SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20459
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2000
COMMISSION FILE NUMBER 000-22347
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ASCENT PEDIATRICS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 04-3047405
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
187 Ballardvale Street, Suite B125, Wilmington, MA 01887
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(Address of principle executive offices) (Zip Code)
Registrant's telephone number, including area code (978) 658-2500
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None
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(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: As
of May 12, 2000, there were 9,764,158 depositary shares outstanding, each
depositary share representing one share of common stock, $0.00004 par value per
share, and represented by a depositary receipt.
ASCENT PEDIATRICS, INC.
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
Part I. Financial Information
Item 1 - Unaudited Condensed Financial Statements
1
Unaudited Condensed Balance Sheets
2
Unaudited Condensed Statements of Operations
3
Unaudited Condensed Statements of Cash Flows
4
Notes to Unaudited Condensed Financial Statements
Item 2 - Management's Discussion and Analysis of Financial
10
Condition and Results of Operations
17
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Part II. Other Information
Item 2 - Changes in Securities and Use of Proceeds
17
17
Item 6 - Exhibits and Reports on Form 8-K
18
Signature
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1 - UNAUDITED CONDENSED FINANCIAL STATEMENTS
ASCENT PEDIATRICS, INC.
UNAUDITED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
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ASSETS
<S> <C> <C> <C>
Current assets
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . $ 814,114 $ 1,067,049
Accounts receivable, less allowance for doubtful accounts of $63,000 and
$67,000 at March 31, 2000 and December 31, 1999, respectively . . . 2,212,982 759,098
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,210,580 1,012,430
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 107,736 132,555
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Total current assets. . . . . . . . . . . . . . . . . . . . . . . . 4,345,412 2,971,132
Fixed assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 572,822 516,165
Debt issue costs, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,790,354 1,882,365
Intangibles, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,692,818 9,857,648
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,300 45,300
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Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,446,706 $ 15,272,610
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,449,991 $ 1,645,302
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 713,248 523,023
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 909,066 1,520,591
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,044,953 -
Other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . 90,597 80,264
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Total current liabilities . . . . . . . . . . . . . . . . . . . . . 4,207,855 3,769,180
Subordinated secured notes. . . . . . . . . . . . . . . . . . . . . . . . . . 25,089,695 21,461,041
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Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 29,297,550 25,230,221
Stockholders' deficit
Preferred stock, $.01 par value; 5,000,000 shares authorized; no
shares issued and outstanding at March 31, 2000 and December
31, 1999 - -
Common stock, $.00004 par value; 60,000,000 shares authorized;
9,764,158 and 9,643,883 shares issued and outstanding at
March 31, 2000 and December 31, 1999, respectively. . . . . . . . . 389 385
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 57,009,396 56,304,465
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . (69,860,629) (66,262,461)
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Total stockholders' deficit . . . . . . . . . . . . . . . . . . . . (12,850,844) (9,957,611)
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Total liabilities and stockholders' deficit . . . . . . . . . . . . $ 16,446,706 $ 15,272,610
============= =============
</TABLE>
See accompanying notes to unaudited condensed financial statements.
Page1
<PAGE>
ASCENT PEDIATRICS, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended March 31,
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2000 1999
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<S> <C> <C>
Product revenue, net. . . . . . . . . . . . $ 574,292 $ 1,241,399
Co-promotional revenue. . . . . . . . . . . 535,414 615,000
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Total net revenue . . . . . . . . . . . . . 1,109,706 1,856,399
Costs and expenses
Costs of product sales . . . . . . . . 331,088 581,424
Selling, general and administrative. . 3,018,311 3,889,960
Research and development . . . . . . . 744,332 832,993
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Total costs and expenses . . . . . . . 4,093,731 5,304,377
Loss from operations. . . . . . . (2,984,025) (3,447,978)
Interest income . . . . . . . . . . . . . . 10,587 25,897
Interest expense. . . . . . . . . . . . . . (624,730) (254,704)
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Net loss. . . . . . . . . . . . . (3,598,168) (3,676,785)
Preferred stock dividend. . . . . . . . . . - 192,501
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Net loss to common stockholders . $(3,598,168) $(3,869,286)
============ ============
Results per common share:
Historical - basic and diluted:
Net loss. . . . . . . . . . . . . $ (0.37) $ (0.52)
Preferred stock dividend. . . . . $ - $ (0.03)
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Net loss to common stockholders
$ (0.37) $ (0.55)
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Weighted average shares outstanding - basic
and diluted. . . . . . . . . . . . . . . 9,677,349 7,010,821
============ ============
</TABLE>
See accompanying notes to unaudited condensed financial statements.
Page2
<PAGE>
ASCENT PEDIATRICS, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31,
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2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(3,598,168) $(3,676,785)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . 242,171 248,679
Non-cash interest expense. . . . . . . . . . . . . . . . . . 147,905 36,025
Non-cash extraordinary items . . . . . . . . . . . . . . . . - -
Provision for bad debts. . . . . . . . . . . . . . . . . . . (4,400) 14,801
Inventory write-off. . . . . . . . . . . . . . . . . . . . . (3,936) (36,603)
Changes in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . (1,449,484) (587,387)
Inventory. . . . . . . . . . . . . . . . . . . . . . . . (194,214) 257,563
Other assets . . . . . . . . . . . . . . . . . . . . . . 24,819 (120,441)
Accounts payable . . . . . . . . . . . . . . . . . . . . (195,311) 893,090
Interest payable . . . . . . . . . . . . . . . . . . . . 190,225 185,408
Accrued expenses . . . . . . . . . . . . . . . . . . . . (611,525) (459,217)
Deferred revenue . . . . . . . . . . . . . . . . . . . . 1,044,953 -
Other current liabilities. . . . . . . . . . . . . . . . 10,333 (69,694)
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Net cash used in operating activities . . . . . . . (4,396,632) (3,314,561)
Cash flows from investing activities:
Purchase of property and equipment. . . . . . . . . . . . . . . . (133,998) (13,662)
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Net cash (used in) provided by investing activities (133,998) (13,662)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs . . 277,695 76,893
Proceeds from issuance of debt. . . . . . . . . . . . . . . . . . 3,582,701 4,000,000
Proceeds from issuance of debt related warrants . . . . . . . . . 417,299 -
Cash paid for debt issue costs. . . . . . . . . . . . . . . . . . - (652,471)
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Net cash provided by financing activities. . . . . 4,277,695 3,424,422
Net (decrease) increase in cash and cash equivalents . . . . . . . . . (252,935) 96,199
Cash and cash equivalents, beginning of period . . . . . . . . . . . . 1,067,049 2,171,777
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Cash and cash equivalents, end of period . . . . . . . . . . . . . . . $ 814,114 $ 2,267,976
============ ============
</TABLE>
See accompanying notes to unaudited condensed financial statements.
Page3
<PAGE>
ASCENT PEDIATRICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Ascent Pediatrics, Inc. ("Ascent" or the "Company"), incorporated in Delaware on
March 16, 1989, is a drug development and marketing company focused exclusively
on the pediatric market. From its inception to July 9, 1997, the Company
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.
and subsequently commenced sales of the Feverall line of products. In October
1997, the Company also commenced sales of Pediamist nasal saline spray. During
February 1999, the Company began marketing Omnicef(R) (cefdinir) oral suspension
and capsules to pediatricians in the United States pursuant to a promotion
agreement with Warner-Lambert Company, which agreement was terminated in January
2000. During May 1999, the Company began marketing Pediotic(R) (a combination
corticosteroid/antibiotic) to pediatricians in the United States pursuant to a
one-year co-promotion agreement with King Pharmaceuticals, Inc., which agreement
expired in April 2000. During February 2000, the Company began marketing
Primsol(R) solution, an internally developed prescription antibiotic for the
treatment of middle ear infections, in the United States.
The Company has incurred net losses since its inception and expects to incur
additional operating losses in the future as the Company continues its product
development programs, growth of 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.
2. BASIS OF PRESENTATION
The accompanying interim financial statements are unaudited and have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and with 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, 2000 and 1999. The results for the
interim periods presented are not necessarily indicative of results to be
expected in the full fiscal year. Certain prior period items have been
reclassified to conform with current period presentation.
These financial statements should be read in conjunction with the audited
financial statements and notes thereto for the year ended December 31, 1999
included in the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission.
