As a result, peptide
based radiopharmaceuticals have not been extensively tested in humans or used in
the medical community. These factors may make it more difficult for us to
achieve market acceptance of our products, particularly the first products that
we introduce to the market based on this new technology.
Other factors that we believe will materially affect market acceptance of
our products include:
- The timing of the receipt of marketing approvals and the countries in
which such approvals are obtained;
- The safety, efficacy and ease of administration of the product; and
- The success of physician education programs.
WE NEED TO ESTABLISH COLLABORATIVE COMMERCIAL RELATIONSHIPS; WE ARE DEPENDENT ON
OUR COLLABORATIVE PARTNERS
An important element of our business strategy is entering into strategic
alliances or marketing and distribution arrangements with corporate partners for
the development, commercialization, marketing and distribution of certain of our
potential products. To date, we have only entered into one such arrangement with
only one corporate partner, Nycomed. In August 1998, Nycomed terminated the
research and development portion of its alliance with us, effective December 31,
1998. We are actively seeking additional collaborations with respect to our
Techtide programs that are not subject to Nycomed's options and our Theratide
and Tin-117m DTPA therapeutic programs. Although we are engaging in limited
clinical development of our Techtides and Tin-117m DTPA and preclinical
development of our Theratides in order to generate sufficient data to enter into
discussions with potential collaborative partners, we do not intend to engage in
any significant clinical trials of our Techtides or Theratides without first
obtaining financial support from a collaborative partner unless our existing
capital resources increase significantly.
We may not be able to negotiate any additional collaborative or marketing
and distribution arrangements. Moreover, the terms of any such arrangement may
not be favorable to us. If we are unable to establish additional collaborative
arrangements, our business may be adversely affected.
Our existing collaboration with Nycomed and any future collaboration
arrangement that we may enter into with other third parties may not be
scientifically or commercially successful. In particular, it is likely that a
significant portion of any payments due from the collaborator to us will be
contingent upon completion of development milestones or be based upon a
percentage of net sales.
The factors that may affect the success of our collaborations include:
- Our collaborative partners may be pursuing alternative technologies or
developing alternative products, either on their own or in collaboration
with others, that may be competitive with the product as to which they are
collaborating with us. For example, Nycomed manufactures and distributes a
wide variety of imaging agents for other imaging modalities that may
compete against the products that Nycomed licenses from us or co-markets
with us.
- The success of our corporate partners in marketing any successfully
developed products within the geographic areas in which such partners are
granted marketing rights will materially affect our commercial success.
For example, Nycomed has primary responsibility for the promotion of
AcuTect in the United States and, subject to obtaining final marketing
approval from the FDA, will have such responsibility for the marketing of
NeoTect in the United States. A reduction in sales efforts or a
discontinuance of sales of the our products by collaborative or corporate
partners may result in reduced revenues to us.
15
<PAGE>
- Our collaborative partners generally will have various rights to terminate
the collaboration with us. If a collaborator terminates such a
collaboration, it may be difficult for us to attract a new collaborator to
work with us as to the particular product. In addition, the announcement
of the termination can adversely affect the perception of us in the
business and financial communities.
WE HAVE NOT BEEN PROFITABLE
We have incurred net losses since our inception. At December 31, 1998, our
accumulated deficit was approximately $55.4 million. We received our first
revenues from product sales only in October 1998. We expect to incur additional
significant operating losses over the next 12 to 24 months and expect cumulative
losses to increase during the initial marketing of AcuTect and as the Company's
research and development and clinical trial efforts continue. We expect that our
losses will fluctuate from quarter to quarter and that such fluctuations may be
substantial.
WE EXPECT TO REQUIRE ADDITIONAL FUNDING
Our future capital requirements will depend on many factors, including:
- continued progress in our research and product development programs, as
well as the magnitude of these programs;
- the scope and results of preclinical studies and clinical trials;
- the time and costs involved in obtaining regulatory approvals;
- competing technological and market developments;
- the ability of the Company to establish and maintain collaborative
academic and commercial research, development and marketing relationships;
- the costs and success of commercialization activities and arrangements;
- the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims and other patent-related costs, including
litigation costs; and
- the costs of obtaining any required licenses of third parties
technologies.
Based upon our current operating plan, we anticipate that our existing
capital resources, will be adequate to satisfy our capital requirements through
1999. In the future, we may be required to raise additional funds, including
through collaborative relationships and public or private financings. Such
additional financing may not be available to us or may not be available on
acceptable terms.
If we raise additional funds by issuing equity securities, further dilution
to our then existing stockholders will result. In addition, the terms of the
financing may adversely affect the holdings or the rights of such stockholders.
If we are unable to obtain adequate funding on a timely basis, we may be
required to significantly curtail one or more of our research or product
development programs or reduce our marketing and sales initiatives, or we also
could be required to seek funds through arrangements with collaborative partners
or others that may require us to relinquish rights to certain of its
technologies, product candidates or products which we would otherwise pursue on
our own.
