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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1999
Commission File Number: 0-37159
IOMED, INC.
(Exact name of registrant as specified in its charter)
UTAH 87-0441272
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3385 WEST 1820 SOUTH, SALT LAKE CITY, UTAH 84104
(Address of principal executive offices) (Zip Code)
(801) 975-1191
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
COMMON STOCK, NO PAR VALUE
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 [X] Yes [ ] No.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
The aggregate market value of the Registrant's voting stock held by
non-affiliates based upon the closing price of the common stock as quoted on the
American Stock Exchange on September 1, 1999, was approximately $13,647,315.
The number of shares of Registrant's common stock outstanding on September 1,
1999, was 6,507,744.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information is incorporated into Part III of this Report on Form 10-K by
reference to the Registrant's Proxy Statement for its 1999 Annual Meeting of
Shareholders.
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TABLE OF CONTENTS
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PART I
Item 1 -- Business ..........................................................3
Item 2 -- Properties ........................................................19
Item 3 -- Legal Proceedings .................................................19
Item 4 -- Submission of Matters to a Vote of Security Holders ...............19
PART II
Item 5 -- Market for Registrant's Common Equity and Related Stockholder
Matters ...........................................................20
Item 6 -- Selected Consolidated Financial Data ..............................21
Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations .............................................22
Item 7a -- Quantitative and Qualitative Information about Market Risk ........33
Item 8 -- Financial Statements and Supplementary Data .......................33
-- Audited Financial Statements ...................................34-50
Item 9 -- Changes and Disagreements with Accountants on Accounting and
Financial Disclosure ..............................................33
PART III
Item 10 -- Directors and Executive Officers of the Company ...................51
Item 11 -- Executive Compensation ............................................51
Item 12 -- Security Ownership of Certain Beneficial Owners and Management ....51
Item 13 -- Certain Relationships and Related Transactions ....................51
PART IV
Item 14 -- Exhibits, Financial Statement Schedules, and Reports on Form 8-K ..51
SIGNATURES ..........................................................................54
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report on Form 10-K (the "Report")
are "forward-looking statements" within the meaning of Section 21E of the
Securities and Exchange Act of 1934, as amended. Such forward-looking statements
may be identified by the use of terminology such as "may," "will," "expect,"
"anticipate," "intend," "designed," "estimate," "should," or "continue" or the
negatives thereof or other variations thereon or comparable terminology. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
IOMED, Inc. and its subsidiary Dermion, Inc. (collectively the "Company"), or
industry results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. These risks, uncertainties and other factors include, among other
things, the following: the Company's sporadic history of profitability and the
continuing uncertainty of its profitability; the Company's ability to develop
and introduce new products; the uncertainty of market acceptance of the
Company's new and existing products and their market penetration; the
uncertainties related to the Company's product development programs; the
Company's reliance on collaborative partners and licenses; the Company's limited
sales, marketing and distribution experience and current dependence on
distributors; the risks associated with obtaining governmental approval of the
Company's products; the highly competitive industry in which the Company
operates and the rapid pace of technological change within that industry; the
uncertainty of patented and proprietary technology protection and the Company's
reliance on such patented and proprietary technology (including reliance on
technology licensed from third parties); changes in or failure to comply with
governmental regulation; the uncertainty of third party reimbursement for the
Company's products; the Company's dependence on key employees; general economic
and business conditions and other factors referenced in this Report.
INTRODUCTION
The Company was incorporated in Utah in 1974 as Motion Control, Inc. In
1987, the Company merged with JMW Acquisition Corporation, and the name of the
merged entity was changed to IOMED, Inc. The Company commercializes controllable
drug delivery systems using iontophoretic technology. Iontophoresis is a
non-invasive method of enhancing and controlling the transport of water-soluble
ionic drugs into and through the skin using a low-level electrical current. The
Company's proprietary iontophoretic drug delivery systems allow rapid onset and
cessation of therapeutic action, as well as programmable dose control. The
flexibility of the Company's proprietary systems provides therapeutic control
not possible with many alternative drug delivery methods, including oral tablets
and capsules, injections, inhalants and passive transdermal patches. The
Company's systems may also increase bioavailability, safety and patient comfort.
The Company currently markets two products, an iontophoretic system used
to deliver dexamethasone sodium phosphate ("Dexamethasone") and an iontophoretic
system used to deliver Iontocaine(R), IOMED's brand of lidocaine HCl 2% and
epinephrine 1:100,000. The Company's system for the delivery of Dexamethasone
has been used primarily by physical therapists and athletic trainers in over 12
million patient applications for the treatment of acute local inflammatory
conditions such as tendonitis, tennis elbow and carpal tunnel syndrome. The
Company's system to deliver Iontocaine provides needle-free, long-lasting local
dermal anesthesia up to six times more rapidly and up to three times deeper than
can be achieved using topical anesthetic creams. The Company is initially
marketing its Iontocaine product under the brand name Numby Stuff(R) to
pediatric hospitals in the United States. The Company is also developing a
number of iontophoretic drug delivery systems in other therapeutic areas,
including pain control, ophthalmic disease, and conscious sedation.
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BACKGROUND ON DRUG DELIVERY SYSTEMS
A wide variety of drug delivery methods are currently available in the
market, although not all drugs can be delivered by all routes of administration.