Page4
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Product revenue is recognized upon shipment of the product when the terms are
F.O.B. shipping point or upon customer receipt of the product when the terms are
F.O.B. destination and provided that no significant obligations remain
outstanding and the resulting receivable is deemed collectible by management.
Co-promotion revenue is recognized as earned based upon the performance
requirements of respective agreement.
During February 2000, the Company launched a new product, Primsol solution with
extended payment terms and certain rights of return. Based upon the guidance
set forth in SAB 101 (as defined below), the Company has elected to defer the
recognition of revenue from the sale of Primsol solution until the product is no
longer returnable or sufficient information becomes available to make a
reasonable and reliable estimate of returns.
Net Loss Per Common Share
Options, warrants, and preferred stock to purchase or convert to 767,315
depositary shares and 2,038,490 shares of common stock outstanding as of March
31, 2000 and 1999, respectively, were not included in the computation of diluted
net loss per common share because the Company is in a loss position, and the
inclusion of such shares, therefore, would be antidilutive.
Similarly, options, warrants and debt to purchase or convert to 6,898,306
depositary shares and 2,457,153 shares of common stock outstanding as of March
31, 2000 and 1999, respectively, were not included in the computation of diluted
net loss per common share because the options and warrants have exercise prices
greater than the average market price of the common shares and, therefore, would
be antidilutive under the treasury stock method.
Recent Accounting Pronouncements
In December 1999, the Staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 summarizes certain of the Staff's views in applying
generally accepted accounting principles to revenue recognition issues in
financial statements. The application of the guidance in SAB 101 will be
required in the Company's second quarter of fiscal 2000. The Company is
currently assessing the impact that the provisions of SAB 101 will have on its
financial statements.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 to certain issues including: the
definition of an employee for purposes of applying APB Opinion No. 25; the
criteria for determining whether a plan qualifies as a non-compensatory plan;
the accounting consequence of various modifications to the terms of previously
fixed stock options or awards; and the accounting for the exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1,
2000, but certain conclusions in FIN 44 are applicable retroactively to specific
events occurring after either December 15, 1998 or January 12, 2000. The
Company does not expect the application of FIN 44 to have a material impact on
the Company's financial position or results of operations.
4. ACCOUNTS RECEIVABLE
Accounts receivable consists of $1,434,000 in co-promotion receivables as of
March 31, 2000. Of this amount, $890,000 relates to the termination of the
co-promotion agreement for Omnicef(R) (cefdinir) by Warner-Lambert Company in
January 2000. Deferred revenue of $533,000 will be recognized ratably through
June 2000 due to contractual non-compete terms in the termination agreement.
Page5
<PAGE>
5. 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,
2000 1999
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<S> <C> <C>
Raw materials. $ 622,508 $ 375,719
Finished goods 588,072 636,711
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Total . . . . $1,210,580 $1,012,430
========== ==========
</TABLE>
6. INTANGIBLE ASSETS
Intangible assets consist of goodwill, patents, trademarks and a manufacturing
agreement and are being amortized using the straight-line method over useful
lives of fifteen to twenty years. The Company periodically reviews the
propriety of carrying amounts of its intangible assets as well as the
amortization periods to determine whether current events and circumstances
warrant adjustment to the carrying value or estimated useful lives. This
evaluation compares the expected future cash flows against the net book values
of related intangible assets. If the sum of the future cash flows (undiscounted
and without interest charges) is less than the carrying amount of the asset, the
Company would recognize an impairment loss as a charge to operations. If
impaired, the intangible asset would be written down to the present value of
estimated expected future cash flows using a discount rate commensurate with the
risks involved. Impairment of goodwill, if any, is measured periodically on the
basis of whether anticipated undiscounted operating cash flows generated by the
acquired businesses will recover the recorded net goodwill balances over the
remaining amortization period.
7. ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
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<S> <C> <C>
Employee compensation expenses $394,117 $1,033,187
Legal and accounting expenses. 51,184 81,726
Selling fees and chargebacks . 129,892 78,071
Preferred stock dividend . . . 323,082 323,082
Other. . . . . . . . . . . . . 10,791 4,525
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Total . . . . . . . . $909,066 $1,520,591
======== ==========
</TABLE>
7. ALPHARMA STRATEGIC ALLIANCE
On February 16, 1999, the Company entered into a series of agreements with
Alpharma, Inc. and its wholly-owned subsidiary, Alpharma USPD Inc. ("Alpharma").
This strategic alliance contemplates a number of transactions, including a loan
agreement under which Alpharma agreed to loan Ascent up to $40.0 million from
time to time, $12.0 million of which may be used for general corporate purposes
and $28.0 million of which may only be used for specified projects and
acquisitions intended to enhance the Company's growth. This agreement was
amended as described below.
Page6
<PAGE>
On July 23, 1999, following the approval by the Company's stockholders of
certain resolutions relating to the strategic alliance with Alpharma, the
Company consummated its strategic alliance with Alpharma. In connection with
this closing, the Company obtained a call option to acquire all of its
outstanding common stock and assigned the option to Alpharma, thereby giving
Alpharma the option, exercisable in 2002 (delayed, subject to stockholder
approval, to 2003 pursuant to the second supplemental agreement described
below), to purchase all of the Company's common stock then outstanding at a
purchase price to be determined by a formula based on the Company's 2001
earnings (delayed, subject to stockholder approval, to the Company's 2002
earnings pursuant to the second supplemental agreement described below). In
connection with the closing of these transactions, the Company consummated a
merger with a wholly-owned subsidiary pursuant to which each share of common
stock of the Company was converted into one depositary share, representing one
share of common stock, subject to Alpharma's call option, and represented by a
depositary receipt.
On February 19, 1999, the Company borrowed $4.0 million from Alpharma under the
loan agreement and issued Alpharma a 7.5% convertible subordinated note in the
principal amount of up to $40.0 million. As of March 31, 2000, Ascent has
borrowed the entire $12.0 million available for general corporate purposes. The
principal terms of the Alpharma note are set forth below.
PAYMENT OF PRINCIPAL AND INTEREST. The Alpharma note bears interest at a rate
of 7.5% per annum. Interest is due and payable quarterly, in arrears on the last
day of each calendar quarter. If the call option terminates or expires, the
Company does not otherwise prepay the principal amount of the note outstanding
and Alpharma does not otherwise convert the note, the Company will repay the
outstanding principal amount under the note over a 15 month period commencing
March 30, 2004 and ending June 30, 2005.
PREPAYMENT. On or before June 30, 2001, the Company may repay all or a portion
of the outstanding principal amount due under the note. The Company may
re-borrow any repaid amounts on or before December 31, 2001. At any time after
the expiration or termination of the call option and on or before December 31,
2002 (extended, subject to stockholder approval, to December 31, 2003 pursuant
to the second supplemental agreement described below), the Company may prepay
all of the outstanding principal amount under the note, together with any
accrued and unpaid interest, if it also pays a conversion termination fee equal
to 25% of the principal amount of the note outstanding as of December 31, 2001.
The Company may not otherwise prepay the note. Following a change in control of
the Company, Alpharma may require the Company to repay all outstanding principal
and interest under the note.
CONVERSION. Alpharma may convert all or a portion of the then outstanding
principal amount of the note into common stock of the Company on one occasion
after a change in control of the Company and at any time after December 31, 2002
at a conversion price of $7.125 per share (subject to adjustment). After January
1, 2003 and on or before February 28, 2003, Alpharma may cause the Company to
borrow all remaining amounts available under the loan agreement (increasing the
principal amount of the note to $40.0 million), but only if Alpharma converts
all of the principal amount of the note into common stock of the Company within
three business days after the increase. On October 15, 1999, pursuant to the
second supplemental agreement described below, the Company and Alpharma agreed,
subject to stockholder approval, to change the foregoing dates to December 31,
2003, January 1, 2004 and February 28, 2004, respectively.
