<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20459
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1998
COMMISSION FILE NUMBER 000-22347
---------
ASCENT PEDIATRICS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3047405
------------------------------- ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
187 Ballardvale Street, Suite B125, Wilmington, MA 01887
- -------------------------------------------------- ----------
(Address of principle executive offices) (Zip Code)
Registrant's telephone number, including area code (978) 658-2500
--------------
None
------------------------------------------------
(Former name, former address, and
former fiscal year if changed since last report)
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 number of shares outstanding of the registrant's Common Stock,
par value $.00004 per share, as of May 11, 1998: 6,921,074.
<PAGE> 2
ASCENT PEDIATRICS, INC.
TABLE OF CONTENTS
Page
Part I. Financial Information
Item 1 - Condensed Financial Statements
Condensed Balance Sheets....................................... 1
Condensed Statements of Operations............................. 2
Condensed Statements of Cash Flows............................. 3
Notes to Condensed Financial Statements........................ 4-7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 8-11
Part II. Other Information
Item 2 - Changes in Securities and Use of Proceeds................ 12
Item 6 - Exhibits and Reports on Form 8-K......................... 13
Signature................................................................ 14
Exhibit Index............................................................ 15
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ASCENT PEDIATRICS, INC.
CONDENSED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ................................. $ 642,292 $ 11,700,612
Current marketable securities ............................. 2,529,662 2,527,900
Accounts receivable, net .................................. 833,252 765,609
Inventory (Note 3) ........................................ 1,092,163 789,498
Other current assets ...................................... 466,186 124,874
------------ ------------
Total current assets ................................... 5,563,555 15,908,493
Fixed assets, net .............................................. 833,548 759,563
Debt issue costs, net .......................................... 369,526 436,515
Intangibles, net ............................................... 11,047,694 11,215,506
Other assets ................................................... 113,859 113,386
------------ ------------
Total assets ........................................... $ 17,928,182 $ 28,433,463
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable .......................................... $ 1,472,365 $ 1,509,258
Accrued expenses .......................................... 1,118,012 1,157,379
Promissory note ........................................... -- 5,500,000
Subordinated secured notes, current portion ............... 3,500,000 3,500,000
------------ ------------
Total current liabilities .............................. 6,090,377 11,666,637
Subordinated secured notes ..................................... 702,548 1,252,068
------------ ------------
Total liabilities ...................................... 6,792,925 12,918,705
Stockholders' Equity
Preferred stock, $.01 par value, 5,000,000 shares
authorized; none issued and outstanding ................ -- --
Common stock, $.00004 par value; 60,000,000 shares
authorized; 6,910,414 and 6,893,332 shares issued
and outstanding at March 31, 1998 and
December 31, 1997, respectively ........................ 277 276
Additional paid-in capital ................................ 47,951,414 47,891,846
Accumulated deficit ....................................... (36,819,312) (32,378,480)
Unrealized gain on securities ............................. 2,878 1,116
------------ ------------
Total stockholders' equity ............................. 11,135,257 15,514,758
------------ ------------
Total liabilities and stockholders' equity ............. $ 17,928,182 $ 28,433,463
============ ============
</TABLE>
See accompanying notes to condensed financial statements
1
<PAGE> 4
ASCENT PEDIATRICS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Product revenue, net .................................... $ 1,314,049 $ --
Costs of sales .......................................... 470,347 --
----------- -----------
Gross margin ............................................ 843,702 --
Costs and expenses:
Selling, general and administrative ............... 3,848,165 972,826
Research and development .......................... 1,123,878 1,528,114
----------- -----------
Total costs and expenses .......................... 4,972,043 2,500,940
----------- -----------
Loss from operations ........................... (4,128,341) (2,500,940)
Interest income ......................................... 158,822 72,745
Interest expense ........................................ (471,313) (19,916)
Other income ............................................ -- 9,242
----------- -----------
Net loss ....................................... (4,440,832) (2,438,869)
Accretion to redemption value of
preferred stock ................................... -- 219,626
----------- -----------
Net loss to common stockholders ................ $(4,440,832) $(2,658,495)
=========== ===========
Basic and diluted net loss per common share ............ $ (0.64) $ (13.42)
=========== ===========
Weighted average shares outstanding ..................... 6,910,414 198,155
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
2
<PAGE> 5
ASCENT PEDIATRICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
------------------------------
1998 1997
------------ -----------
<S> <C> <C>
Cash flows for operating activities:
Net loss ...................................................... $ (4,440,832) $(2,438,869)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization ............................. 293,365 22,098
Non-cash interest expense ................................. 325,480 19,916
Gain on sales of fixed assets ............................. -- (9,242)
Changes in operating assets and liabilities:
Accounts receivable .................................... (67,643) --
Inventory .............................................. (302,665) --
Other assets ........................................... (341,785) (496,116)
Accounts payable ....................................... (36,893) 274,148
Accrued expenses ....................................... (39,367) 231,307
------------ -----------
Net cash used for operating activities .............. (4,610,340) (2,396,758)
Cash flows used for investing activities:
Purchase of property and equipment ............................ (132,548) (174,757)
Proceeds from sale of fixed assets ............................ -- 38,069
------------ -----------
Net cash used for investing activities .............. (132,548) (136,688)
Cash flows from financing activities:
Proceeds from sale of common stock, net of issuance costs ..... 59,568 --
Proceeds from sale of preferred stock, net of issuance costs .. -- 6,957,861
Proceeds from issuance of debt and related warrants ........... -- 2,000,000
Repayment of subordinated secured notes ....................... (875,000) --
Payment of promissory note .................................... (5,500,000) --
Debt issue costs related to subordinated secured note ......... -- (210,304)
------------ -----------
Net cash used for financing activities .............. (6,315,432) 8,747,557
Net (decrease) increase in cash and cash equivalents ............... (11,058,320) 6,214,111
Cash and cash equivalents, beginning of period ..................... 11,700,612 2,085,743
------------ -----------
Cash and cash equivalents, end of period ........................... $ 642,292 $ 8,299,854
============ ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest .................................................... $ 153,125 $ --
============ ===========
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE> 6
ASCENT PEDIATRICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. NATURE OF BUSINESS
Ascent Pediatrics, Inc. (the "Company") is a drug development and marketing
company focused exclusively on the pediatric market. Since its inception,
until July 9, 1997, the Company had operated as a development stage
enterprise devoting substantially all of its efforts to establishing a new
business and to carrying on development activities. On July 10, 1997, the
Company closed the acquisition of the Feverall line of acetaminophen rectal
suppositories from Upsher-Smith Laboratories, Inc. ("Upsher-Smith"),
pursuant to an Asset Purchase Agreement dated as of March 25, 1997 (the
"Asset Purchase Agreement") between the Company and Upsher-Smith and
commenced sales of the Feverall line of products. The Company also
commenced sales of Pediamist nasal saline spray during the quarter ended
December 31, 1997. On February 6, 1998, the Company entered into a
four-year co-promotion agreement with Bristol-Myers Squibb U.S.