WE FACE SIGNIFICANT COMPETITION
The pharmaceutical and biotechnology industries are highly competitive and
characterized by rapid and substantial technological change. Our competitors
include pharmaceutical and chemical companies, biotechnology firms, universities
and other research institutions. Many of these competitors are conducting
extensive research and development activities on technologies and products
similar to or competitive with our technologies and products.
16
<PAGE>
Particular competitive factors that we believe may affect us include:
- Many other companies are actively seeking to develop nuclear medicine
imaging agents that will compete with our Techtides. These competitive
products may be more effective than our products or may render our
technologies and products obsolete or noncompetitive.
- Certain radiopharmaceuticals already have been approved for sale for the
diagnosis or treatment of the indications targeted by our products. In
particular, OctreoScan-Registered Trademark-, a peptide based
radiopharmaceutical, is available for the diagnosis of neuroendocrine
tumors, Ceretec-Registered Trademark-, a radiopharmaceutical labeled with
technetium, is available for imaging inflammation due to infection, and
Metastron-Registered Trademark- and Quadramet-Registered Trademark- are
available for the reduction of pain due to metastatic cancer to the bone.
- There are several well-established medical imaging modalities that compete
against nuclear medicine imaging, including x-rays, CT, MRI and
ultrasound.
- Many of our competitors have substantially greater financial, technical
and human resources than we have, including greater experience and
capabilities in undertaking preclinical studies and human clinical trials,
obtaining FDA and other regulatory approvals and manufacturing and
marketing pharmaceuticals. Our principal competitors include such large
companies as Du Pont Merck and Mallinckrodt.
In addition, there are alternative therapeutics available for the treatment
of the cancer and cardiovascular indications that are the subject of our
Theratide programs. These competitive development activities include
radiolabeled monoclonal antibodies (MABs) for non-Hodgkins lymphoma and
neuroendocrine tumors, vaccines for non-small cell lung cancer, and
non-radiolabeled MABs which target changing the physiology that supports tumor
growth.
OUR SUCCESS DEPENDS ON OUR PROTECTING OUR PATENTS AND PATENTED RIGHTS
Our success depends in significant part on our ability to develop patentable
products, to obtain patent protection for our products, both in the United
States and in other countries, and to enforce these patents. The patent
positions of pharmaceutical and biotechnology firms, including us, are generally
uncertain and involve complex legal and factual questions. As a result, patents
may not issue from any patent applications that we own or license. If patents do
issue, the claims allowed may not be sufficiently broad to protect our
technology. In addition, issued patents that we own or license may be
challenged, invalidated or circumvented. Our patents also may not afford us
protection against competitors with similar technology.
Our success also depends on our not infringing patents issued to competitors
or others. We are aware of patents and patent applications belonging to
competitors and others that may require us to alter our products or processes,
pay licensing fees or cease certain activities.
We may not be able to obtain a license to any technology owned by a third
party that we require to manufacture or market one or more products. Even if we
can obtain a license, the financial and other forms may be disadvantageous.
Our success also depends on our maintaining the confidentiality of our trade
secrets and patented know-how. We seek to protect such information by entering
into confidentiality agreements with our employees, consultants, outside
scientific collaborators and sponsored researchers and other advisors. These
agreements may be breached by such parties. We may not be able to obtain an
adequate, or perhaps, any remedy to remedy such a breach. In addition, our trade
secrets may otherwise become known or be independently developed by our
competitors.
17
<PAGE>
WE ARE A PARTY TO A PATENT INTERFERENCE RELATING TO AN ELEMENT OF ACUTECT
In December 1998, at our request the United States Patent and Trademark
Office declared an interference between a patent application filed by us and a
patent issued to RhoMed Incorporated, a wholly-owned subsidiary of Palatin
Technologies, Inc. This proceeding will determine the patentability of the
technology that is the subject matter of the interference as well as which party
first developed this technology. If the technology is patentable, the party that
first developed the technology will be awarded the United States patent rights.
The process of resolving an interference can take many years. If the
technology that is the subject of this proceeding is found to be patentable and
RhoMed is found to be the party that first developed the technology, we may not
be able to manufacture or market AcuTect in the United States without a license
from RhoMed. RhoMed would be under no obligation to grant us such a license or
to do so on commercially acceptable terms. Accordingly, an adverse outcome in
this proceeding could materially adversely affect our business, financial
position and results of operations.
WE MAY BECOME INVOLVED IN ADDITIONAL PROCEEDINGS RELATING TO INTELLECTUAL
PROPERTY RIGHTS
The pharmaceutical and biotechnology industries have been characterized by
significant litigation and interference and other proceedings regarding patents,
patent applications and other intellectual property rights. In addition to the
interference proceeding with RhoMed, we may become parties to additional patent
litigation and other proceedings in the future. The types of situations in which
we may become parties to such litigation or proceedings include:
- We may initiate litigation or other proceedings against third parties to
enforce our patent rights.