For certain applications, there are clinical benefits in providing rapid onset
of therapeutic action and the minimum drug dosage necessary to achieve the
desired effect. In all applications, drug delivery should be convenient, cost
effective and as non-invasive as possible.
Conventional Oral Methods. Conventional oral drug dosage forms, such as
pills and capsules, are the most common types of drug delivery. These methods
offer ease of administration and low cost-per-use, but their application is
often limited by inconvenient dosage intervals and less than optimal
bioavailability (due to degradation of the drug in the gastro intestinal tract
("GI tract") and the liver) and efficacy. In addition, conventional oral dosage
forms often produce higher initial drug levels than are required to achieve the
desired therapeutic effects, thereby increasing the risk of side effects and
lower than therapeutically optimal levels of the drug as it is metabolized and
cleared from the body. More frequent administration of lower doses can sometimes
mitigate this problem, but can also increase cost, inconvenience and patient
noncompliance.
Injection Methods. Injectable drug dosage forms generally provide rapid
onset of action and offer many of the same advantages as conventional oral drug
dosage methods. Like conventional oral dosage forms, however, they often produce
higher initial drug levels than are required to achieve the desired therapeutic
effect, thereby increasing risk of side effects. Injectable drug delivery
methods require caregiver administration and have the added disadvantage of
using needles as a delivery path into the body, raising the possibility of
needle stick injuries, as well as risk of infection to the caregiver and the
patient. The use of needles also increases patient anxiety due to the pain of
injection.
Controlled Release Methods. Controlled release drug delivery systems
attempt to overcome many of the limitations inherent in conventional drug
delivery methods by maintaining a more consistent and appropriate drug level in
the bloodstream. Sustained release oral dosage forms are designed to release the
active ingredients of the drug into the body at either a predetermined point in
time or at a predetermined rate over an extended period of time, but they
generally do not provide rapid onset of action and may not achieve optimal
bioavailability. Passive transdermal patches allow absorption of drugs through
the skin and generally provide a convenient method of administering drugs at a
steady rate over an extended period of time, but onset of action may take hours
after application, and absorption of the drug may continue for hours after the
patch is removed, which can increase side effects. Additionally, because human
skin is an effective barrier, most drug formulations will not passively permeate
the skin in therapeutic quantities. Continuous infusion pumps introduce drugs
directly into the body, thereby providing rapid onset of action, and may offer
variable controlled dosing. Infusion therapy requires insertion of a needle,
however, and, therefore, can be painful and threatening to the patient. The use
of infusion pumps also increases the risk of infection and generally requires
medical professionals for safe administration, which may significantly increase
costs.
Pulmonary and Nasal Methods. Both pulmonary (inhalation) delivery and
nasal sprays are designed to provide rapid onset of action or to deliver drugs
that are not orally bioavailable. Pulmonary delivery has the disadvantage of
variable drug amounts reaching the alveoli of the lungs, therefore making it
difficult to control the bioavailability of the dose. Nasal sprays can cause
irritation in some patients and can be difficult to administer in variable
intranasal conditions. In addition, the dose of the product cannot be controlled
by the patient over a period of time, and patients and caregivers may have
difficulty maintaining the desired therapeutic effect.
Other. Many existing and emerging pharmaceutical compounds, such as
biotechnology-derived oligonucleotides, peptides and other macromolecular drugs,
cannot be effectively administered by traditional non-invasive methods and are,
therefore, administered only by injection or infusion. Oral delivery of such
molecules is generally inefficient due to the rapid breakdown of the molecules
during
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digestion and the natural impermeability of the GI tract to larger molecules.
The skin is even less permeable to macromolecules than the GI tract, which the
Company believes is the primary reason passive transdermal delivery of those
molecules using patch technology has not been successful to date.
IONTOPHORETIC DRUG DELIVERY AND ITS ADVANTAGES
Iontophoretic drug delivery systems are designed to overcome many of the
limitations associated with many other drug delivery methods. Iontophoresis is
an active method of transdermal drug delivery in which water-soluble, ionized
(electrically charged) drugs are transported through the skin for local or
systemic therapeutic applications by applying a mild, external electrical
current. The amount of drug delivered through the skin is proportional to the
total electrical charge applied (which is a function of time and current).
Therefore, it is possible to program the system's electrical current levels to
control more precisely the desired drug dose, delivery rate and the pattern of
delivery.
Iontophoretic drug delivery systems are generally comprised of a power
supply which is used to control drug dose (the "dose controller") and a pair of
electrodes, one containing the drug and one serving as a grounding electrode to
complete the electrical circuit through the skin. The drug delivery electrode is
applied to the patient's skin at a local treatment site (such as for joint or
tendon soreness or to induce local dermal anesthesia), or at any suitable site
on the body for systemic drug delivery. The grounding electrode is applied to
the skin a short distance away from the drug electrode. When an electric current
with the same positive or negative electric charge as the drug is applied to the
drug electrode, the drug is repelled from the electrode and into the skin in the
same way as like poles of two magnets repel each other. Although the Company's
currently marketed products consist of discrete components, the Company has
begun the development of more advanced systems which integrate all components in
a single miniaturized patch.
The Company believes that, for certain applications, iontophoretic drug
delivery systems may offer several advantages over other drug delivery methods,
including:
Broad Applicability. A substantial number of the drugs on the market and
in development today are, the Company believes, ionic and water-soluble and,
therefore, may be amenable to delivery by iontophoresis. In addition,
iontophoretic drug delivery systems may be applicable to a significantly broader
range of pharmaceutical compounds, including larger drug molecules such as
peptides and oligonucleotides, than passive transdermal drug delivery methods.