Page7
<PAGE>
ALPHARMA FIRST SUPPLEMENTAL AGREEMENT. On July 1, 1999, the Company entered into
a first supplemental agreement with Alpharma amending the terms of the loan
agreement and the other strategic alliance agreements between the Company and
Alpharma. Under the first supplemental agreement, the Company agreed to certain
additional restrictions on its ability to borrow additional funds under the loan
agreement, including a prohibition, prior to the approval and commercial launch
of both the Company's Primsol and Orapred products, on the use of any funds for
any purpose other than normal operating expenses and expenses relating to such
products as set forth in the Company's internal operating plan, as updated from
time to time. In addition, the Company may only use the additional $8.0 million
allocated for general corporate purposes under the loan agreement as of the date
of the first supplemental agreement for the purposes set forth in the Company's
internal operating plan, as updated from time to time, and may only use the
$28.0 million allocated for acquisitions and research and development projects
for those acquisitions and projects that are approved by a newly-formed
screening committee comprised of two nominees of Ascent, one nominee of Alpharma
and one nominee of ING Furman Selz. This screening committee was established for
the purpose of approving any changes to the Company's internal operating plan
involving materially increased expenditures and reviewing and approving
acquisitions of companies, products or product lines or rights to sell a product
or product line and research and development projects. The Company's two
representatives on the screening committee together have one vote, and the
representatives of Alpharma and ING Furman Selz each have one vote. The
screening committee must act by unanimous approval prior to the approval and
commercial launch of the Company's Primsol and Orapred products and by majority
approval following the approval and commercial launch of these products.
ALPHARMA SECOND SUPPLEMENTAL AGREEMENT. On October 15, 1999, the Company entered
into a second supplemental agreement with Alpharma amending the terms of the
loan agreement and the other strategic alliance agreements between the Company
and Alpharma. Under the second supplemental agreement, the Company agreed, among
other things, (i) to extend by 12 months the exercise period of Alpharma's call
option to the first half of year 2003, (ii) to change the fiscal year upon which
the exercise price of Alpharma's call option is based from 2001 to 2002, (iii)
to change the minimum aggregate exercise price of Alpharma's call option from
$140 million to $150 million and (iv) to modify certain conditions on Ascent's
access to funds under the loan agreement relating to the granting of a security
interest in any business or product acquired by the Company using such funds and
to the performance by the company and the funds affiliated with ING Furman Selz
of their respective obligations under the fourth amendment to the May 1998
Securities Purchase Agreement described below. In addition, the Company agreed
that, to the extent it borrowed funds from Alpharma under the loan agreement to
finance the acquisition of products or businesses, it would grant Alpharma a
security interest in such products or businesses. The modification of the terms
of Alpharma's call option is subject to the approval of Ascent's stockholders at
the annual meeting of its stockholders scheduled to be held on June 14, 2000.
SERIES G AMENDMENT. In connection with the Company's strategic alliance with
Alpharma, on February 16, 1999, the Company entered into a second amendment to
the May 1998 Securities Purchase Agreement dated as of May 13, 1998 by and among
the Company, BancBoston Ventures, Inc., Flynn Partners and funds affiliated with
ING Furman Selz Investments LLC (the "May 1998 Securities Purchase Agreement"),
providing for, among other things, (a) the Company's agreement to exercise its
right to exchange all outstanding shares of Series G preferred stock for
convertible subordinated notes in accordance with the terms of the Series G
preferred stock, (b) the reduction in the exercise price of warrants to purchase
2,116,958 shares of common stock of the Company from $4.75 per share to $3.00
per share and the agreement of the Series G purchasers to exercise these
warrants, (c) the issuance and sale to the Series G purchasers of an aggregate
of 300,000 shares of common stock of the Company at a price of $3.00 per share
and (d) the cancellation of approximately $7.25 million of principal under the
subordinated notes held by the Series G purchasers to pay the exercise price of
the warrants and the purchase price of the additional 300,000 shares of common
stock. In addition, the Company entered into an amendment to a financial
advisory services fee agreement with ING Furman Selz whereby the Company agreed
to issue 150,000 shares of common stock to ING Furman Selz in lieu of the
payment of certain financial advisory fees. On July 23, 1999, following the
approval by the Company's stockholders of the reduction in the exercise price of
the warrants and the issuance of the additional shares of common stock to the
Series G purchasers and ING Furman Selz, and in connection with the consummation
of the Company's strategic alliance with Alpharma, the Company and the Series G
purchasers consummated the transactions contemplated above.
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<PAGE>
DEBT ISSUE COSTS. In connection with the Company's strategic alliance with
Alpharma, the Company had incurred $1,348,000 in legal, accounting and
consulting fees as of March 31, 2000. These fees have been capitalized on the
balance sheet as debt issue costs and are being amortized over the life of the
debt.
9. ING FURMAN SELZ LOAN ARRANGEMENTS
$4.0 MILLION FACILITY. On June 30, 1999, the Company issued and sold 7.5%
demand promissory notes in the principal amount of $2.0 million to funds
affiliated with ING Furman Selz Investments LLC ("ING Furman Selz"). On July 1,
1999, the Company and the Series G purchasers entered into a third amendment to
the May 1998 Securities Purchase Agreement under which funds affiliated with ING
Furman Selz agreed to loan the Company up to $4.0 million. Upon executing the
third amendment, the Company issued 7.5% convertible subordinated notes in the
aggregate principal amount of up to $4.0 million and warrants to purchase
300,000 shares of Ascent common stock at an exercise price of $3.00 per share to
the funds affiliated with ING Furman Selz and cancelled the $2.0 million of 7.5%
demand promissory notes issued on June 30, 1999. Of the $2.0 million convertible
subordinated notes issued and sold by Ascent, $1,804,495 was allocated to the
relative fair value of the convertible subordinated notes (classified as debt)
and $195,505 was allocated to the relative fair value of the warrants
(classified as additional paid in capital). Accordingly, the 7.5% convertible
subordinated notes will be accreted from $1,804,495 to the maturity amount of
$2,000,000 as interest expense over the term of the convertible subordinated
notes. The obligation of the funds affiliated with ING Furman Selz to loan the
Company the remaining $2.0 million was subject to the fulfillment to their
reasonable satisfaction or the waiver by the funds of conditions, including that
Ascent has or expects to have a stockholders' deficit reflected on the balance
sheet (calculated in a manner that treats as equity any amounts outstanding
under the 8% subordinated notes, the 7.5% convertible subordinated notes and any
amounts outstanding under any debt securities issued upon exchange of the Series
G preferred stock) and either the requested loan from the funds affiliated with
ING Furman Selz will prevent or eliminate such stockholders' deficit or Alpharma
agrees in writing that it will not deny Ascent's next borrowing request under
the Alpharma loan agreement because of such stockholders' deficit.
On December 30, 1999, the Company borrowed an additional $1.0 million under this
loan arrangement and issued additional warrants to purchase 150,000 Ascent
depositary shares to the funds affiliated with ING Furman Selz. Of the $1.0
million of convertible subordinated notes issued and sold by Ascent, $933,000
was allocated to the relative fair value of the convertible subordinated notes
(classified as debt), and $67,000 was allocated to the relative fair value of
the warrants (classified as additional paid in capital). Accordingly, the 7.5%
convertible subordinated notes will be accreted from $933,000 to the maturity
amount of $1,000,000 as interest expense over the term of the convertible
subordinated notes.
On February 14, 2000, the Company borrowed the final $1.0 million under this
loan arrangement and issued additional warrants to purchase 150,000 Ascent
depositary shares to the funds affiliated with ING Furman Selz. Of the $1.0
million of convertible subordinated notes issued and sold by Ascent, $868,000
was allocated to the relative fair value of the convertible subordinated notes
(classified as debt), and $132,000 was allocated to the relative fair value of
the warrants (classified as additional paid in capital). Accordingly, the 7.5%
convertible subordinated notes will be accreted from $868,000 to the maturity
amount of $1,000,000 as interest expense over the term of the convertible
subordinated notes.
All of the warrants issued by Ascent under the third amendment have an exercise
price of $3.00 per share and expire on July 1, 2006.
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$10.0 MILLION FACILITY. On October 15, 1999, the Company and the Series G
purchasers entered into a fourth amendment to the May 1998 Securities Purchase
Agreement under which funds affiliated with ING Furman Selz agreed to loan the
Company up to an additional $10.0 million. Upon executing the fourth amendment,
the Company issued 7.5% convertible subordinated notes in the aggregate
principal amount of up to $10.0 million and warrants to purchase 1,000,000
Ascent depositary shares at an exercise price of $3.00 per share to the funds
affiliated with ING Furman Selz. The obligation of the funds affiliated with
ING Furman Selz to loan the Company the $10.0 million is subject to the
fulfillment to their reasonable satisfaction or the waiver by the funds of
certain conditions. The Company has agreed to issue warrants to purchase up to
an additional 4,000,000 Ascent depositary shares in connection with borrowings
under this credit facility. All of the warrants issued by the Company under the
fourth amendment will have an exercise price of $3.00 per share and will expire
on October 15, 2006. The Company has agreed that, to the extent it grants
Alpharma a security interest in products or businesses acquired by the Company
using funds borrowed under the Alpharma loan agreement, the Company will grant a
junior security interest in such assets to the funds affiliated with ING Furman
Selz to secure the Company's indebtedness under the $10.0 million credit
facility.