- We may initiate litigation or other proceedings against third parties to
seek to invalidate the patents held by such third parties or to obtain a
judgment that our products or processes do not infringe such third
parties' patents.
- If our competitors file patent applications that claim technology also
claimed by us, we may participate in interference or opposition
proceedings to determine the priority of invention.
- If third parties initiate litigation claiming that our processes or
products infringe their patent or other intellectual property rights, we
will need to defend against such proceedings.
An adverse outcome in any litigation or other proceeding could subject us to
significant liabilities to third parties and require us to cease using the
technology that is at issue or to license the technology from third parties. We
may not be able to obtain any required licenses on commercially acceptable terms
or at all. Thus, an unfavorable outcome in any patent litigation or other
proceeding could have a material adverse effect on our business, financial
condition or results of operations.
The cost to us of any patent litigation or other proceeding, even if
resolved in our favor, could be substantial. Some of our competitors may be able
to sustain the cost of such litigation and proceedings more effectively than we
can because of their substantially greater resources. Uncertainties resulting
from the initiation and continuation of patent litigation or other proceedings
could have a material adverse effect on our ability to compete in the
marketplace. Patent litigation and other proceedings may also absorb significant
management time.
OUR PATENT LICENSES ARE SUBJECT TO TERMINATION IN CERTAIN CIRCUMSTANCES
We are a party to a number of patent licenses that are important to our
business and expect to enter into additional patent licenses in the future.
These licenses impose various commercialization, sublicensing, royalty,
insurance and other obligations on us. If we fail to comply with these
requirements, the licensor will have the right to terminate the license.
18
<PAGE>
WE HAVE ONLY LIMITED SALES AND MARKETING EXPERIENCE
We introduced our first product to the market in October 1998 and have only
limited product sales, marketing and distribution experience. Although we plan
to rely significantly on collaborative partners for the marketing and
distribution of its products through co-marketing, other licensing or
distribution arrangements, we expect to market and sell certain of our products
directly and to engage in certain other marketing activities in collaboration
with our partners. For example, under our United States co-promotion agreement
with Nycomed, we have primary responsibility for promotion of the products
covered by such agreement to commercial radiopharmacies.
Our strategy of relying on collaborative partners to market and distribute
our products will result in our being dependent upon the success of the efforts
of these collaborators in performing such functions. The terms of these
marketing and distribution arrangements may not be favorable to us. In addition,
our partner may not successfully market our products. In many instances we may
have little or no control over our partners' activities in marketing and
distributing our products.
If our plan to rely on corporate partners for significant aspects of
marketing and selling our products is unsuccessful for any reason, we may need
to recruit and train a far larger marketing and sales force than we currently
anticipate doing. In such event, we would face a number of additional risks,
including:
- we may not be able to attract and build a sufficient marketing staff or
sales force;
- the cost of establishing such a marketing staff or sales force may not be
justifiable in light of anticipated product revenues; and
- the Company's direct sales and marketing efforts may not be successful.
WE HAVE ONLY LIMITED MANUFACTURING CAPABILITIES AND WILL BE DEPENDENT ON THIRD
PARTY MANUFACTURERS
We lack commercial scale facilities to manufacture our products in
accordance with current GMP requirements prescribed by the FDA. We have relied
on a large third party pharmaceutical company for the manufacture of our
peptides for clinical trials and for commercial sale of AcuTect. Similarly, we
have entered into an arrangement with a GMP-qualified third party manufacturer
for the supply of Tin-117m for clinical trials.
We expect to be dependent on third party manufacturers or collaborative
partners for all of our commercial production of peptides. There are a limited
number of manufacturers that operate under GMP regulations capable of
manufacturing our products. In the event that we are unable to obtain contract
manufacturing, or obtain such manufacturing on commercially reasonable terms, we
may not be able to commercialize our products as planned.
We are dependent upon our third party suppliers to perform their obligations
in a timely manner. If such third party suppliers fail to will perform their
obligations, we may be adversely affected in a number of ways, including:
- we may not be able to meet commercial demands for our products;
- we may not be able to initiate or continue clinical trials of products
that are under development; and
- we may be delayed in submitting applications for regulatory approvals of
our products.
We have no experience in manufacturing on a commercial scale and no
facilities or equipment to do so. If we determine to develop our own
manufacturing capabilities, we will need to recruit qualified personnel and
build or lease the requisite facilities and equipment. We may not be able to
successfully
19
<PAGE>
develop our own manufacturing capabilities. Moreover, it may be very costly and
time consuming for us to develop such capabilities.