Increased Convenience and Compliance. Iontophoretic drug delivery
systems are easy to use and offer simple, needle-free administration that
eliminates the inconvenience of frequent dosing, and may, if successfully
developed and approved by applicable regulatory authorities, permit patient
self-administration.
Programmable Control of Drug Delivery. The rate, timing and pattern of
drug delivery using an iontophoretic drug delivery system can be controlled by
varying the electrical current applied to the system's electrodes. The benefits
of this ability to control the drug's delivery include the following:
- Rapid Onset of Action -- The speed with which a drug delivery
system can provide efficacious blood levels of the target drug
determines the onset of therapeutic action. Iontophoretic drug
delivery systems allow many drugs to pass directly through the
skin into underlying tissue and the bloodstream at a rate that
is significantly more rapid than oral or passive transdermal
delivery methods. Research has shown that certain drugs can be
delivered by iontophoresis 10 to 1,000 times faster than drug
delivery by passive transdermal patches.
- Rapid Cessation of Administration -- In certain applications, it
is desirable that drug delivery cease once the desired effect
has been obtained. Iontophoretic drug delivery systems allow
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rapid cessation of drug delivery since absorption of
water-soluble drugs from the skin into the bloodstream ceases
rapidly after the current is turned off or the drug electrode is
removed from the skin.
- Variable Dose Control -- Iontophoretic drug delivery systems may
be designed to offer precision controlled dosing that can be
customized for desired therapeutic profiles or for individual
patient needs, including baseline and/or bolus dosing.
- Patient Controlled Dosing -- Iontophoretic drug delivery systems
may be designed to offer active patient control or intervention
in the dosing regimen, while at the same time incorporating
programmed lock-outs for added safety and dose monitoring
capability.
- Dose-to-Effect -- Iontophoretic drug delivery systems allow
caregivers or patients to monitor the onset of drug
effectiveness and maintain, progressively reduce or cease drug
administration once a desired therapeutic effect is observed.
THE COMPANY'S IONTOPHORETIC SYSTEMS
While the fundamentals of iontophoresis have been understood for
decades, the method has become commercially practicable as a means for
delivering drugs only recently as a result of advances in electronics, materials
science and electrochemistry. These advances have led to the development of more
efficient and adaptable drug containment electrodes and more reliable, compact
and programmable dose controllers. The Company has developed iontophoretic drug
delivery systems which incorporate dose controllers and electrodes that have
enhanced performance characteristics, which the Company believes are adaptable
to a number of clinical settings and therapeutic applications, and which the
Company believes are cost effective in a number of therapeutic applications. The
Company's current iontophoretic drug delivery systems are not designed to
facilitate patient self-administration, but drug delivery systems currently
being developed by the Company may allow patients significant control over the
administration of certain drugs.
In March 1997, the Company entered into a series of agreements with Elan
Corporation, plc ("Elan") pursuant to which the Company acquired certain
in-process research and development programs, including exclusive world-wide
rights to the commercial exploitation of certain technology developed by Elan in
the field of iontophoretic drug delivery and certain other electro-transport
fields (the "Elan Agreements"). The acquisition of the Elan technology is
intended to speed the development and commercialization of products using a
combination of the Company's and Elan's technology, including the miniaturized
integrated, wearable systems currently under development by the Company. The
Company also believes its competitive position in relation to other companies
engaged in the development of iontophoretic drug delivery systems has been
significantly enhanced by Elan's broad base of United States and foreign
patents, in-depth body of in vitro drug transport data and in vivo animal and
human clinical data, in addition to other proprietary know-how.
Dose Controllers. The Company's dose controllers generate the low-level
electrical current needed for iontophoretic drug delivery. The Company presently
markets a compact, fully portable dose controller (the "Phoresor(R)") that
offers durable microprocessor control, enhanced user interface, versatile
programmable dosing capability, autocalculating treatment time (based on
electrical current settings and selected dose) and constant current output (by
automatically adjusting voltage to compensate for variations in the electrical
resistance of the skin). The Phoresor incorporates a microprocessor, other
microelectronic components, on-board software that monitors and controls the
rate of current flow, and an easy-to-use control panel. The Company's next
generation of dose controllers, both stand-alone and wearable miniaturized
versions, are being designed to include many of the same features as the
Phoresor. Depending on the therapeutic application, the new generation dose
controllers may be designed to allow bolus dosing capability and programming
(using a physician's or pharmacist's key) to adjust dosing to match desired
delivery profiles or patterns.
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In a clinical setting for short treatment durations, the dose controller
is a small, discrete, reusable unit connected to a pair of disposable,
single-use electrodes to which drug solution is added immediately prior to
application to the patient. This technology is used in the Company's current
products. For longer term or chronic applications or patient-administered
therapy outside the clinical setting, the Company is developing iontophoretic
drug delivery systems in which the battery, dose controller and electrodes will
be combined on a small adhesive patch applied to the skin as a single,
integrated unit. The electronic components may be reusable, with replaceable or
rechargeable batteries, or the entire unit may be disposable after a single use.
The drug may be added to the electrode drug pad during manufacturing, or may be
stored separately in the system and introduced into the drug containment pad
immediately before use by means of proprietary, integrated hydration devices
developed by the Company.