On March 13, 2000, the Company borrowed $1.5 million under the fourth amendment
and issued warrants to purchase 375,000 Ascent depositary shares to the funds
affiliated with ING Furman Selz. Of the $1.5 million of convertible
subordinated notes issued and sold by Ascent, $1,215,000 was allocated to the
relative fair value of the convertible subordinated notes (classified as debt),
and $285,000 was allocated to the relative fair value of the warrants
(classified as additional paid in capital). Accordingly, the 7.5% convertible
subordinated notes will be accreted from $1,215,000 to the maturity amount of
$1,500,000 as interest expense over the term of the convertible subordinated
notes.
PAYMENT OF PRINCIPAL AND INTEREST; CONVERSION. The 7.5% convertible
subordinated notes issued pursuant to the third amendment and the fourth
amendment expire on July 1, 2004 and are convertible into shares of Ascent
common stock at a conversion price of $3.00 per share in accordance with the
terms of the May 1998 Securities Purchase Agreement, as amended. Interest on
these notes is due and payable quarterly, in arrears, on the last day of each
calendar quarter, and the outstanding principal on the notes is payable in full
on July 1, 2004.
10. SUBSEQUENT EVENTS
On April 1, 2000, Ascent entered into an agreement with an unrelated third party
to sublease approximately 4,500 square feet of Ascent's office space. This
agreement expires in February 2002.
On May 8, 2000, the Company borrowed an additional $1.25 million under the
fourth amendment to the May 1998 Securities Purchase Agreement and additional
issued warrants to purchase 312,500 Ascent depositary shares to the funds
affiliated with ING Furman Selz. Of the $1.25 million of convertible
subordinated notes issued and sold by Ascent, $1,100,000 was allocated to the
relative fair value of the convertible subordinated notes (classified as debt),
and $150,000 was allocated to the relative fair value of the warrants
(classified as additional paid in capital). Accordingly, the 7.5% convertible
subordinated notes will be accreted from $1,100,000 to the maturity amount of
$1,250,000 as interest expense over the term of the convertible subordinated
notes.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Ascent is a drug development and marketing company focused exclusively on the
pediatric market. Ascent commenced operations in March 1989 and prior to the
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quarter ended September 30, 1997 was engaged primarily in developing its
products and product candidates and in organizational efforts, including
recruiting scientific and management personnel and raising capital. Ascent
introduced its first product, Feverall acetaminophen suppositories, during the
quarter ended September 30, 1997 and its second product, Pediamist nasal saline
spray, during the quarter ended December 31, 1997. During the quarter ended
March 31, 1999, Ascent began marketing Omnicef(R) (cefdinir) oral suspension and
capsules to pediatricians in the United States pursuant to a promotion agreement
with Warner-Lambert Company. Following the sale by Warner-Lambert of its assets
with respect to Omnicef(R) to Abbott Laboratories in January 2000, Ascent ceased
promoting this product. During the quarter ended June 30, 1999, the Company
began marketing Pediotic(R) (a combination corticosteroid/antibiotic) to
pediatricians in the United States under a one-year co-promotion agreement with
King Pharmaceuticals, Inc. In February 2000, Ascent began marketing Primsol
solution, an internally-developed prescription antibiotic for the treatment of
middle ear infections.
Ascent has incurred net losses since its inception and expects to incur
additional operating losses at least into 2001 as it continues its product
development programs, maintains its sales and marketing organization and
introduces products to the market. Ascent expects cumulative losses to increase
over this period. Ascent has incurred a deficit from inception through March 31,
2000 of $69,861,000.
In December 1999, Ascent modified its short-term strategy until such time as
Ascent determines that its financial condition has adequately improved.
Specifically, Ascent is focused on introducing Primsol to the market, obtaining
FDA approval for Orapred and introducing it to the market and seeking
appropriate co-promotional opportunities. Ascent has suspended its other
product development activities until its financial condition has adequately
improved.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1999
REVENUE: Ascent had total net revenue of $1,110,000 for the three months ended
March 31, 2000, compared with total net revenue of $1,856,000 for the three
months ended March 31, 1999. The decrease in revenue of $746,000 was primarily
attributable to a decrease of $642,000 in Feverall revenue due to the loss of a
large retail customer and the loss of institutional contracts and a decrease of
$80,000 in co-promotional revenue due to the termination of the Omnicef(R)
agreement in January 2000.
COST OF PRODUCT SALES: Cost of product sales was $331,000 for the three months
ended March 31, 2000, compared with $581,000 for the three months ended March
31, 1999. The decrease in cost of product sales of $250,000 was primarily the
result of a decrease of $228,000 in manufacturing costs associated with the
production of Feverall as a result of a decrease in sales volume of this
product.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Ascent incurred selling, general
and administrative expenses of $3,018,000 for the three months ended March 31,
2000, compared with $3,890,000 for the three months ended March 31, 1999,
representing a decrease of $872,000.
Selling and marketing expenses were $2,482,000 for the three months ended March
31, 2000, compared with expenses of $3,063,000 for the three months ended March
31, 1999. The decrease in selling and marketing expenses of $581,000 was
primarily the result of decreases of (i) $274,000 in personnel expenses mainly
due to a restructured commission policy, (ii) $111,000 in expenses related to
maintaining a sales force due to cost containment efforts, (iii) $101,000 in
samples and trade promotions due to the termination of the Omnicef(R)
co-promotion agreement by Warner-Lambert Company in January 2000 and lower sales
for the Feverall product line, (iv) $56,000 in media expenses due to an
advertising campaign that ran in 1999 but was not repeated in 2000, and (v)
$36,000 in consulting expenses due to the non-renewal of contracts that ended in
1999.
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General and administrative expenses were $536,000 for the three months ended
March 31, 2000, compared with expenses of $827,000 for the three months ended
March 31, 1999. The decrease of $291,000 was primarily attributable to decreases
of (i) $83,000 in personnel expenses due to reduced headcount, (ii) $87,000 due
to changes in the Company's bonus plan, (ii) $87,000 in consulting expenses due
to the non-renewal of contracts that ended in 1999 and (iii) $23,000 in legal,
accounting and investor relations expenses.
RESEARCH AND DEVELOPMENT: Ascent incurred research and development expenses of
$744,000 for the three months ended March 31, 2000, compared with expenses of
$833,000 for the three months ended March 31, 1999. The decrease of $89,000 was
primarily attributable to decreases of (i) $117,000 for the Pediavent and
Feverall Extended Release products' research and development programs due to the
Company's suspension of product development for its products other that Primsol
and Orapred, (ii) $55,000 for the Orapred product's research and development
program due to timing differences in expenses while the Company waited for the
FDA's response on its Abbreviated New Drug Applications and (iii) $32,000 in
consulting expenses due to the reduced use of the consultants' time. These
decreases were offset by an increase of $116,000 in research and development
expenses related to the production of Primsol solution batches in anticipation
of receiving FDA market approval.
INTEREST: Ascent had interest income of $11,000 for the three months ended
March 31, 2000, compared with interest income of $26,000 for the three months
ended March 31, 1999. The decrease of $15,000 was primarily due to a lower
average cash investment balance. Ascent had interest expense of $625,000 for
the three months ended March 31, 2000, compared with interest expense of
$255,000 for the three months ended March 31, 1999. The increase of $370,000 was
primarily attributable to the additional $15.5 of subordinated notes issued and
outstanding during the first quarter of 2000 compared to the first quarter of
1999.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Ascent has financed its operations primarily from private
sales of preferred stock, the private sale of subordinated secured notes and
related common stock purchase warrants and, in 1997, an initial public offering
of shares of common stock. As of March 31, 2000, Ascent had raised approximately
$33,560,000 (net of issuance costs) from the sales of preferred stock,
approximately $32,318,000 (net of issuance costs and deferred charges) from the
issuance of subordinated secured notes and related warrants (including the
approximately $12.0 million borrowed under the Alpharma loan agreement) and
approximately $17,529,000 (net of issuance costs) from the initial public
offering of 2,240,000 shares of common stock. In addition, in the second half of
1997, Ascent began shipping its first two products, Feverall acetaminophen
suppositories and Pediamist nasal saline spray. In February 1999, Ascent began
promoting Omnicef(R) pursuant to a promotion agreement with Warner-Lambert
Company that was subsequently terminated in January 2000. In May 1999, Ascent
began promoting Pediotic(R) pursuant to a one-year co-promotion agreement with
King Pharmaceuticals, Inc. that expired in April 2000. In February 2000, Ascent
began marketing Primsol solution in the United States.