Pharmaceuticals Group ("Bristol-Myers Squibb") to exclusively promote
Duricef(R) oral suspension to pediatricians in the United States.
The Company has incurred net losses since inception and expects to incur
additional operating losses in the future as the Company continues its
product development programs, maintains its sales and marketing
organization and introduces its products to the market. The Company is
subject to a number of risks similar to other companies in the industry,
including rapid technological change, uncertainty of market acceptance of
products, uncertainty of regulatory approval, limited sales and marketing
experience, competition from substitute products and larger companies,
customers' reliance on third-party reimbursement, the need to obtain
additional financing, compliance with government regulations, protection of
proprietary technology, dependence on third-party manufacturers,
distributors, collaborators and limited suppliers, product liability, and
dependence on key individuals. These risks are set forth in more detail in
"Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations - Certain Factors That May Affect Future Results" of
the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1997, which are expressly incorporated by reference herein.
2. BASIS OF PRESENTATION
The accompanying financial statements are unaudited and have been prepared
by the Company 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, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The interim
financial statements include, in the opinion of management, all adjustments
(consisting of normal and recurring adjustments) that are necessary for a
fair presentation of the results for the interim periods ended March 31,
1998 and 1997. The results for the interim periods presented are not
necessarily indicative of results to be expected in the full fiscal year.
These financial statements should be read in conjunction with the audited
financial statements and notes thereto for the year ended December 31, 1997
included in the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission.
4
<PAGE> 7
3. INVENTORIES
Inventories are stated at the lower of cost or market using the first in,
first out (FIFO) method and consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------- -----------
<S> <C> <C>
Raw materials........................ $ 548,821 $455,663
Work in process...................... -- 35,110
Finished goods....................... 543,342 298,725
---------- --------
Total................................ $1,092,163 $789,498
========== ========
</TABLE>
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net Loss Per Common Share
The Company has adopted Statement of Financial Accounting Standard ("SFAS")
No. 128, "Earnings Per Share," which specifies the computation,
presentation and disclosure requirements for net income (loss) per common
share. Basic net income (loss) per common share is computed based on the
weighted average number of common shares outstanding during the period.
Diluted net income (loss) per common share gives effect to all dilutive
potential common shares outstanding during the period. Under SFAS No. 128,
the computation of diluted earnings per share does not assume the issuance
of common shares that have an antidilutive effect on net income per common
share. In accordance with Staff Accounting Bulletin 98 issued by the
Securities and Exchange Commission in February 1998, the Company restated
loss per share for prior periods without including certain awards of stock
and warrants issued within a one-year period prior to the initial filing of
an Initial Public Offering of common stock.
Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components. Components of comprehensive income
are net income and all other non-owner changes in equity such as the change
in the cumulative translation adjustment. SFAS 130 requires that an
enterprise: (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a balance sheet. SFAS 130 is
effective for financial statements issued for periods beginning after
December 15, 1997 which for the Company is the first quarter of 1998.
Presentation of comprehensive income for earlier periods provided for
comparative purposes is required. Comprehensive income for the three months
ended March 31, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
------------ -----------
<S> <C> <C>
Net loss to common stockholders............... $(4,440,832) $(2,658,495)
Unrealized gain on securities................. 1,762 --
------------ -----------
Total......................................... $(4,439,070) $(2,658,495)
=========== ===========
</TABLE>
5
<PAGE> 8
Recent Pronouncement
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5
"Accounting for the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5
requires all costs of start-up activities (as defined by SOP 98-5) to be
expensed as incurred. The Company has not assessed the impact of SOP 98-5
on its financial statement disclosures.
5. CO-PROMOTION AGREEMENT
On February 6, 1998, the Company entered into a four-year co-promotion
agreement with Bristol-Myers Squibb to exclusively promote Duricef(R)
(cefadroxil monohydrate) oral suspension to pediatricians in the United
States. As compensation for the Company's co-promotional efforts,
Bristol-Myers Squibb has agreed to pay the Company a specified percentage
of net sales of the product attributed to pediatricians (as defined in the
agreement) on sales above a specified number of prescriptions for the
product. In addition, Bristol-Myers Squibb has agreed to reimburse the
Company for a specified amount of the Company's marketing costs during each
year of the agreement.
6. SUBSEQUENT EVENTS
1998 Financing
On May 13, 1998, the Company entered into a definitive agreement with funds
affiliated with Furman Selz Investments and BancBoston Ventures, pursuant
to which the investors will purchase at closing $7 million of Series G
convertible exchangeable preferred stock (the "Preferred Stock"), $9
million of 8% seven-year subordinated notes (the "Subordinated Notes") and
seven-year warrants to purchase 2,116,958 shares of common stock of the
Company (the "Common Stock"). The Preferred Stock is convertible into
Common Stock at a price of $4.75 per share, and the warrants are
exercisable at a price of $4.75 per share. The Preferred Stock will
automatically convert into Common Stock under specified circumstances based
on the fair market value of the Company's Common Stock. The Preferred Stock
is entitled to cumulative annual dividends equal to 8% (subject to
adjustment) of the liquidation preference of such stock ($1,000), payable
semiannually in June and December of each year, commencing December 1998,
and may be exchanged for 8% seven-year convertible subordinated notes
having an aggregate principal amount equal to the aggregate liquidation
preference of the Preferred Stock (the "Convertible Notes") at the option
of the Company any time within seven years of issuance of the Preferred
Stock.
The Subordinated Notes and the Convertible Notes (when issued upon exchange
of the Preferred Stock) (collectively, the "1998 Notes") bear interest at a
rate of 8% per annum, payable semiannually in June and December of each
year, commencing December 1998. Forty percent of the interest due on the
Subordinated Notes and fifty percent of the dividends due on the Preferred
Stock (or the interest due on the Convertible Notes if issued upon exchange
of the Preferred Stock) in each of December 1998, June 1999, December 1999
and June 2000 may be deferred by the Company for a period of three years.
The Company may also redeem the Preferred Stock (or the Convertible Notes
issued upon exchange of the Preferred Stock) at a price equal to the
liquidation preference on such stock ($1,000) plus accrued and unpaid
dividends in the event of a change of control or unaffiliated merger of the
Company, although the Company will be required to issue new Common Stock
purchase warrants in connection with such redemption. In addition, in the
event of a change of control or unaffiliated merger of the Company (as such
terms are defined in the agreement), the holders of the 1998 Notes may
require the Company to redeem the 1998 Notes at a price equal to the unpaid
principal plus accrued and unpaid interest on such notes. In connection
with the investment, a representative of Furman Selz Investments will be
added to the Company's Board of Directors.
6
<PAGE> 9
Primsol
On May 1, 1998, the United States Food and Drug Administration notified the
Company that, in connection with its New Drug Application for the 50mg/5ml
formulation of Primsol trimethoprim solution, the Company will be required
to conduct a pre-approval clinical use study to determine the adverse event
profile of Primsol in children. The Company is currently discussing the
form of this study with the FDA.