Electrodes. Electrode design is critical to successful delivery of a
drug by iontophoresis. The Company's electrodes incorporate patented and
proprietary design innovations which the Company believes offer significant
advantages to both patients and health care providers. The Company's proprietary
electrode technology includes patented polymer hydrogels which absorb drug
solutions in seconds, becoming soft and pliable so as to conform better to the
body and to be comfortable to the patient. The Company's electrode technology
also employs special silver and silver chloride inks to distribute electric
current more evenly from the dose controller to the electrodes and to control
potential changes in acidity and alkalinity (pH changes) which can occur during
iontophoresis.
BUSINESS STRATEGY
The Company's primary business goal is to establish its proprietary
iontophoretic drug delivery systems as a preferred, cost effective means of
delivering a wide range of drugs. To achieve this goal, the Company uses its
multi-disciplinary expertise in pharmacology and drug formulation, regulatory
and product testing, microelectronics, electrochemistry, polymer chemistry,
adhesives, design and manufacturing. The Company's strategy for achieving this
goal includes the following principal elements:
Develop Systems for Off-Patent Drugs. The Company intends to continue
the independent development of proprietary iontophoretic drug delivery systems
for off-patent drugs with known safety and efficacy and for which the Company
believes its drug delivery technology may be cost competitive with and offer
advantages over other drug delivery methods. The Company believes that, by
developing proprietary products based on currently approved off-patent drugs,
rather than new chemical entities ("NCEs"), it can reduce regulatory and
development risks and shorten the product development cycle for certain
products.
Enter into Collaborative Relationships. In order to gain access to NCEs
and other proprietary drugs, and to reduce the costs and risks associated with
the development of iontophoretic drug delivery systems for such compounds, the
Company intends to enter into collaborative relationships with pharmaceutical
and other biotechnology companies whose drugs could benefit from the Company's
iontophoretic drug delivery technology.
Increase Market Penetration of Existing Products. In order to leverage
the capabilities of its limited number of sales personnel, the Company intends
to expand its existing dealer distribution network and seek additional
collaborative sales and marketing relationships with other parties that have
specific expertise in markets targeted by the Company. In general, the Company
intends to use collaborative sales and marketing relationships in the sale and
distribution of its products.
In addition, the Company is actively seeking to expand the commercial
potential of its local anesthesia and acute inflammation products by pursuing
new applications. The Company will continue to support (i) marketing studies
aimed at expanding the use of its delivery system for Iontocaine to a broader
range of procedures and (ii) clinical trials to further establish the safety and
efficacy of iontophoresis for the treatment of local inflammation using
Dexamethasone or for use in other specific procedures.
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Broaden Technology Platform. The Company intends to enhance its
proprietary iontophoretic technology base principally through internal research
and development. The Company will also pursue additional iontophoretic and other
complementary products and technologies owned or developed by third parties, on
a case-by-case basis, through in-licensing or acquisition.
Control Product Manufacturing Processes. The Company has historically
maintained control over the manufacture of its electrode kits in order to retain
control over the quality of its products and capture a larger portion of the
product revenue stream when third parties are involved in the marketing of the
product.
PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
The Company currently has product development programs in various stages
of development for acute local inflammation, local dermal anesthesia, pain
control, ophthalmic disease, and conscious sedation. The following table lists
the therapeutic applications of the principal products developed or currently
under development by the Company. This table is qualified in its entirety by
reference to the more detailed descriptions set forth elsewhere in this Report.
There can be no assurance that any product under development will be developed
successfully or approved in a timely manner, if at all, or even if developed or
approved, be successfully manufactured or marketed. In addition, the status of
development indicated below does not necessarily indicate the order in which the
products shown may be submitted to or approved by the Food and Drug
Administration ("FDA").
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APPLICATION THERAPEUTIC AGENT PRODUCT STATUS
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Acute local inflammation Dexamethasone Currently marketed(1)
Local dermal anesthetic Iontocaine Currently marketed
Pain control Hydromorphone Phase II clinicals(2)
Ophthalmic disease To be determined Preclinical
Conscious sedation To be determined Preclinical
Local mucosal anesthetic Iontocaine Preclinical
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(1) Currently marketed under a 510(k) clearance for use with "ions of soluble
salts or other drugs." The Company has initiated Phase III trials in support
of an NDA seeking drug labeling for this application.
(2) Initial Phase II clinical studies were conducted by Elan. The Company
acquired the rights to the data from those studies under the Elan
Agreements. The Company will be required to conduct expanded Phase II and
Phase III clinical trials.
ACUTE LOCAL INFLAMMATION
Acute local inflammatory conditions resulting from exercise, sports
injuries, trauma or repetitive motion disorders are among the leading types of
injuries occurring in the workplace and among physically active adults. The most
common of these injuries include tendonitis, bursitis, carpal tunnel syndrome
and epicondylitis (tennis elbow). Generally, patients suffering from these
conditions are initially treated with oral nonsteroidal anti-inflammatory drugs
("NSAIDS") for a period of up to fourteen days. Although steroid injections are
generally more effective than NSAIDS, medical professionals usually avoid
steroid injections in all but severe cases because of the negative side effects
that can accompany bolus needle injections of corticosteroids into an inflamed
joint or tendon, including risk of infection, tissue distortion, tendon
weakening and tendon rupture. If patients do not respond to treatment with
NSAIDS, the physician generally has two options -- refer the patient to a
physical therapist, or proceed with injection of anti-inflammatory steroids such
as Dexamethasone. While the Company's iontophoretic drug delivery technology is
currently used to deliver Dexamethasone, validation of efficacy, an approved New
Drug Application ("NDA"), and a strong pharmaceutical marketing partner may
dramatically expand the market potential for this product. The Company estimates
that the total potential retail market in the United States for the sale of
iontophoretic drug delivery systems to treat acute local inflammatory conditions
may be in
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excess of $540 million. The Company estimates that present retail sales into
this market by the Company and its competitors are approximately $35 million.