ALPHARMA STRATEGIC ALLIANCE. On February 16, 1999, Ascent entered into a series
of agreements with Alpharma, Inc. and its wholly-owned subsidiary, Alpharma USPD
Inc. ("Alpharma"). This strategic alliance contemplates a number of
transactions, including a loan agreement under which Alpharma agreed to loan
Ascent up to $40.0 million from time to time, $12.0 million of which may be used
for general corporate purposes and $28.0 million of which may only be used for
specified projects and acquisitions intended to enhance Ascent's growth. In
addition, Ascent has obtained a call option to acquire all of its then
outstanding common stock and assigned the option to Alpharma, thereby giving
Alpharma the option, exercisable in 2002 (delayed, subject to stockholder
approval, to 2003 pursuant to the second supplemental agreement described
below), to purchase all of the Ascent common stock then outstanding at a
purchase price to be determined by a formula based on Ascent's 2001 earnings
(delayed, subject to stockholder approval, to Ascent's 2002 earnings pursuant to
the second supplemental agreement described below).
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On February 19, 1999, the Company borrowed $4.0 million from Alpharma under the
loan agreement and issued Alpharma a 7.5% convertible subordinated note in the
principal amount of up to $40.0 million. As of March 31, 2000, Ascent has
borrowed the entire $12.0 million available for general corporate purposes. The
principal terms of the Alpharma note are set forth below. The loan agreement
prohibits, among other things, Ascent's ability to make distributions of
property or cash, including dividends, in respect of its capital stock.
PAYMENT OF PRINCIPAL AND INTEREST. The Alpharma note bears interest at a rate
of 7.5% per annum. Interest is due and payable quarterly, in arrears on the
last day of each calendar quarter. If the call option terminates or expires,
Ascent does not otherwise prepay the principal amount of the note outstanding
and Alpharma does not otherwise convert the note, Ascent will repay the
outstanding principal amount under the note over a 15 month period commencing
March 30, 2004 and ending June 30, 2005.
PREPAYMENT. On or before June 30, 2001, Ascent may repay all or a portion of
the outstanding principal amount under the note. Ascent may re-borrow any
repaid amounts on or before December 31, 2001. At any time after the expiration
or termination of the call option and on or before December 31, 2002 (extended,
subject to stockholder approval, to December 31, 2003 pursuant to the second
supplemental agreement described below), Ascent may prepay all of the
outstanding principal amount under the note, together with any accrued and
unpaid interest, if it also pays a conversion termination fee equal to 25% of
the principal amount of the note outstanding as of December 31, 2001. Ascent
may not otherwise prepay the note. Following a change in control of Ascent,
Alpharma may require Ascent to repay all outstanding principal and interest
under the note.
CONVERSION. Alpharma may convert all or a portion of the then outstanding
principal amount of the note into Ascent common stock on one occasion after a
change in control of Ascent and at any time after December 31, 2002 at a
conversion price of $7.125 per share (subject to adjustment). After January 1,
2003 and on or before February 28, 2003, Alpharma may cause Ascent to borrow all
remaining amounts available under the loan agreement (increasing the principal
amount of the note to $40.0 million), but only if Alpharma converts all of the
principal amount of the note into Ascent common stock within three business days
after the increase. On October 15, 1999, pursuant to the second supplemental
agreement described below, Ascent and Alpharma agreed, subject to stockholder
approval, to change the foregoing dates to December 31, 2003, January 1, 2004
and February 28, 2004, respectively.
ALPHARMA FIRST SUPPLEMENTAL AGREEMENT. On July 1, 1999, Ascent entered into a
first supplemental agreement with Alpharma amending the terms of the loan
agreement and the other strategic alliance agreements between Ascent and
Alpharma. Under the first supplemental agreement, Ascent agreed to certain
additional restrictions on its ability to borrow additional funds under the loan
agreement, including a prohibition, prior to the approval and commercial launch
of both Ascent's Primsol and Orapred products, on the use of any funds for any
purpose other than normal operating expenses and expenses relating to such
products as set forth in Ascent's internal operating plan, as updated from time
to time. In addition, Ascent may only use the additional $8.0 million allocated
for general corporate purposes under the loan agreement as of the date of the
first supplemental agreement for the purposes set forth in its internal
operating plan, as updated from time to time, and may only use the $28.0 million
allocated for acquisitions and research and development projects for those
acquisitions and projects that are approved by a screening committee comprised
of two nominees of Ascent, one nominee of Alpharma and one nominee of ING Furman
Selz. This screening committee was established for the purpose of approving any
changes to Ascent's internal operating plan involving materially increased
expenditures and reviewing and approving acquisitions of companies, products or
product lines or rights to sell a product or product line and research and
development projects. Ascent's two representatives on the screening committee
together have one vote, and the representatives of Alpharma and ING Furman Selz
each have one vote. The screening committee must act by unanimous approval prior
to the approval and commercial launch of Ascent's Primsol and Orapred products
and by majority approval following the approval and commercial launch of these
products.
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ALPHARMA SECOND SUPPLEMENTAL AGREEMENT. On October 15, 1999, Ascent entered
into a second supplemental agreement with Alpharma amending the terms of the
loan agreement and the other strategic alliance agreements between Ascent and
Alpharma. Under the second supplemental agreement, Ascent agreed, among other
things, (i) to delay by 12 months the exercise period of Alpharma's call option
to the first half of year 2003, (ii) to change the fiscal year upon which the
exercise price of Alpharma's call option is based from 2001 to 2002, (iii) to
change the minimum aggregate exercise price of Alpharma's call option from $140
million to $150 million and (iv) to modify certain conditions on Ascent's access
to funds under the loan agreement. In addition, Ascent agreed that, to the
extent it borrowed funds from Alpharma under the loan agreement to finance the
acquisition of products or businesses, it would grant Alpharma a security
interest in such products or businesses. The modification of the terms of
Alpharma's call option is subject to the approval of Ascent's stockholders at
the annual meeting of its stockholders scheduled to be held on June 14, 2000.
ING FURMAN SELZ LOAN ARRANGEMENTS
$4.0 MILLION FACILITY. On June 30, 1999, Ascent issued and sold 7.5% demand
promissory notes in the principal amount of $2.0 million to funds affiliated
with ING Furman Selz. On July 1, 1999, Ascent and the Series G purchasers
entered into a third amendment to the May 1998 Securities Purchase Agreement
under which funds affiliated with ING Furman Selz agreed to loan Ascent up to
$4.0 million. Upon executing the third amendment, Ascent issued 7.5% convertible
subordinated notes in the aggregate principal amount of up to $4.0 million and
warrants to purchase 300,000 Ascent depositary shares at an exercise price of
$3.00 per share to the funds affiliated with ING Furman Selz and cancelled the
$2.0 million of 7.5% demand promissory notes issued on June 30, 1999. The
obligation of the funds affiliated with ING Furman Selz to loan Ascent the
remaining $2.0 million was subject to the fulfillment to their reasonable
satisfaction or the waiver by the funds of conditions, including that Ascent had
or expected to have a stockholders' deficit reflected on the balance sheet
(calculated in a manner that treats as equity any amounts outstanding under the
8% subordinated notes, the 7.5% convertible subordinated notes and any amounts
outstanding under any debt securities issued upon exchange of the Series G
preferred stock) and either the requested loan from the funds affiliated with
ING Furman Selz would have prevented or eliminated such stockholders' deficit or
Alpharma agreed in writing that it would not deny Ascent's next borrowing
request under the Alpharma loan agreement because of such stockholders' deficit.