7
<PAGE> 10
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is a drug development and marketing company focused exclusively on
the pediatric market. The Company commenced operations in March 1989 and prior
to the quarter ended September 30, 1997 had been engaged primarily in developing
its products and product candidates and in organizational efforts, including
recruiting scientific and management personnel and raising capital. The Company
introduced its first product, Feverall, during the quarter ended September 30,
1997 and its second product, Pediamist, during the quarter ended December 31,
1997. During the quarter ended March 31, 1998, the Company began marketing
Duricef(R) (cefadroxil monohydrate) oral suspension to pediatricians in the
United States pursuant to a four-year co-promotion agreement with Bristol-Myers
Squibb.
The Company has incurred net losses since its inception and expects to incur
additional operating losses at least through the current fiscal year as it
continues its product development programs, maintains its sales and marketing
organization and introduces products to the market. The Company expects
cumulative losses to increase over this period. The Company has incurred a
deficit accumulated since inception through March 31, 1998 of $36,819,312.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared with Three Months Ended March 31,
1997
Revenue and Cost of Sales. The Company had revenue of $1,314,000 for the three
months ended March 31, 1998, compared with no revenue in the comparable prior
year period due primarily to revenues from the sales of its Feverall products,
which product line was acquired in July 1997 and, to a lesser extent, revenue
from the Pediamist product. Cost of sales was $470,000 for the three months
ended March 31, 1998 and was primarily attributable to the manufacturing cost
associated with the marketing of the Feverall and Pediamist products.
Selling, General and Administrative Expenses. The Company incurred selling,
general and administrative expenses for the three months ended March 31, 1998 of
$3,848,000, which was an increase of $2,875,000 over the comparable prior year
period. Selling expenses increased in the three months ended March 31, 1998 by
$2,330,000 over the comparable prior year period primarily as a result of (i)
increased personnel expenses related to the Company's sales and marketing
personnel hired in the second half on 1997 and (ii) increased advertising and
promotional activities relating to the marketing of Feverall and Pediamist.
General and administrative expenses increased in the three months ended March
31, 1998 by $545,000 which was primarily a result of additional staffing
expenses and amortization expenses of intangible assets related to the Feverall
acquisition.
Research and Development. The Company incurred research and development
expenses for the three months ended March 31, 1998 of $1,124,000, a decrease of
$404,000 from the comparable prior year period. This decrease primarily reflects
increased product development charges in the prior year period for the Company's
Pediavent albuterol controlled-release suspension product and increased clinical
trial expenditures for the Company's Feverall ER acetaminophen beaded product.
8
<PAGE> 11
Interest. The Company had interest income of $159,000 for the three months
ended March 31, 1998, an increase of $86,000 over the comparable prior year
period. This increase was primarily attributable to an increase in funds
available for investment by the Company as a result of the Company's initial
public offering and issuance of subordinated secured notes in the first half of
1997. The Company had interest expense of $471,000 for the three months ended
March 31, 1998, an increase of $451,000 over the comparable prior year period.
The interest expense includes the accretion of the subordinated secured notes
and related cash interest payments.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily from
private sales of capital stock, subordinated secured notes and related Common
Stock purchase warrants and an initial public offering of shares of Common
Stock. In addition, in the second half of 1997, the Company began shipping its
first two products, Feverall acetaminophen suppositories and Pediamist nasal
saline spray. As of March 31, 1998, the Company had raised approximately
$27,123,000 (net of issuance costs) from the sales of preferred stock,
approximately $6,404,000 (net of issuance costs) from the issuance of
subordinated secured notes and related warrants and approximately $17,529,000
(net of issuance costs) from the initial public offering of 2,240,000 shares of
Common Stock.
On July 10, 1997, the Company closed the acquisition of the Feverall line of
acetaminophen rectal suppositories from Upsher-Smith for a purchase price of
$11,905,000. The Company issued a promissory note for $5.5 million as partial
payment for the purchase price, which promissory note was paid in full on
February 20, 1998.
In January and May 1997, the Company issued an aggregate of $7 million of
subordinated secured notes, resulting in net proceeds to the Company of
$6,404,000, which was recorded as a liability of $4,494,000 with $2,506,000 to
be accreted as interest expense over the term of the notes. The notes amortize
in eight equal quarterly principal installments and require quarterly interest
payments on the unpaid balance. The notes mature on September 2, 1999. The notes
are collateralized by a lien on all of the Company's assets, prohibit the
payment of dividends by the Company and, subject to certain exceptions
(including for up to $6 million of senior secured bank financing), prohibit the
incurrence of additional indebtedness. On March 3, 1998, the Company made its
second quarterly payment of principal and interest, $875,000 and $153,125
respectively, that was due on the subordinated secured notes.
Through March 31, 1998, the Company applied the proceeds from the sales of
preferred stock, subordinated notes, its initial public offering and product and
other revenues to fund the purchase of the Feverall product line, partial
payment of the subordinated secured notes and interest, and general corporate
purposes. As of March 31, 1998, the Company had cash, cash equivalents and
current marketable securities of $3,172,000.
On May 13, 1998, the Company entered into a definitive agreement (the "1998
Financing Agreement") with funds affiliated with Furman Selz Investments and
BancBoston Ventures, pursuant to which the Company will issue and sell at the
closing $7 million of Series G convertible exchangeable preferred stock, $9
million of 8% seven-year subordinated notes and seven-year warrants to purchase
2,116,958 shares of Common Stock (collectively the "1998 Financing"). The
Preferred Stock is convertible into Common Stock at a price of $4.75 per share,
and the warrants are exercisable at a price of $4.75 per share. The Preferred
Stock will automatically convert into Common Stock under specified circumstances
based on the fair market value of the Company's Common Stock. The Preferred
Stock is entitled to cumulative annual dividends equal to 8% (subject to
adjustment) of the liquidation preference of such stock ($1,000), payable
semiannually in June and December of each year, commencing December 1998, and
may be exchanged for 8% seven-year convertible subordinated notes having an
aggregate principal amount equal to the aggregate liquidation
9
<PAGE> 12
preference of the Preferred Stock at the option of the Company any time within
seven years of issuance of the Preferred Stock. The Company intends to use the
net proceeds, after fees and expenses, of $14.7 million to repay the outstanding
$5.3 million in subordinated secured notes and the balance for working capital.