The Company believes iontophoretic delivery of Dexamethasone provides
significant advantages over other current treatment regimens for acute local
inflammation. Dexamethasone is a potent, highly effective corticosteroid used to
treat local inflammation. Because the Company's delivery systems are
non-invasive and can be site specific, IOMED believes that it can offer patients
the benefit of the most potent anti-inflammatory drug available with the added
benefits of enhanced safety and a benign side effect profile. Iontophoresis
eliminates many of the risks and much of the inconvenience associated with bolus
steroid injections, avoids the systemic side effects of oral steroids and
eliminates the significant incidence of GI tract side effects of orally
administered NSAIDS. The Company believes iontophoresis also increases
therapeutic efficacy by bypassing metabolism by the liver, by reducing the
possibility of overdosing, and by providing localized delivery at the target
site without trauma. As a result, the Company believes that it may be
advantageous to introduce the iontophoretic delivery of Dexamethasone into the
initial treatment regimen for acute local inflammation. The Company believes
that earlier treatment with Dexamethasone has the potential to significantly
increase the rate of patient recovery and, in doing so, reduce the overall cost
of patient treatment.
Commercial Products. The Company pioneered the commercial introduction
of an iontophoretic drug delivery system for the treatment of local acute
inflammation in 1979. The product is used principally by physical therapists
(under a doctor's prescription) and has been administered in over 12 million
patient treatments for the iontophoretic delivery of Dexamethasone. More than 10
million of these treatments have occurred since 1990, when advancements in
electrode technology made by the Company led to the introduction of its present
family of gel electrodes for use with its microprocessor controlled dose
controllers. The Company's system for the delivery of Dexamethasone is also used
by athletic trainers and physical therapists serving a number of professional
athletes, including professional golfers and tennis players, men's and women's
Olympic ski teams and professional football, basketball and hockey teams. The
Company believes that iontophoretic drug delivery systems have been accepted in
the rehabilitation marketplace due to their ease of use, non-invasiveness,
recognized efficacy and lack of significant side effects.
Products Under Development. Currently, due to limited labeling of
Dexamethasone, neither the Company nor its competitors has the requisite
regulatory approval to promote the use of iontophoretic drug delivery systems
specifically for the delivery of Dexamethasone. The Company believes that its
inability to do so limits its ability to market its system, particularly to the
physician market. The Company further believes that to market iontophoretic drug
delivery systems for a specific drug and therapeutic indication the FDA requires
that each new drug/device combination be approved through an NDA. Therefore, in
order to expand the Company's sales of its delivery systems into the physician
market as a first line treatment for acute local inflammation, the Company has
filed an investigational new drug application ("IND") with the FDA. The Company
has initiated Phase III clinical studies in support of an NDA seeking FDA
approval for IontoDex(TM), a formulation of Dexamethasone, labeled for use with
the Company's iontophoretic drug delivery systems. These randomized,
double-blind, placebo-controlled studies will involve approximately 400 patients
at 12-18 sites across the U.S. and are being conducted with the assistance of a
specialty clinical research organization. IOMED plans to complete the studies in
approximately nine months, and plans to file its NDA in the third quarter of
calendar year 2000. The Company expects FDA review time of about one year. The
Company believes the approval of an NDA (if obtained) would allow the Company
through its marketing partner to more actively promote the iontophoretic
delivery of Dexamethasone to family physicians, orthopedists, neurologists and
sports and industrial medicine clinics. The Company also believes that with NDA
approval of IontoDex in a patient friendly, second-generation, mini-integrated
iontophoretic delivery system, could effectively compete as a first line therapy
in the $5 billion NSAID and COX-II inhibitor market.
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LOCAL DERMAL ANESTHESIA
Medical care providers have long recognized the importance of the
management of pain, including pain associated with certain minimally invasive
medical procedures such as needle injections; venous access (including
phlebotomies and intravenous catheterizations); lumbar punctures; and local
dermatological, gynecological and urological procedures such as wart and mole
removal, biopsies (including fine needle, punch, excisional, shave and cervical
biopsies), Mohs procedures and vasectomies. To address this concern, local
dermal anesthetics are widely used in medical practice.
The primary means of administering local dermal anesthetics is by needle
injection, which has the benefit of being fast, effective and long lasting.
However, the fear and pain associated with the needle stick, especially on the
extremities or on other sensitive areas such as the face, vulva and cervix is
compounded by the sting associated with virtually all injectable local
anesthetics. These factors increase patient discomfort and anxiety. In addition,
the local tissue distortion which typically accompanies injections may cause
procedural difficulty for the physician. New topical analgesic formulations have
recently been introduced into the market and are gaining widespread acceptance,
especially in pediatric hospitals and clinics and in pediatric dermatology.