On December 30, 1999, Ascent borrowed an additional $1.0 million under this loan
arrangement and issued additional warrants to purchase 150,000 Ascent depositary
shares to the funds affiliated with ING Furman Selz. On February 14, 2000,
Ascent borrowed the final $1.0 million under this loan arrangement and issued
additional warrants to purchase 150,000 Ascent depositary shares to the funds
affiliated with ING Furman Selz. All of the warrants Ascent has issued under the
third amendment have an exercise price of $3.00 per share and will expire on
July 1, 2006.
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$10.0 MILLION FACILITY. On October 15, 1999, Ascent and the Series G purchasers
entered into a fourth amendment to the May 1998 Securities Purchase Agreement
under which funds affiliated with ING Furman Selz agreed to loan Ascent up to an
additional $10.0 million. Upon executing the fourth amendment, Ascent issued
7.5% convertible subordinated notes in the aggregate principal amount of up to
$10.0 million and warrants to purchase 1,000,000 depositary shares at an
exercise price of $3.00 per share to the funds affiliated with ING Furman Selz.
On March 13, 2000, Ascent borrowed $1.5 million under the fourth amendment and
on May 8, 2000, Ascent borrowed an additional $1.25 million under the fourth
amendment. The obligation of the funds affiliated with ING Furman Selz to loan
Ascent the remaining $7.25 million is subject to the fulfillment to their
reasonable satisfaction or the waiver by the funds of certain conditions. Ascent
has agreed to issue warrants to purchase up to an additional 4,000,000
depositary shares in connection with borrowings under this credit facility.
Ascent has issued warrants exercisable for an aggregate of 687,500 depositary
shares in connection with borrowings under the fourth amendment to date. All of
the warrants Ascent has issued or will issue under the fourth amendment have or
will have an exercise price of $3.00 per share and expire on October 15, 2006.
Ascent has agreed that, to the extent it grants Alpharma a security interest in
products or businesses acquired by Ascent using funds borrowed under the
Alpharma loan agreement, Ascent will grant a junior security interest in such
assets to the funds affiliated with ING Furman Selz to secure Ascent's
indebtedness under the $10.0 million credit facility.
PAYMENT OF PRINCIPAL AND INTEREST; CONVERSION. The 7.5% convertible subordinated
notes issued pursuant to the third amendment and the fourth amendment expire on
July 1, 2004 and are convertible into shares of Ascent common stock at a
conversion price of $3.00 per share in accordance with the terms of the May 1998
Securities Purchase Agreement, as amended. Interest on these notes is due and
payable quarterly, in arrears, on the last day of each calendar quarter, and the
outstanding principal on the notes is payable in full on July 1, 2004.
FUTURE CAPITAL REQUIREMENTS. Ascent's future capital requirements will depend
on many factors, including the timing of FDA approval of Orapred, the costs and
margins on sales of its products, success of its commercialization activities
and arrangements, particularly the level of product sales, its ability to
acquire and successfully integrate business and products, continued progress in
its product development programs, the magnitude of these programs, the results
of pre-clinical 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 Ascent to maintain and, in the future, expand its
sales and marketing capability and product development, manufacturing and
marketing relationships, and the ability of Ascent to enter into and maintain
promotion agreements. Ascent's business strategy requires a significant
commitment of funds to engage in product and business acquisitions, 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.
Ascent anticipates that, based upon its current operating plan and its existing
capital resources, it will have enough cash to fund operations through December
31, 2000. In order to do so, Ascent expects to borrow the remaining $7.25
million available under Ascent's financing arrangements with ING Furman Selz.
An additional $4.0 million may need to be borrowed for fiscal year 2001. In
April 2000, the FDA issued a minor deficiency letter with respect to Ascent's
Abbreviated New Drug Applications for Orapred. Ascent still believes, based on
the matters raised in the letter and communications with the third party
manufacturer that produces this product for Ascent, that it is reasonable to
expect that marketing approval of Orapred will be granted within the third
quarter of 2000. If Ascent's business does not progress in accordance with its
current operating plan, such as if Orapred is not approved by the FDA or its
approval is delayed beyond the third quarter of 2000, Ascent may need to raise
additional funds, including through collaborative relationships and public or
private financings. The additional financing may not be available to Ascent or
may not be available on acceptable terms. If adequate funds are not available,
Ascent may be required to significantly curtail one or more of its planned
product development programs or product commercialization efforts, obtain funds
through arrangements with collaborative partners or others that may require
Ascent to relinquish rights to certain of its technologies, product candidates
or products which Ascent would otherwise pursue on its own, or significantly
scale back or terminate operations.
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RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 summarizes certain of the Staff's views in applying
generally accepted accounting principles to revenue recognition issues in
financial statements. The application of the guidance in SAB 101 will be
required in the Company's second quarter of fiscal 2000. The Company is
currently assessing the impact that the provisions of SAB 101 will have on its
financial statements.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 to certain issues including: the
definition of an employee for purposes of applying APB Opinion No. 25; the
criteria for determining whether a plan qualifies as a non-compensatory plan;
the accounting consequence of various modifications to the terms of previously
fixed stock options or awards; and the accounting for the exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1,
2000, but certain conclusions in FIN 44 are applicable retroactively to specific
events occurring after either December 15, 1998 or January 12, 2000. The
Company does not expect the application of FIN 44 to have a material impact on
the Company's financial position or results of operations.
IMPACT OF YEAR 2000 ISSUES
In prior periods, Ascent discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, Ascent completed its assessment of its
computer systems, software and operations infrastructure to identify hardware,
software and process control systems that were not Year 2000 compliant. Ascent
also initiated communications with certain significant suppliers, service
providers and customers to determine the extent to which such suppliers,
providers or customers would be affected by any significant Year 2000 issues.
As a result of these planning and implementation efforts, Ascent experienced no
significant disruptions in mission critical information technology and
non-information technology systems and believes those systems successfully
responded to the Year 2000 date changes. Ascent is not aware of any material
problems resulting from Year 2000 issues, either with its products, its internal
systems or the products and services of third parties. Ascent will continue to
monitor its mission critical computer applications and those of its suppliers
and service providers through the Year 2000 to ensure that any latent Year 2000
matters that may arise are promptly addressed.
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, 1999 as filed
with the Securities and Exchange Commission, which are expressly incorporated by
reference herein.
Page16
<PAGE>
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In January 1997, the Securities and Exchange Commission issued Financial
Reporting Release 48, also known as FRR 48, "Disclosure of Accounting Policies
for Derivative Financial Instruments and Derivative Commodity Instruments, and
Disclosure of Quantitative and Qualitative Information About Market Risk
Inherent in Derivative Financial Instruments, Other Financial Instruments and
Derivative Commodity Instruments". FRR 48 requires disclosure of qualitative and
quantitative information about market risk inherent in derivative financial
instruments, other financial instruments, and derivative commodity instruments
beyond those required under generally accepted accounting principles.
In the ordinary course of business, Ascent is exposed to interest rate risk for
its subordinated and convertible subordinated notes and the promissory note
issued by Ascent to Alpharma under its loan agreement with Alpharma. At March
31, 2000, the fair value of these notes was estimated to approximate carrying
value. Market risk was estimated as the potential increase in fair value
resulting from a hypothetical 10% decrease in the Company's weighted average
short-term borrowing rate at March 31, 2000, which was not materially different
from the year-end carrying value.
PART II. OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
a) See Part 1, "Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources," for a
description of (i) equity securities of Ascent sold by Ascent which were not
registered under the Securities Act of 1933, as amended, (each of which was
issued pursuant to Section 4(2) of the Securities Act) and (ii) working capital
and restrictions and other limitations upon payment of dividends, which
information is incorporated herein by reference.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
See the Exhibit Index on Page 19 for a list of 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
1. On February 10, 2000, the Company filed a Current Report on Form 8-K with
the Securities and Exchange Commission announcing that the Company had received
the approval of the U.S. Food and Drug Administration to market Primsol Solution
(trimethoprim HCl oral solution), for the treatment of acute otitis media, or
middle ear infection, caused by susceptible organisms in children age six months
to twelve years.
Page17
<PAGE>
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>
<CAPTION>
ASCENT PEDIATRICS, INC.