The Subordinated Notes and Convertible Notes (when issued upon exchange of the
Preferred Stock) bear interest at a rate of 8% per annum, payable semiannually
in June and December of each year, commencing December 1998. Forty percent of
the interest due on the Subordinated Notes and fifty percent of the dividends
due on the Preferred Stock (or the interest due on the Convertible Notes if
issued upon exchange of the Preferred Stock) in each of December 1998, June
1999, December 1999 and June 2000 may be deferred by the Company for a period of
three years. The Company may redeem the Subordinated Notes in whole or in part
at any time by paying the outstanding principal plus accrued and unpaid interest
on such notes. The Company may also redeem the Preferred Stock (or the
Convertible Notes issued upon exchange of the Preferred Stock) at a price equal
to the liquidation preference on such stock ($1,000) plus accrued and unpaid
dividends in the event of a change of control or unaffiliated merger of the
Company, although the Company will be required to issue new Common Stock
purchase warrants in connection with such redemption. In addition, in the event
of a change of control or unaffiliated merger of the Company (as such terms are
defined in the agreement), the holders of the 1998 Notes may require the Company
to redeem the 1998 Notes at a price equal to the unpaid principal plus accrued
and unpaid interest on such notes. In connection with the investment, a
representative of Furman Selz Investments will be added to the Company's Board
of Directors.
The Company has no committed external sources of capital. The Company expects,
based on its current operating plan, that its existing capital resources, taken
together with the proceeds of the 1998 Financing and internally generated funds,
should be adequate to satisfy its capital requirements for at least the next 12
months. However, the Company's future capital requirements will depend on many
factors, including continued progress in its product development programs, the
magnitude of these programs, the results of preclinical studies and clinical
trials, the time and cost involved in obtaining regulatory approvals, the cost
involved in filing, prosecuting, enforcing and defending patent claims,
competing technological and market developments, the ability of the Company to
maintain and, in the future, expand its sales and marketing capability and
product development, manufacturing and marketing relationships, and the costs
and success of commercialization activities and arrangements, particularly the
level of product sales. The Company's business strategy requires a significant
commitment of funds to conduct clinical testing of potential products, to pursue
regulatory approval of such products and maintain sales and marketing
capabilities and manufacturing relationships necessary to bring such products to
market.
Although the Company has entered into a binding agreement with respect to the
1998 Financing, the closing of such financing is subject to a number of
different conditions and is not scheduled to occur until June 1998. In the event
that the Company does not complete the 1998 Financing by such date or at all,
the Company will be required to significantly curtail one or more of its product
development programs or product commercialization efforts, obtain funds through
arrangements with collaborative partners or others that may require the Company
to relinquish rights to certain of its technologies, product candidates or
products which the Company would otherwise pursue on its own or significantly
scale back or terminate operations.
The Company is aware of the issues that many computer systems will face as the
millenium ("Year 2000") approaches. The Company does not expect the cost of the
effort to install Year 2000 compliant software to be material. In addition, the
Company believes that the Year 2000 issue will not pose significant operational
problems. However, Year 2000 issues could have a significant impact on the
Company's business, financial condition and results of operations if
modifications cannot be completed on a timely basis, unforeseen needs or
problems arise, or if the systems operated by suppliers, collaborative partners
or licensees are not Year 2000 compliant.
RECENT PRONOUNCEMENT
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5
"Accounting for the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5
requires all costs of start-up activities (as defined by SOP 98-5) to be
expensed as incurred. The Company has not assessed the impact of SOP 98-5 on its
financial statement disclosures.
10
<PAGE> 13
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This quarterly report on Form 10-Q contains certain forward-looking statements.
For this purpose, any statements herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects," "intends"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause the Company's 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 - Certain Factors That May Affect Future Results" of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997 as filed
with the Securities and Exchange Commission, which are expressly incorporated by
reference herein.
11
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with the initial public offering (the "Offering") of shares of
Common Stock of the Company, the Company's Registration Statement on Form S-1,
Commission File No. 333-23319 (the "Registration Statement"), was declared
effective by the Securities and Exchange Commission on May 29, 1997. In the
Offering, the Company issued and sold an aggregate of 2,240,000 shares of Common
Stock, with an aggregate offering price of $20,160,000, and paid an aggregate of
$2,630,661 in total expenses, which consisted of $1,411,200 in underwriting
discounts and commissions, $3,492 in expenses paid to or for the underwriters
and an aggregate of $1,216,059 in accounting, legal, printing and other
expenses. None of these expenses was paid, directly or indirectly, to directors,
officers, general partners of the Company or their associates, persons owning
ten percent or more of any class of equity securities of the Company or
affiliates of the Company. The net Offering proceeds to the Company, after
deducting total expenses of the Offering, was $17,529,339.
From May 29, 1997 through March 31, 1998, the Company used the net Offering
proceeds in the following manner:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Direct or indirect payments to
directors, officers, general partners
of the Company or their associates;
to persons owning ten percent or
more of any class of equity
securities of the Company, and Direct or indirect payments to
to affiliates of the Company Others
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Construction of a plant, building
or facilities $ 0 $ 0
- -----------------------------------------------------------------------------------------------------------
Purchase and installation of
- -----------------------------------------------------------------------------------------------------------
Machinery and equipment $ 0 $ 660,540
- -----------------------------------------------------------------------------------------------------------
Purchase of real estate $ 0 $ 0
- -----------------------------------------------------------------------------------------------------------
Acquisition of other business(es) $ 0 $11,471,000
- -----------------------------------------------------------------------------------------------------------
Repayment of debt $1,768,250 $ 309,875
- -----------------------------------------------------------------------------------------------------------
Working capital $ 0 $ 3,319,674
- -----------------------------------------------------------------------------------------------------------
Temporary investment (specify) $ 0 $ 0
- -----------------------------------------------------------------------------------------------------------
Other purposes (specify) $ 0 $ 0
- -----------------------------------------------------------------------------------------------------------
</TABLE>
In March 1998, the Company paid an aggregate of $1,050,000 (representing the
second of eight equal quarterly payments of principal under the subordinated
secured notes and interest on the outstanding principal amount of such notes as
of such date) to the holders of the subordinated secured notes of the Company,
including a profit sharing plan for the benefit of Thomas W. Janes, a director
of the Company, and Triumph-Connecticut Limited Partnership, and affiliated
entity. In all other respects, the Company's use of the net Offering proceeds in
the period from January 1, 1998 through March 31, 1998 does not represent a
material change in the use of proceeds described in the Registration Statement.
12
<PAGE> 15
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits See exhibit index on page 15 for a list
of the exhibits filed as part of this
Quarterly Report on Form 10-Q, which
exhibit index is incorporated herein by
reference.
(b) Reports on Form 8-K None.
13
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ASCENT PEDIATRICS, INC.
Date: May 14, 1998 By: /s/ JOHN G. BERNARDI
-------------------------------------------
John G. Bernardi, Vice-President-Finance
and Treasurer (Principal Financial Officer)
14
<PAGE> 17
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
27 Financial Data Schedule
99 Pages 28 through 35 of the Company's Annual Report
on Form 10-K for the year ended December 31, 1997
as filed with the SEC (which is not deemed filed
except to the extent that portions thereof are
expressly incorporated by reference herein).