These topical formulations avoid many of the pitfalls of anesthetic injections,
but they generally require significant advance preparation since they take one
to two hours to obtain anesthesia. Even when topical formulations are given
adequate time to achieve anesthesia, they anesthetize only to a maximum depth of
3 to 5 mm. The time required to achieve therapeutic anesthesia and the depth of
anesthesia make these formulations less suitable or impractical for many
potential applications. The Company believes that the growing interest in these
products, in spite of their clinical limitations, is a positive indication of
the market's desire for an effective, needle-free local dermal anesthetic.
Commercial Products. The Company's Iontocaine is FDA approved under an
NDA and is specifically labeled for use with the Company's Phoresor and its
proprietary, single use, disposable electrode kits. The Iontocaine delivery
system was shown to be safe and effective in double blinded, placebo controlled,
randomized studies in over 400 adult and pediatric patients. Based on these
studies, the Company filed an NDA with the FDA and received labeling to use the
system for all procedures requiring local dermal anesthesia.
Using the Company's product, clinicians can administer needle-free, long
lasting (up to two hours) local dermal anesthesia up to a depth of 10 mm in
approximately ten minutes. The Company believes the ability to provide painless
local dermal anesthesia up to three times deeper than topical formulations, and
in 85% less time, could make the Company's products a preferred drug delivery
method for many existing applications where topical anesthetic creams are
currently employed, and that the product will provide a means of painlessly
inducing local dermal anesthesia for a broader range of medical procedures where
the use of such creams is not practical.
A leading concern among patients, parents and health care professionals
is the control of pain in the practice of children's medicine, including the
pain associated with needle insertions. With the growing acceptance of topical
anesthetic creams in the pediatric hospital setting, the Company believes there
is a large potential market for an iontophoretic drug delivery system targeted
toward pediatrics. Accordingly, the Company has focused its initial local dermal
anesthesia product launch into the pediatric market under the brand name Numby
Stuff. In December 1996, Numby Stuff was reviewed by the Alliance of Children's
Hospitals ("ACH"), a consortium of 36 free standing children's hospitals in the
United States and was awarded ACH's Seal of Acceptance for use in the promotion
of Numby Stuff. Numby Stuff, launched in January of 1997, currently consists of
the Phoresor, the Company's line of proprietary, single use, disposable
electrode kits and Iontocaine, all in a brightly colored, child friendly product
package. Numby Stuff is presently being used to induce local dermal anesthesia
prior to pediatric intravenous starts, blood draws and other invasive
procedures, and the Company believes it provides a cost effective alternative to
the leading topical product.
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Although the response to the Company's Numby Stuff product line by
medical professionals and medical organizations, including the ACH, has been
very positive, the process by which such products obtain administrative review
and final approval for use in the hospital environment is extremely complex and
time consuming. Among other things, such new products are subject to extensive
evaluations within each hospital and often each department, require review and
approval by hospital products and therapeutics committees, and must be accepted
for inclusion on the hospital's formulary. As a result, to date, Numby Stuff has
not generated significant revenues. The Company seeks to expand its sales,
marketing and distribution capabilities for this product through collaborative
partnerships and other distribution arrangements and does not anticipate
achieving significant revenues to be generated from this product until such
distribution capabilities have been established.
Products Under Development. In order to achieve greater market
acceptance of its Iontocaine product in pediatric markets, the Company supports
evaluations conducted by doctors and other medical personnel for the use of its
anesthetic product prior to a wide variety of painful medical procedures. The
Company also believes, in addition to the pediatric market, the adult hospital
market represents additional opportunities for growth.
The Company also believes Iontocaine, together with the Phoresor and
adaptations of its existing electrode designs, can be successfully used to
induce effective local dermal or mucosal anesthesia prior to certain
gynecological procedures. The Company believes the effective, rapid, painless,
needle-free anesthesia provided by the Company's drug delivery technology would
increase patient comfort. In general, the Company believes the promotion of the
Company's systems for use in connection with gynecological procedures involving
mucosal membranes would require additional FDA approval, most likely in the form
of a supplement to the Company's existing Iontocaine NDA. The Company does not
believe gynecological procedures involving the vulva would require additional
FDA approval. The Company has performed preliminary studies which indicate that
its anesthetic system may significantly reduce or eliminate the pain of vulvar
biopsies. The Company has already tested prototype electrodes which are
specifically designed for this application. In addition, there are approximately
50 million pap smears performed each year in the United States, of which the
Company estimates approximately 2.5 million require follow-up procedures that
could benefit from non-invasive local mucosal anesthesia. The majority of these
procedures are performed by a relatively small number of gynecologists who are
mainly located in high density population areas.
PAIN MANAGEMENT
The Company estimates that of the 24 million surgeries performed each
year in the United States, 75%, or 18 million, result in moderate to severe
post-operative pain. In addition, there are currently 9.1 million cancer
patients in the United States. Each year roughly 6.6 million patients with
cancer are treated for pain and of these, 65% to 80% experience moderate to
severe pain. In recent years, there has been a growing awareness that many
patients, especially the terminally ill, do not receive adequate analgesic
therapy for their pain. Sales of prescription narcotics in the United States to
treat pain are over $1.0 billion and, according to market reports, the market is
estimated to be growing at a rate of approximately 10% per year. Factors
contributing to this growth rate include more relaxed policies for narcotic
administration and the introduction of drug delivery systems that make
administration safer, more controllable and convenient.