<S> <C>
Date: May 15, 2000 . . . . . . . . . . . . . . By: /s/ ELIOT M. LURIER
-----------------------
Eliot M. Lurier, Chief Financial Officer
(Principal Financial and Accounting Officer)
</TABLE>
Page18
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
<S> <C>
Exhibit Number Description
- -------------- --------------------------------------------------------------------------
27 . . . . . . Financial Data Schedule
Pages 30 through 37 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1999 as filed with the SEC (which is
not deemed filed except to the extent that portions thereof are expressly
99 . . . . . . incorporated by reference herein)
</TABLE>
Page19
<PAGE>
[ARTICLE] 5
[MULTIPLIER] 1
<TABLE>
<CAPTION>
<S> <C>
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] DEC-31-2000
[PERIOD-START] JAN-01-2000
[PERIOD-END] MAR-31-2000
[EXCHANGE-RATE] 1
[CASH] 814114
[SECURITIES] 0
[RECEIVABLES] 2275538
[ALLOWANCES] 62556
[INVENTORY] 1210580
[CURRENT-ASSETS] 4345412
[PP&E] 1611211
[DEPRECIATION] 1038389
[TOTAL-ASSETS] 16446706
[CURRENT-LIABILITIES] 4207855
[BONDS] 25089695
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 389
[OTHER-SE] 57009396
[TOTAL-LIABILITY-AND-EQUITY] 16446706
[SALES] 574292
[TOTAL-REVENUES] 1109706
[CGS] 163561
[TOTAL-COSTS] 331088
[OTHER-EXPENSES] 3762643
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 624730
[INCOME-PRETAX] (3598168)
[INCOME-TAX] 0
[INCOME-CONTINUING] 0
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (3598168)
[EPS-BASIC] (.37)
[EPS-DILUTED] (.37)
</TABLE>
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 FORWARDING-LOOKING
STATEMENTS. THESE FACTORS INCLUDE, WITHOUT LIMITATION, THOSE SET FORTH BELOW.
THE FDA MAY NOT APPROVE THE MARKETING AND SALE OF ORAPRED SYRUP
In April 1997, we filed two Abbreviated New Drug Applications, or ANDAs, with
the FDA covering 5mg/5ml and 15mg/5ml formulations of Orapred syrup. In October
1998, the FDA issued a deficiency letter on chemistry, manufacturing and
controls which cited certain deficiencies with both ANDAs. In January 1998, we
amended the ANDA for the stronger formulation of Orapred to address the issues
raised by the FDA. A minor chemistry deficiency was received in August 1999 and
a response was provided in December 1999. The FDA is currently reviewing this
ANDA. The FDA may not approve this ANDA on a timely basis or at all. The
failure of the FDA to approve one of these ANDAs or a significant delay in such
approval would have a material adverse effect on our business.
WE HAVE NOT BEEN PROFITABLE
We have incurred net losses since our inception. At December 31, 1999, our
accumulated deficit was approximately $66.3 million. We received our first
revenues from product sales only in July 1997. We expect to incur additional
significant operating losses over the next 12 months and expect cumulative
losses to increase as our research and development, clinical trial and marketing
efforts expand. We expect that our losses will fluctuate from quarter to
quarter based upon factors such as our product acquisition and development
efforts, sales and marketing initiatives, competition and the extent and
severity of illness during cold and flu seasons. These quarterly fluctuations
may be substantial.
WE MAY REQUIRE ADDITIONAL FUNDING AND OUR LOAN AGREEMENT WITH ALPHARMA RESTRICTS
OUR ABILITY TO DO SO
Based upon our current operating plan, we anticipate that our existing capital
resources, including the remaining $8.5 million which we may borrow from funds
affiliated with ING Furman Selz under the fourth amendment to the May 1998
securities purchase agreement will be adequate to satisfy our capital
requirements through the end of 2000. We currently believe that we will need to
raise additional funds to satisfy our capital requirements through 2001. If our
business does not progress in accordance with our current operating plan, we may
need to raise additional funds, including through collaborative relationships
and public or private financings. The additional financing may not be available
to us or may not be available on acceptable terms.
Although the loan agreement with Alpharma gives us access to $28.0 million for
acquisitions of companies and products that meet specified criteria and for
funding research and development, it places numerous restrictions on our ability
to raise additional capital, including restrictions on the type and amount of
securities that we may issue and the use of proceeds of any debt or equity
financing. These restrictions apply particularly in the context of raising
capital for general corporate purposes, such as funding operating expenses. If
we are unable to obtain adequate funding on a timely basis, we may need to
significantly curtail one or more of our research or product development
programs or reduce our marketing and sales initiatives, or we may be unable to
effect strategic acquisitions. We may also need to seek funds through
arrangements with collaborative partners or others that may require us to
relinquish rights to technologies, product candidates or products which we would
otherwise pursue on our own. Any of such cases would have a material adverse
effect on our business.
THE FDA MAY NOT APPROVE THE MARKETING AND SALE OF FEVERALL CONTROLLED RELEASE
SPRINKLES
In December 1997, we filed an NDA for Feverall controlled-release sprinkles, an
acetaminophen product for the treatment of pain and fever in children. In
December 1998, the FDA issued a not-approvable letter covering this NDA which
cited deficiencies relating to the manufacture and packaging of this product.
The letter also indicated that the clinical trials of Feverall sprinkles did not
demonstrate adequate duration of action and that the product should only be used
in patients older than two years of age. Discussions with the FDA have led to an
agreement that with changes and data required to address the manufacturing and
packaging deficiencies, the product may be approvable for the fever reduction
indication but that additional clinical data is required for approval of the
pain indication. We are planning on resuming the required manufacturing and
packaging work as our financial position improves. The FDA may not approve this
NDA on a timely basis or at all. The failure of the FDA to approve this NDA or
a significant delay in such approval would have a material adverse effect on our
business.
THERE IS UNCERTAINTY AS TO THE MARKET ACCEPTANCE OF OUR TECHNOLOGY AND PRODUCTS
The commercial success of Orapred syrup, Primsol solution, Feverall sprinkles,
and Pediavent albuterol controlled-release suspension, a prescription product
for the treatment of asthma, will depend upon their acceptance by pediatricians,
pediatric nurses and third party payors as clinically useful, cost-effective and
safe. Factors that we believe will materially affect market acceptance of
these products include:
- - the receipt and timing of FDA approval;
- - the timing of market introduction of our products and competing products;
- - the safety, efficacy, side effect profile, taste, dosing and ease of
administration of the product;
- - the patent and other proprietary position of the product;
- - brand name recognition; and
- - price.
The failure to achieve market acceptance of Primsol solution and Orapred syrup
could have a material adverse effect on our business.
WE ARE SUBJECT TO TECHNOLOGICAL UNCERTAINTY IN OUR DEVELOPMENT EFFORTS
We have introduced only two internally-developed products, Pediamist nasal
saline spray and Primsol trimethoprim solution, into the market. Although we
have completed development of products and have filed applications with the FDA
for marketing approval, many of our product candidates are in development and
require additional formulation, preclinical studies, clinical trials and
regulatory approval prior to any commercial sales. We must successfully address
a number of technological challenges to complete the development of our
potential products. These products may have undesirable or unintended side
effects, toxicities or other characteristics that may prevent or limit
commercial use.
WE FACE SIGNIFICANT COMPETITION IN THE PEDIATRIC PHARMACEUTICAL INDUSTRY
The pediatric pharmaceutical industry is highly competitive and characterized by
rapid and substantial technological change. We may be unable to successfully
compete in this industry. Our competitors include several large pharmaceutical
companies that market pediatric products in addition to products for the adult
market, including Glaxo Wellcome Inc., Eli Lilly and Company, the Ortho-McNeil
Pharmaceutical Division of Johnson & Johnson, Inc. and the Ross products
Division of Abbot Laboratories Inc.
We currently market one of our products and expect to market many of our product
candidates as alternative treatments for pediatric indications for which
products with the same active ingredient are well-entrenched in the market. Our
products compete and our product candidates also will compete with products that
do not contain the same active ingredient but are used for the same indication
and are well entrenched within the pediatric market. Moreover, some of our
products and many of our potential products that are reformulations of existing
drugs of other manufacturers may have significantly narrower patent or other
competitive protection.
Particular competitive factors that we believe may affect us include:
- - many of our competitors have well known brand names that have been
promoted over many years;
- - many of our competitors offer well established, broad product lines and
services which we do not offer; and
- - 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 marketing pharmaceuticals.