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 642,292
<SECURITIES> 2,529,662
<RECEIVABLES> 883,252
<ALLOWANCES> (50,000)
<INVENTORY> 1,092,163
<CURRENT-ASSETS> 5,563,555
<PP&E> 1,180,327
<DEPRECIATION> (346,779)
<TOTAL-ASSETS> 17,928,182
<CURRENT-LIABILITIES> 6,090,377
<BONDS> 702,548
0
0
<COMMON> 277
<OTHER-SE> 47,951,414
<TOTAL-LIABILITY-AND-EQUITY> 17,928,182
<SALES> 1,314,049
<TOTAL-REVENUES> 1,314,049
<CGS> 470,347
<TOTAL-COSTS> 470,347
<OTHER-EXPENSES> 4,972,043
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 471,313
<INCOME-PRETAX> (4,440,832)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,440,832)
<EPS-PRIMARY> (0.64)
<EPS-DILUTED> (0.64)
</TABLE>
<PAGE> 1
Exhibit 99
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Annual Report on Form 10-K contains forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects,"
"intends" and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the
Company's actual results to differ materially from those indicated by such
forward-looking statements. These factors include, without limitation, those set
forth below.
CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company has no committed external sources of capital. Based on its 1998
operating plan, the Company anticipates that it will require approximately
$8,000,000 of additional funds from external sources no later than the beginning
of the third quarter of 1998 to meet its capital requirements and continue its
operations for the balance of the third quarter and the remainder of 1998. The
Company is currently in negotiations with a number of potential sources of
financing to obtain additional funding. No assurance can be given that such
financing will be available, or, if available, that it will be available on
acceptable terms. If additional funds are raised by issuing equity securities,
further dilution to then existing stockholders will result. Additionally, the
terms of the financing may adversely affect the holdings or the rights of the
then existing stockholders.
If adequate funds are not available, the Company may be required to
significantly curtail one or more of its product development programs or product
commercialization efforts, obtain funds through arrangements with collaborative
partners or others that may require the Company to relinquish rights to certain
of its technologies, product candidates or products which the Company would
otherwise pursue on its own or significantly scale back or terminate operations.
The Company's future capital requirements will depend on many factors,
including continued progress in its product development programs, the magnitude
of these programs, the results of preclinical studies and clinical trials, the
time and cost involved in obtaining regulatory approvals, the costs involved in
filing, prosecuting, enforcing and defending patent claims, competing
technological and market developments, the ability of the Company to maintain
and, in the future, expand its sales and marketing capability and product
development, manufacturing and marketing relationships, and the costs and
success of commercialization activities and arrangements, particularly the level
of product sales. The Company's business strategy requires a significant
commitment of funds to conduct clinical testing of potential products, to pursue
regulatory approval of such products and maintain sales and marketing
capabilities and manufacturing relationships necessary to bring such products to
market.
28
<PAGE> 2
EARLY STAGE OF DEVELOPMENT; HISTORY OF OPERATING LOSSES AND CUMULATIVE DEFICIT
Ascent has incurred net operating losses since its inception. At December
31, 1997, the Company's cumulative deficit was approximately $32,378,000. Such
losses have resulted primarily from costs incurred in the Company's product
development programs, general and administrative costs associated with the
Company's product development and costs associated with raising equity capital
and the establishment of the Company's sales force. The Company first began to
market products in the second half of 1997 and most of its products are still in
development.
The Company expects to incur additional operating losses over at least the
next two years, as it continues its product development programs and incurs the
costs of maintaining its marketing and sales capabilities, and expects
cumulative losses to increase. The Company expects that losses will fluctuate
from quarter to quarter and that such fluctuations may be substantial. The
Company's ability to achieve profitability is dependent in part upon obtaining
regulatory approval for new products, commercial acceptance of products that are
introduced to the market after required approvals have been obtained, the
successful development and commercialization of its products and sales of such
products and margins on such sales. There can be no assurance that the Company
will obtain required regulatory approvals, successfully develop, commercialize,
manufacture and market its products or ever achieve sales or profitability.
UNCERTAINTY RELATED TO APPROVAL OF PRIMSOL TRIMETHOPRIM SOLUTION
In 1996, the Company filed two NDA's covering 25mg and 50mg strengths of
Primsol trimethoprim solution for the treatment of acute otitis media ("AOM"),
or middle ear infection, for children age six months to 12 years. In June 1997,
the FDA approved the Company's NDA for its 25mg strength of Primsol solution.
The Company's NDA for its 50mg strength of Primsol solution is still pending. In
February 1998, the Company received a letter from the FDA citing certain
deficiencies in the Company's NDA for the 50mg strength. There can be no
assurance as to when or if the Company will receive approval of such NDA.
Ascent plans to introduce the 50mg improved formulation as the Primsol
solution product that it brings to market. If the FDA were not to grant
marketing approval of the 50mg strength of Primsol solution for this indication,
or if there were significant delays in such approval, the business, financial
condition and operating results of the Company would be adversely affected,
possibly materially. See "Item 1. Business -- Products and Products Under
Development -- Primsol Trimethoprim Solution."
PRODUCTS IN DEVELOPMENT; TECHNOLOGICAL UNCERTAINTY
Ascent has introduced only one internally-developed product, Pediamist
nasal saline spray, into the market. Although the Company has completed
development of certain other products and has filed with the FDA applications
for marketing approval, many of the Company's product candidates are in
development and require additional formulation, preclinical studies, clinical
trials and regulatory approval prior to any commercial sales. With respect to
certain product candidates, the Company must successfully address a number of
technological challenges to complete its development efforts. In addition, there
can be no assurance that the Company will be permitted to undertake and complete
human clinical trials of certain of the Company's potential products, either in
the United States or elsewhere, or, if permitted, that such products will be
demonstrated to be safe and efficacious. The administration of any product the
Company develops may produce undesirable side effects that could result in the
interruption, delay or suspension of clinical trials. In addition, there can be
no assurance that any of the Company's product candidates will obtain the
approval of the FDA or other regulatory approvals or that any approved product
will be capable of being produced in commercial quantities at reasonable cost
and successfully marketed.
LIMITED SALES AND MARKETING EXPERIENCE
The Company markets and sells its products in the United States through its
own dedicated marketing staff and sales force. The Company only recruited its
marketing staff and sales force in the second half of 1997 and has limited
experience in marketing and sales. The Company believes that its success will
depend in significant part upon its ability to maintain a dedicated marketing
staff and sales force capable of promoting its products. However, there can be
no assurance that the Company will be able to maintain the marketing staff
29
<PAGE> 3
and sales force that it has recruited, that the cost of establishing and
maintaining this marketing staff and sales force will be justifiable in light
of product revenues or that the Company's marketing and sales efforts will be
successful. Should the Company fail in its marketing and sales efforts, its
business, financial condition and operating results would be materially
adversely affected. See "Item 1. Business -- Sales and Marketing."