The manufacture of products by us and our suppliers is subject to regulation
by the FDA and comparable agencies in foreign countries. Delay in complying or
failure to comply with such manufacturing requirements could materially
adversely affect the marketing of our products and our business, financial
condition and results of operations.
WE ARE DEPENDENT UPON A SOLE SOURCE SUPPLIER FOR OUR PEPTIDES
We purchase our synthetic peptides from a sole source supplier. We may enter
into similar arrangements with respect to other components of our products.
While we are aware of alternative sources for our peptides, the establishment of
additional or replacement suppliers could be time consuming, result in a supply
interruption or cause significant regulatory delays and expense. The
establishment of an alternative source of supply or any significant supply
interruption could have a materially adverse effect on our ability to develop
and manufacture our products.
HAZARDOUS MATERIALS THAT WE HANDLE IN OUR BUSINESS
Our research and development involves the controlled use of hazardous
materials, chemicals and radioactive compounds. There are risks of accidental
contamination or injury from our handling , storing and disposing of these
materials. In the event of an accident, we could be held liable for significant
damages
WE WILL BE EXPOSED TO PRODUCT LIABILITY CLAIMS AND MAY NOT BE ABLE TO OBTAIN
ADEQUATE PRODUCT LIABILITY INSURANCE
Our business exposes us to potential product liability risks which are
inherent in the testing, manufacturing, marketing and sale of human diagnostic
and therapeutic products. Product liability claims might be made by consumers,
health care providers or pharmaceutical companies or others that sell our
products. If product liability claims are made with respect to our products, we
may need to recall such products or change the indications for which they may be
used.
We have only limited product liability insurance coverage. This coverage is
subject to various deductibles. Product liability coverage is expensive. In the
future, we may not be able to maintain or obtain such product liability
insurance at a reasonable cost or in sufficient amounts to protect us against
losses due to liability claims. Accordingly, such claims could have a material
adverse effect on the Company's business, financial condition and results of
operations.
UNCERTAINTY OF PHARMACEUTICAL PRICING, REIMBURSEMENT AND HEALTHCARE REFORM
MEASURE
The availability of reimbursement by governmental and other third party
payors affects the market for any pharmaceutical product. These third party
payors continually attempt to contain or reduce the costs of healthcare by
challenging the prices charged for medical products and services. In certain
foreign countries, particularly the countries of the European Union, the pricing
of prescription pharmaceuticals is subject to governmental control.
In both the United States and certain foreign jurisdictions, there have been
a number of legislative and regulatory proposals to change the healthcare
system. Further proposals are likely. The potential for adoption of these
proposals affects or will affect our ability to raise capital, obtain additional
collaborative partners and market our products.
If we or our collaborators obtain marketing approvals for our products, we
expect to experience pricing pressure due to the trend toward managed health
care, the increasing influence of health
20
<PAGE>
maintenance organizations and additional legislative proposals. We may not be
able to sell our products profitably if reimbursement is unavailable or limited
in scope or amount.
WE NEED TO ATTRACT AND RETAIN OF KEY MANAGEMENT AND QUALIFIED PERSONNEL
We are highly dependent on the principal members of our management and
scientific staff, particularly Dr. Dean, our President and Chief Executive
Officer. The loss of the services of these individuals could have a material
adverse effect on our business. We are a party to an employment agreement with
Dr. Dean that extends through April 2, 2000, subject to automatic extension for
additional one-year periods unless either Dr. Dean or we provide written notice
to the contrary to the other party at least six months prior to the expiration
period.
Recruiting and retaining qualified scientific personnel to perform research
and development work in the future will be critical to the Company's success. We
may not be able to attract and retain highly skilled personnel on acceptable
terms given the competition for experienced scientists among pharmaceutical,
biotechnology and health care companies, universities and non-profit research
institutions. We do not carry key-man insurance with respect to any of our
executive officers.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Diatide is exposed to changes in interest rates primarily from its
investments in certain available-for-sale securities and long term obligations
under capital leases. Under our current policies, we do not use interest rate
derivative instruments to manage exposure to interest rate changes.
The following table provides information about Diatide's financial
instruments that are sensitive to changes in interest rates as of December 31,
1998. For investment securities and debt obligations, the table presents
principal cash flows and related weighted-average interest rates by expected
maturity dates. Additionally, we assumed our available-for-sale securities,
comprised of cash management investment funds and corporate bonds, are similar
enough to aggregate those securities for presentation purposes.
INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY
AVERAGE INTEREST RATE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 2000 2001 TOTAL
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Available-For-Sale Securities.................................................. $ 7,472 -- -- $ 7,472
Average Interest Rate.......................................................... 5.2% -- -- --
Long-term Debt, including Current Portion (Fixed Rate)......................... $ 137 $ 157 $ 144 $ 438
</TABLE>
21