WE MAY BE UNSUCCESSFUL WITH OUR 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.
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.
The rate of completion of our clinical trials is dependent on the rate of
patient enrollment, which is beyond our control. We may not be able successfully
to complete any clinical trial of a potential product within a specified time
period, if at all, including because of a lack of patient enrollment. Moreover,
clinical trials may not show any potential product to be safe or efficacious.
Thus, the FDA and other regulatory authorities may not approve any of our
potential products for any indication.
If we are unable to complete a clinical trial of one of our potential products,
if the results of the trial are unfavorable or if the time or cost of completing
the trial exceeds our expectation, our business, financial condition or results
of operations could be materially adversely affected.
WE MAY NOT OBTAIN OR MAINTAIN REGULATORY APPROVALS
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 United States and other countries. 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.
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; and
- - 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.
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.
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.
WE ARE DEPENDENT ON THIRD PARTY MANUFACTURERS
We have no manufacturing facilities. Instead, we rely on third parties to
manufacture our products in accordance with current "good manufacturing
practice" requirements prescribed by the FDA. For example, we rely on
Upsher-Smith Laboratories, Inc. for the manufacture of Feverall acetaminophen
rectal suppositories. We also rely on Lyne Laboratories, Inc. for the
manufacture of Primsol solution. In addition, we rely on third parties for the
manufacture of our product candidates for clinical trials and for commercial
sale following FDA approval of the product. For example, we rely on Recordati
S.A. Chemical and Pharmaceutical Company for the manufacture of Pediavent.
We expect to be dependent on third party manufacturers or collaborative partners
for the production of all of our products. There are a limited number of
manufacturers that operate under the FDA's good manufacturing practice
requirements and capable of manufacturing our products. In the event that we are
unable to obtain contract manufacturing, or obtain manufacturing on commercially
reasonable terms, we may not be able to commercialize our products as planned.
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 develop
our own manufacturing capabilities. Moreover, it may be very costly and time
consuming for us to develop the capabilities.
WE ARE DEPENDENT UPON SOLE SOURCE SUPPLIERS FOR OUR PRODUCTS
Some of our supply arrangements require that we buy all of our requirements of a
particular product exclusively from the other party to the contract. Moreover,
for many of our products, we have qualified only one supplier. Any interruption
in supply from any of our suppliers or their inability to manufacture our
products in accordance with the FDA's good manufacturing requirements may
adversely affect us 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 INTEND TO PURSUE STRATEGIC ACQUISITIONS WHICH MAY BE DIFFICULT TO INTEGRATE
As part of our overall business strategy, we intend to pursue strategic
acquisitions that would provide additional product offerings. Any future
acquisition could result in the use of significant amounts of cash, potentially
dilutive issuances of equity securities, the incurrence of debt under the
Alpharma loan agreement or otherwise or amortization expenses related to the
goodwill and other intangible assets, any of which could have a material adverse
effect on our business. In addition, acquisitions involve numerous risks,
including:
- - difficulties in the assimilation of the operations, technologies, products
and personnel of the acquired company;
- - the diversion of management's attention from other business concerns; and
- - the potential loss of key employees of the acquired company.
From time to time, we have engaged in discussions with third parties concerning
potential acquisitions of product lines, technologies and businesses.
OUR SUCCESS DEPENDS ON OBTAINING PATENTS
Our success depends upon us obtaining patents to protect our products. As a
pharmaceutical company, our patent position involves complex legal and factual
questions. As a result, patents may not issue from any patent applications that
we own or license and, if issued, may not be sufficiently broad to protect our
technology.
Because some of our products and product candidates are reformulations of
existing off-patent drugs, any patent protection afforded to the products will
be significantly narrower than a patent on the active ingredient itself. In
particular, we do not expect that the active ingredients of our products will
qualify for composition-of-matter patent protection.
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
terms may be disadvantageous.
WE MAY BECOME INVOLVED IN PROCEEDINGS RELATING TO INTELLECTUAL PROPERTY RIGHTS
Because our products are based on existing compounds rather than new chemical
entities, we may become parties to patent litigation and interference
proceedings. The types of situations in which we may become parties to
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 them or to obtain a judgment that our
products or processes do not infringe their 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; or
- - 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 interference 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
interference 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 interference proceeding, even if
resolved in our favor, could be substantial. Uncertainties resulting from the
initiation and continuation of patent litigation or interference proceedings
could have a material adverse effect on our ability to compete in the
marketplace. Patent litigation and interference proceedings may also absorb
significant management time.
OUR PATENT LICENSES ARE SUBJECT TO TERMINATION
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.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE CANNOT ADEQUATELY PROTECT OUR
PROPRIETARY KNOW-HOW
We must maintain the confidentiality of our trade secrets and other proprietary
know-how. We seek to protect this 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
the other party. We may not be able to obtain an adequate, or perhaps, any
remedy to remedy the breach. In addition, our trade secrets may otherwise
become known or be independently developed by our competitors.
THE PRICING OF OUR PRODUCTS IS SUBJECT TO DOWNWARD PRESSURES
The availability of reimbursement by governmental and other third party payors
affects the market for our pharmaceutical products. These third party payors
continually attempt to contain or reduce healthcare costs by challenging the
prices charged for medical products and services. In some foreign countries,
particularly the countries of the European Union, the pricing of prescription
pharmaceuticals is subject to governmental control.
If we obtain marketing approvals for our products, we expect to experience
pricing pressure due to the trend toward managed healthcare, the increasing
influence of health 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 ARE EXPOSED TO PRODUCT LIABILITY CLAIMS
Our business exposes us to potential product liability risks which are inherent
in the testing, manufacturing, marketing and sale of pharmaceuticals. 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 the products
or change the indications for which they may be used. A recall of a product
would have a material adverse effect on our business, financial condition and
results of operations.
WE HAVE LIMITED PRODUCT LIABILITY COVERAGE AND WE MAY NOT BE ABLE TO OBTAIN IT
IN THE FUTURE
Our product liability coverage is expensive and we have purchased only limited
coverage. This coverage is subject to various deductibles. In the future, we
may not be able to maintain or obtain the necessary product liability insurance
at a reasonable cost or in sufficient amounts to protect us against losses.
Accordingly, product liability claims could have a material adverse effect on
our business, financial condition and results of operations.
WE ARE DEPENDENT ON A FEW KEY EMPLOYEES WITH KNOWLEDGE OF THE PEDIATRIC
PHARMACEUTICAL INDUSTRY
We are highly dependent on the principal members of our management and
scientific staff, particularly Dr. Clemente, the president and chairman of our
board of directors. The loss of the services of any of these individuals could
have a material adverse effect on our business. We do not carry key-man
insurance with respect to any of our executive officers other than Dr. Clemente.
WE NEED TO ATTRACT AND RETAIN HIGHLY SKILLED PERSONNEL WITH KNOWLEDGE OF
DEVELOPING AND MANUFACTURING PEDIATRIC PHARMACEUTICALS
Recruiting and retaining qualified scientific personnel to perform research and
development is critical to our success. Our 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. We may not be able to attract and
retain highly skilled personnel on acceptable terms given the competition for
experienced scientists among pharmaceutical and health care companies,
universities and non-profit research institutions. In addition, the existence
of the call option and the resulting uncertainty as to whether we will be
acquired by Alpharma may dissuade highly skilled personnel from accepting
employment with or remaining employed by us.
OUR PROMOTION ARRANGEMENTS DEPEND ON THE SUPPORT OF OUR COLLABORATORS
We plan to enter into arrangements to promote some pharmaceutical products of
third parties to pediatricians in the United States. For example, in April
1999, we entered into a one-year co-promotion agreement with King
Pharmaceuticals, Inc. to market Pediotic, a combination
corticosteroid/antibiotic. The success of any 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.
WE ARE DEPENDENT UPON A THIRD PARTY DISTRIBUTOR
We distribute our products through a third party distribution warehouse. We have
no experience with the distribution of products and rely on the third party
distributor to perform order entry, customer service and collection of accounts
receivable on our behalf. The success of this arrangement is dependent on,
among other things, the skills, experience and efforts of the third party
distributor.
UNCERTAINTY OF HEALTHCARE REFORM MEASURES
In both the United States and some 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 and will affect our ability to raise capital, obtain additional
collaborative partners and market our products.