UNCERTAINTY OF MARKET ACCEPTANCE OF PRODUCTS
Although many of the Company's product candidates are reformulations of
compounds marketed by other manufacturers, there can be no assurance that these
products or other current or future products of the Company will achieve market
acceptance. The commercial success of the Company's products and products under
development, when and if any required approval for marketing by the FDA or any
other regulatory agency is obtained, will depend, in significant part, on such
products' efficacy, side effect profile, taste, dosing frequency, method of
administration, patent and other proprietary position, brand name recognition
and price. Another important factor will be the timing of market introduction of
the Company's or competitive products. Earlier entrants in the market often
obtain and maintain significant market share relative to later entrants.
The commercial success of the Company's products also will depend in
significant part upon their acceptance by pediatricians, pediatric nurses and
third party payors (particularly managed care providers). Acceptance of the
Company's products by pediatricians, pediatric nurses and third party payors
will in turn be dependent upon the success of the Company's marketing and sales
activities. There can be no assurance that pediatricians, pediatric nurses and
third party payors will accept the Company's products on a timely basis or at
all. In addition, in order to stimulate demand for its products, the Company may
be required to, among other things, offer substantial price discounts. Failure
to achieve market acceptance would have a material adverse effect on the
Company's business, financial condition and operating results.
COMPETITION
Competition in the pediatric pharmaceutical market is intense. Several
large pharmaceutical companies with significant research, development, marketing
and manufacturing operations market pediatric products in addition to products
for the adult market. These competitors include Glaxo Wellcome Inc., Eli Lilly
and Company, the Ortho-McNeil Pharmaceutical Division of Johnson & Johnson Inc.,
Pfizer Inc., the Ross Products Division of Abbott Laboratories Inc.,
Schering-Plough Corporation and the Wyeth-Lederle Vaccines and Pediatrics
Division of American Home Products, Inc.
Many of the companies against which Ascent competes have substantially
greater name recognition and greater financial, technical and human resources
than Ascent. In addition, many of these competitors have significantly greater
experience than the Company in undertaking preclinical testing and human
clinical trials of pharmaceutical products and obtaining FDA and other
regulatory approvals of products for use in health care. Accordingly, the
Company's competitors may succeed in obtaining FDA or other regulatory approvals
for products more rapidly than the Company. Furthermore, Ascent competes against
these larger companies with respect to manufacturing efficiency and marketing
capabilities, areas in which Ascent has limited or no experience. These
competitors may introduce competitive pricing pressures that may adversely
affect Ascent's sales levels and margins. Moreover, many of these competitors
offer well established, broad product lines and services not offered by the
Company. Many of the products and services offered by these competitors have
well known brand names that have been promoted over many years.
The Company expects to market many of its product candidates as alternative
treatments for pediatric indications for which products with the same active
ingredient are well entrenched in the market. For example, the Company intends
to market Primsol, a trimethoprim antibiotic, for the treatment of AOM, an
indication for which pediatricians often prescribe the well-known combination
therapies Bactrim and Septra, which also contain trimethoprim. Similarly,
Feverall controlled-release beads will compete against Tylenol liquid for
children. The Company's product candidates also will face competition from other
products that do not contain the same active ingredient but are used for the
same indication and are well entrenched within the pediatric market. For
example, Primsol solution will compete against other antibiotics, including
amoxicillin. Moreover, many of the Company's potential products that are
reformulations of existing drugs of other manufacturers may have limited patent
or other competitive protection. There can be no assurance that
30
<PAGE> 4
pediatricians, pediatric nurses and third party payors will prefer the Company's
products to existing products. See "Item 1. Business -- Competition."
The Company plans to apply for three year protection for certain products
under the Waxman-Hatch Act from the approval of a potential competitor's ANDA
which is based on the Company's clinical trial results. There can be no
assurance that any of the Company's products will qualify for protection under
the Waxman-Hatch Act or, if any product does so qualify, that the statutory
protection will enhance the competitive position of such product. See "Item 1.
Business -- Government Regulation."
UNCERTAINTY OF IDENTIFICATION OR ACQUISITION OF NEW PRODUCT CANDIDATES AND NEW
TECHNOLOGIES
The success of the Company depends in part upon its ability to identify and
develop or obtain rights to pharmaceuticals suitable for pediatric use. There
can be no assurance that the Company will be successful in identifying and
developing pharmaceuticals suitable for pediatric use or in acquiring such
rights. The Company's success also depends upon its ability to apply its drug
delivery and reformulation technologies to produce proprietary products. There
can be no assurance that the Company will be able to develop additional
technologies or obtain rights from third parties to additional technologies on
reasonable terms, or at all.
UNPROVEN SAFETY AND EFFICACY OF PRODUCTS; UNCERTAINTIES RELATED TO CLINICAL
TRIALS
In order to obtain regulatory approval for the commercial sale of many of
its products, the Company is conducting or plans to conduct clinical trials to
demonstrate that such products are safe and effective. There can be no assurance
that any of these clinical trials will be successfully completed within any
specified time period, if at all. The results from early clinical trials may not
be predictive of results that will be obtained in large-scale clinical trials,
and there can be no assurance that the Company's clinical trials will
demonstrate the safety and effectiveness of any products or will result in
marketable products.
The rate of completion of the Company's clinical trials is dependent upon,
among other things, 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. Historically, recruiting children to
participate in clinical trials has been difficult, as parents are reluctant to
permit their children to take experimental medications. Delays in planned
patient enrollment may result in increased costs, program delays, or both, which
could have a material adverse effect on the Company.
The Company has contracted with clinical research organizations for the
conduct of all of its clinical trials and expects to continue to do so for the
foreseeable future. There can be no assurance that such entities will conduct
the clinical trials successfully. The Company relies on scientific, technical
and clinical data supplied by its academic and industry collaborators and
licensors in the design, development and evaluation of product candidates. There
can be no assurance that there are no errors or omissions in such data that
would materially adversely affect the development of these products.
NO ASSURANCE OF REGULATORY APPROVAL; EXTENSIVE GOVERNMENT REGULATION
The production and the marketing of the Company's products and the
Company's ongoing product development activities are and will be subject to
extensive regulation by numerous federal, state and local governmental
authorities in the United States and abroad. The Company has had only limited
experience in filing or pursuing applications necessary to gain regulatory
approvals. Preclinical testing of the Company's product candidates is subject to
Good Laboratory Practice ("GLP") requirements and the manufacture of products is
subject to Good Manufacturing Practice ("GMP") requirements prescribed by the
FDA.
Many of the products that the Company is developing are subject to the NDA
regulatory process. This process generally includes preclinical studies,
clinical trials and ongoing post-approval testing of each compound to establish
or monitor its safety and effectiveness for the intended indications, typically
takes many years and requires the expenditure of substantial resources. The
Company has limited experience in filing or pursuing applications necessary to
gain regulatory approval. There can be no assurance that, even after the
performance of clinical studies and the expenditure of resources, regulatory
approval will be obtained for any products developed by the Company on a timely
basis, if at all. The Company's analysis of data obtained from
31
<PAGE> 5
preclinical and clinical activities is subject to confirmation and
interpretation by regulatory authorities which could delay, limit or prevent
FDA regulatory approval. The Company or the FDA may suspend clinical trials at
any time if the participants in such trials are being exposed to unanticipated
or unacceptable health risks. Moreover, if regulatory approval to market a
product is granted, such approval may entail limitations on the indicated uses
for which it may be marketed. See "Item 1. Business -- Government Regulation."