Morphine is the most commonly prescribed drug for the management of
severe pain in critically ill patients in the United States. Morphine and
hydromorphone are the most widely used parenteral pain medications for home use
because they are relatively safe, effective and have relatively short half
lives. Hydromorphone is a more potent, highly soluble analog of morphine, which
is the standard against which other analgesics are generally measured.
The Company believes that iontophoretic delivery systems for narcotic
analgesics for the treatment of post operative and chronic pain control could
offer significant benefits over existing methods of delivery, including infusion
pumps, transdermal patches and transmucosal products. To provide
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effective pain relief, a morphine injection is generally administered every four
hours. Repeated injection or continuous infusion of morphine is expensive
because the methods of administration consume substantial hospital staff time or
require frequent visits by a health care provider to a patient receiving home
infusion therapy. An iontophoretic system has the potential to offer all of the
benefits of an infusion pump, including the ability to closely match the
delivery profile with rapid onset and cessation of action characteristics and to
provide control of baseline delivery with bolus dose capability for acute
episodes of pain, but without the need to use needles. The Company believes an
iontophoretic delivery system for pain management may also be more convenient
and less expensive, since the rental of costly infusion pumps and intervention
by a skilled medical professional may not be required. Passive transdermal
patches offer convenience and reduced costs, but they take four to eight hours
before effective analgesia is achieved and take hours or even days for the drug
depot to clear from the skin after the patch is removed. In addition, passive
transdermal patches do not offer precise baseline dosing from patient to patient
and do not address the need for bolus dosing required to address acute episodes
of pain.
Products Under Development. The Company believes an iontophoretic
delivery system for hydromorphone may be a favorable alternative to the
administration of morphine by infusion for acute post operative pain and for
chronic pain in the hospice or home care setting. Hydromorphone is approximately
ten times more potent than morphine and has added therapeutic advantages,
including lower incidence of nausea and vomiting (which frequently accompanies
the administration of morphine), and more effective analgesia with no stupefying
and minimal hypnotic effects. Through the Elan Agreements, the Company obtained
rights to prototype wearable iontophoretic drug delivery systems for the
delivery of hydromorphone and to the preclinical, Phase I and limited Phase II
clinical data generated by Elan in testing the device. In addition, the Company
is conducting further studies in support of this program and believes that the
mini-integrated system being developed for IontoDex may offer additional
advantages to those systems already under development. The Company will continue
to conduct studies and development activities to facilitate its business
development efforts relating to this therapeutic application. However, at this
time, the Company does not intend to advance this development program further
into Phase II or into Phase III clinical trials without the financial,
strategic, marketing, and clinical and regulatory support of a collaborative
development and marketing partner. The Company believes the clinical trials
necessary to market this product may be of relatively short duration in
comparison to an NCE, since hydromorphone's safety and efficacy profile is well
known and the clinical endpoints are both well established and easy to measure.
OPHTHALMICS
Age related macular degeneration ("AMD") and proliferative diabetic
retinopathy are the two leading causes of blindness in the United States. Both
of these diseases result in the abnormal growth of blood vessels in the eye,
which weaken and allow the leakage of blood into the macula of the eye causing
damage to the retina and loss of vision. Currently AMD and diabetic retinopathy
remain largely untreatable diseases. Laser photocoagulation surgery can be used
in about 5% - 15% of patients to destroy leaking blood vessels that arise in wet
AMD and is also used in about 50% of diabetic retinopathy patients. However,
laser surgery itself causes progressive damage to the retinal tissue, formation
of scar tissue; and the reappearance of the fragile blood vessels is a common
occurrence.
New photodynamic treatments are under development, whereby a light
sensitive compound is injected into the bloodstream and a low-dose laser or
other light source is used to "activate" the photo-sensitive compound in the
eye. These therapies are proving effective. However, due to the fact the eye is
generally immunopriviledged, large systemic doses of these compounds are
generally necessary in order to reach a therapeutic level in the diseased
tissue. Furthermore due to these high systemic doses of photosensitive
compounds, patients must remain protected from external light sources for up to
twenty-four hours after administration.
In addition, many new anti-angiogenic compounds, which inhibit the
formation of new blood vessels, are being evaluated; however, they must be
administered by needle injection into the eye. This
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involves significant patient anxiety and discomfort as well as risk of vision
loss due to infection, bleeding and retinal detachment.
The Company believes that effective treatment for this patient
population represents a significant unmet clinical need. Industry analysts
project revenues for therapies to halt the progression of these two sight
threatening diseases to be in excess of $2.0 billion.
Products Under Development. The Company is at a pre-clinical stage in
the development of proprietary systems for the non-invasive, site-specific
iontophoretic delivery of drugs into the center and posterior chambers of the
eye. The initial focus of this application of the Company's technology will be
for the delivery of anti-angiogenic compounds, which will bind to or near the
retinal structure or related tissue to inhibit the abnormal vessel growth and
halt the progression of diseases such as AMD and diabetic retinopathy.
In addition to these conditions, the Company believes that, if
successful, this technology platform may offer significant advantages in the
delivery of a variety of therapeutics to the interior of the eye, including
antibiotics, antivirals, antiinflammatories and oncologic compounds.