Failure to comply with applicable regulatory requirements can, among other
things, result in fines, suspension or withdrawal of regulatory approvals,
product recalls, seizure of products, operating restrictions and criminal
prosecutions. FDA policy may change and additional government regulations may
be established that could prevent or delay regulatory approval of the Company's
product candidates. In addition, a marketed product, its manufacturer and its
manufacturing facilities are subject to continual review and periodic
inspections, and subsequent discovery of previously unknown problems with a
product, manufacturer or facility may result in restrictions on such product or
manufacturer, including withdrawal of the product from the market. There can be
no assurance that additional statutes or regulations applicable to the
Company's business will not be adopted, impose substantial additional costs
upon or otherwise adversely affect the Company's operations.
The Company is also subject to numerous and varying foreign regulatory
requirements governing the design and conduct of clinical trials and the
manufacturing and marketing of its products. The approval procedure varies
among countries and can involve additional testing, and the time required to
obtain approval may differ from that required to obtain FDA approval. The
foreign regulatory approval process may include all of the risks associated
with obtaining FDA approval set forth above. There can be no assurance that
foreign regulatory approvals will be obtained on a timely basis, if at all.
DEPENDENCE ON THIRD PARTY MANUFACTURING; RISKS RELATED TO SOLE SOURCE OF SUPPLY
The Company has no manufacturing facilities and has to date relied, and
plans in the future to rely, upon third parties to manufacture the Company's
products in accordance with GMP for preclinical testing, clinical trial and
commercial purposes. In addition, the Company has not arranged for the
production of certain of its product candidates in commercial quantities, and
it is possible that the Company will encounter difficulties in scaling up the
production of these product candidates. Although there are a number of
manufacturers that operate under GMP regulations capable of manufacturing
certain of the Company's products, in the event that the Company is unable to
obtain contract manufacturing, or obtain such manufacturing on commercially
reasonable terms, it may not be able to develop and commercialize its products
as planned. Where third-party arrangements are established, the Company will
depend upon such third parties to perform their obligations in a timely manner.
There can be no assurance that third parties depended upon by the Company will
perform and any failures by third parties may delay clinical trial development
or the submission of products for regulatory approval, impair the Company's
ability to commercialize its products as planned and deliver products on a
timely basis, or otherwise impair the Company's competitive position, which
could have a material adverse effect on the Company's business, financial
condition and operating results.
Certain of the Company's supply arrangements require that Ascent buy all of
the Company's requirements of a particular product exclusively from the other
party to the contract. Moreover, for many of its products, Ascent has qualified
only one supplier, even though the contractual arrangement with the supplier
may permit Ascent to qualify an alternative manufacturer. Any interruption in
supply from any of the Company's manufacturers or the inability of these
manufacturers to manufacture the Company's products in accordance with GMP
could have a material adverse effect on the Company's business, financial
condition and operating results. See "Item 1. Business -- Manufacturing and
Distribution."
In the future, the Company may establish its own manufacturing facilities
if it becomes economically attractive to do so. In order for the Company to
establish a manufacturing facility, the Company would require substantial
additional funds and be required to hire and retain significant additional
personnel and comply with the extensive GMP regulations of the FDA.
32
<PAGE> 6
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS
The Company's success depends in part on its ability to develop patentable
products and obtain patent or other proprietary rights protection for its
products, both in the United States and in other countries. The Company intends
to file applications as appropriate for patents and other protection covering
both its products and processes. However, the patent positions of
pharmaceutical firms, including Ascent, are generally uncertain and involve
complex legal and factual questions. Moreover, because the Company's product
candidates are reformulations of existing off-patent drugs, any patent
protection afforded will be significantly narrower than a patent on the active
ingredient itself. In particular, the Company does not expect that
composition-of-matter patent protection will be available for the active
ingredients in its products. No assurance can be given that patents will issue
from any patent applications owned by or licensed to the Company or that, if
patents do issue, the claims allowed will be sufficiently broad to protect the
Company's products or technology. In addition, no assurance can be given that
any issued patents owned by or licensed to the Company will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
competitive advantages to the Company.
The commercial success of the Company will also depend in part on its
neither infringing patents or other proprietary rights granted to competitors
or others nor breaching the technology licenses upon which the Company's
products are based. The Company's licenses of third party patents and patent
applications impose various commercialization, sublicensing, royalty and other
payment, insurance and other obligations on the Company. Failure of the Company
to comply with these requirements could result in termination of the licenses.
Competitors of the Company and other third parties hold issued patents and
pending patent applications which may result in claims of infringement against
the Company or other patent-related litigation. There can be no assurance that
the Company will be able to successfully obtain a license to any technology
that it may require or that, if obtainable, such technology can be licensed at
a reasonable cost or on an exclusive basis. Failure by the Company to obtain a
license to any technology that it may require to commercialize its products
could have a material adverse effect on the Company.
The pharmaceutical industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. Litigation, which
could result in substantial cost to the Company, may be necessary to enforce
any patents issued or licensed to the Company and/or to determine the scope and
validity of others' proprietary rights. Competitors of the Company and other
third parties hold issued patents and pending patent applications relating to
aspects of the Company's technology, and it is uncertain whether these patents
and patent applications will require the Company to alter its products or
processes, pay licensing fees or cease activities. The Company also may have to
participate in interference proceedings declared by the United States Patent
and Trademark Office to determine the priority of inventions, which could
result in substantial cost to the Company. Furthermore, the Company may have to
participate at substantial cost in International Trade Commission proceedings
to abate importation of products which would compete unfairly with products of
the Company.
The Company relies on trade secret and proprietary know-how which it seeks
to protect, in part, by confidentiality agreements with its collaborators,
employees, advisors and consultants. There can be no assurance that these
agreements will not be breached, that the Company would have adequate remedies
for any breach or that the Company's trade secrets will not otherwise become
known or be independently developed by competitors. Failure to obtain or
maintain patent and trade secret protection, for any reason, could have a
material adverse effect on the Company's business, financial condition and
operating results.
UNCERTAINTY OF PHARMACEUTICAL PRICING AND ADEQUATE REIMBURSEMENT; NEED FOR
INCLUSION ON FORMULARIES
The Company's ability to commercialize its products successfully depends in
part on the extent to which appropriate reimbursement levels for the cost of
such products are obtained from government authorities, private health insurers
and other organizations, such as health maintenance organizations ("HMOs").
Third-party payors are increasingly challenging the prices charged for medical
products and services. Also, the trend towards managed health care in the United
States and the concurrent growth of organizations such as HMOs, which control or
significantly influence the purchase of health care services and products, as
well as legislative proposals to reduce government insurance programs, may all
result in lower prices for the Company's
33
<PAGE> 7
products. The cost containment measures that health care providers are
instituting could affect the Company's ability to sell its products and may
have a material adverse effect on the Company.
Thus, there can be no assurance that reimbursement in the United States or
foreign countries will be available for any of the Company's products, or if
available, will not be decreased in the future, or that reimbursement amounts
will not reduce the demand for, or the price of, the Company's products. The
unavailability or inadequacy of third-party reimbursement for the Company's
products would have a material adverse effect on the Company's business,
financial condition and operating results.
Managed care providers generally maintain formularies, or lists of
products, that such providers have approved for use and reimbursement. The
Company plans to seek to have its products included on such formularies. There
can be no assurance that the Company's products will be included on the
formularies of managed care providers on a timely basis, or at all. The
Company's success in obtaining inclusion of its products on managed care
formularies will materially affect the Company's business, financial condition
and operating results.
POTENTIAL PRODUCT LIABILITY EXPOSURE AND INSURANCE
The use of the Company's products in human clinical trials and the
commercial sale of such products may expose the Company to potential product
liability risks which are inherent in the testing, manufacturing, marketing and
sale of human therapeutic pharmaceuticals. Product liability claims might be
made directly by consumers, health care providers or by licensees, distributors
or others selling such products. There can be no assurance that product
liability claims, if made, would not result in a recall of the Company's
products or a change in the indications for which they may be used. Ascent has
limited product liability insurance coverage, and such coverage is subject to
various deductibles. Such coverage is expensive, and no assurance can be given
that the Company will be able to maintain or obtain such insurance at
reasonable cost or in sufficient amounts to protect the Company against losses
due to liability claims that could have a material adverse effect on the
Company.
ATTRACTION AND RETENTION OF KEY EMPLOYEES
The Company is highly dependent on the principal members of its management
and scientific staff, particularly Dr. Clemente, the Company's Chairman, the
loss of whose services could have a material adverse effect on the Company.
Also, recruiting and retaining qualified scientific personnel to perform
product development work in the future will be critical to the Company's
success. There can be no assurance that the Company will be able to attract and
retain such highly skilled personnel on acceptable terms given the competition
among numerous pharmaceutical and health care companies, universities and
non-profit research institutions for experienced scientists. The Company does
not carry key-man insurance with respect to any of its executive officers other
than Dr. Clemente.
The Company's anticipated growth and expansion into areas and activities
requiring additional expertise are expected to require the addition of new
management personnel and the development of additional expertise by existing
management personnel. The failure to acquire such services or to develop such
expertise could have a material adverse effect on the Company's business,
financial condition and operating results.
RISKS RELATED TO POSSIBLE ACQUISITIONS
The Company may expand its operations or product offerings through the
acquisition of businesses, products or technologies. There can be no assurance
that the Company will be able to identify, acquire or profitably manage
additional businesses or successfully integrate any acquired businesses,
products or technologies into the Company without substantial expense, delays
or other operational or financial problems. Further, acquisitions may involve a
number of special risks, including diversion of management's attention, failure
to retain key acquired personnel, unanticipated events or circumstances and
legal liabilities, some or all of which could have a material adverse effect on
the Company's business, financial condition and operating results. In addition,
there can be no assurance that acquired businesses, products or technologies,
if any, will achieve anticipated revenues and earnings
34
<PAGE> 8
DEPENDENCE ON COLLABORATORS; COPROMOTION ARRANGEMENTS
In addition to the manufacturing of product candidates and products, the
Company is dependent upon third parties with respect to significant other
aspects of its operations, including product design and formulation work,
conduct of clinical trials, marketing to managed care organizations and product
distribution. There can be no assurance that the Company will be able to enter
into future collaborative arrangements with respect to these matters or as to
whether any of the Company's existing or future relationships will be
successful. The success of any such arrangement is dependent on, among other
things, the skills, experience and efforts of the third party, the third
party's commitment to the arrangement and the financial condition of the third
party, all of which are beyond the control of the Company.
The Company plans to enter into arrangements to copromote certain
pharmaceutical products of third parties to pediatricians in the United States.
To date, the Company has entered into a four-year copromotion agreement with
Bristol-Myers Squibb to market Bristol-Myers Squibb's Duricef oral suspension
product. See "Item 1. Business -- Products and Products Under Development --
Duricef Oral Suspension." There can be no assurance that the Company will be
able to enter into future arrangements or as to whether any of the Company's
existing or any future copromotion arrangements will be successful. The success
of any such arrangement is dependent on, among other things, the third party's
commitment to the arrangement, the financial condition of the third party and
market acceptance of the third party's products.
RELIANCE ON THIRD PARTIES FOR CERTAIN SALES AND MARKETING AND DISTRIBUTION
ACTIVITIES
The Company plans to sell its pediatric products in international markets
through distribution, licensing and similar arrangements and to sell its
products for adult indications in the United States and in international
markets through similar arrangements. To date, the Company has not entered into
any material arrangements of this nature. To the extent the Company enters into
such arrangements with third parties, any revenues the Company receives will
depend upon the efforts of such parties. There can be no assurance that any
third party will market the Company's products successfully or that any
arrangements with third parties will be on terms favorable to the Company. If a
third party does not market the Company's products successfully, the Company's
business, financial condition and operating results would be adversely
affected, possibly materially. If Ascent's plan to rely on third parties for
certain aspects of marketing and selling the Company's products is unsuccessful
for any reason, Ascent may need to forgo international and adult market
opportunities or recruit and train a larger marketing staff and sales force and
establish a larger distribution capability than it currently anticipates doing,
which would entail the incurrence of significant additional costs.
Ascent distributes its products through a third party distribution
warehouse. The Company has no experience with the distribution of products and
relies on the third party distributor to perform various functions on behalf of
the Company, including order entry, customer service and collection of accounts
receivable. The success of this arrangement is dependent on, among other
things, the skills, experience and efforts of the third party distributor, all
of which are beyond the control of the Company.
UNCERTAINTY OF HEALTH CARE REFORM MEASURES
Federal, state and local officials and legislators (and certain foreign
government officials and legislators) periodically propose or consider
proposing a variety of reforms to the health care systems in the United States
and abroad. The Company cannot predict what health care reform legislation, if
any, will be enacted in the United States or elsewhere or when such legislation
will be enacted. Significant changes in the health care system in the United
States or elsewhere are likely to have a substantial impact over time on the
manner in which the Company conducts its business and could have a material
adverse effect on the Company. The existence of pending health care reform
proposals could have a material adverse effect on the Company's ability to
raise capital. Further, to the extent that proposals have a material adverse
effect on other pharmaceutical companies that are prospective collaborators
with the Company, the Company's ability to establish collaborative commercial
relationships may be adversely affected.
35