CONSCIOUS SEDATION
Many patients, especially children, experience extreme anxiety before
the start of invasive or painful medical procedures, during stressful diagnostic
tests such as endoscopies, magnetic resonance imaging, and CT scans, and before
and during certain dental and emergency room procedures. Invasive methods of
premedication and sedation, such as intramuscular ("IM") injections or IV
administration of analgesics or sedatives, can cause anxiety. Clinicians have
long sought alternative, non-invasive methods of premedication. Despite the
absence of approved labeling for safety and efficacy for oral administration,
clinicians widely use injectable drugs and drug combinations mixed with flavored
syrups for off-label oral administration in children. Since 1994, clinicians
have also been able to use fentanyl for conscious sedation using an oral
transmucosal delivery system. Oral administration may require up to five times
the amount of drug recommended for injection because of decreased
bioavailability, but is used because the alternative of IV or IM injections are
counterproductive to the goal of relieving anxiety. Based on market data, the
Company estimates that annual worldwide sales of the top two products used for
conscious sedation are approximately $950 million.
Products Under Development. The Company believes that an iontophoretic
drug delivery system may offer significant advantages to alternative drug
delivery systems currently employed in this therapeutic area. The non-invasive
characteristic of the system together with rapid onset and cessation of action
and the ability to dose-to-effect, could make an iontophoretic delivery system
ideal for the administration of drugs to induce conscious sedation. To date, the
oral transmucosal fentanyl product has achieved limited commercial success. The
Company believes that this may be due to the potency and associated risks of
fentanyl administration, especially in pediatric applications. Accordingly, the
Company has concluded that the use of the drug fentanyl may not be widely
accepted by the medical profession for this therapeutic application. The Company
continues to evaluate suitable drug candidates and other technologies, which can
increase the solubility of certain drugs, some of which are presently used in
conscious sedation.
OTHER POTENTIAL PRODUCT APPLICATIONS
The Company has a program for identifying and screening iontophoretic
drug delivery products for additional therapeutic indications where the Company
believes there is a potential market need. This includes the identification of
suitable water-soluble ionic drugs that can be delivered through iontophoresis
in therapeutic quantities on a cost-competitive basis. The Company has
identified certain drugs and therapeutic indications as potential product
opportunities, and has undertaken preliminary steps toward verifying the market
need and technical feasibility of iontophoretic delivery of those drugs. In
addition, through the Elan Agreements, the Company acquired certain in-process
research and development,
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including exclusive world-wide rights for the commercial exploitation of certain
iontophoretic patents, know-how and clinical data. The Elan technology includes
in vitro feasibility studies conducted on 64 drugs (including several peptide
drugs), in vivo blood level animal studies on 18 of those drugs and human blood
level studies on nine of those drugs.
As part of its continuing product development program, the Company will
evaluate the feasibility of iontophoretic delivery of biotechnology derived
peptides, small proteins and oligonucleotides for applications where existing
drug delivery systems have significant limitations.
COLLABORATIVE RELATIONSHIPS AND LICENSES
A principal component of the Company's commercial strategy is to develop
products, where appropriate, in collaboration with established pharmaceutical
companies or other strategic partners. These collaborative partners may provide
proprietary drugs, technology, financial resources, research and pharmaceutical
manufacturing capabilities or marketing infrastructure to aid in the development
and commercialization of the Company's products and potential future products.
Depending on the availability of financial, marketing and scientific resources
and other factors, the Company may also license or cross license its technology
or products to others and retain profit sharing, royalty, manufacturing,
co-marketing, co-promotion or similar rights. Any such arrangements could limit
the Company's flexibility in pursuing alternatives for the development or
commercialization of its products.
The Company has entered into the following collaborative relationships
and license arrangements:
Novartis Agreement. In July 1995, the Company entered into various
research and development agreements (the "R&D Agreements") with Novartis
Pharmaceuticals Corporation ("Novartis") to evaluate the feasibility of
delivering a number of Novartis compounds for several therapeutic applications
utilizing the Company's iontophoretic drug delivery technologies, including
certain of its existing iontophoretic devices.
Although the Company met all of the essential development objectives
under the R&D Agreements, Novartis terminated the development project for
internal reasons and did not renew the R&D Agreements beyond their scheduled
December 31, 1998, expiration date.
In connection with the R&D Agreements, the Company granted Novartis a
perpetual non-exclusive, royalty bearing license to the Company's iontophoretic
technology. However, the Company is free to apply the technologies it developed
for Novartis to any available drug candidates, either independently or on behalf
of other parties. The Company believes the application of that technology will
shorten the Company's future product development cycles.
The Company has also agreed that, during the term of the agreement with
Novartis and for a period of five years thereafter, the Company will negotiate
in good faith to license to Novartis rights to any iontophoretic drug delivery
technologies developed or acquired by the Company but which are not covered
under the existing license agreements (the "Second Generation Technology").
Further, the Company has agreed to negotiate such additional licenses prior to
entering into any agreement to license or otherwise transfer any rights to such
Second Generation Technology to a third party. Under the R&D Agreements, as
amended, the parties agreed to the joint ownership of technology developed in
the collaboration.
Elan Agreements. Effective March 1997, the Company entered into the Elan
Agreements. Under the Elan Agreements, the Company acquired exclusive, worldwide
licenses to certain of Elan's iontophoretic drug delivery technologies,
including know-how and over 250 issued and 47 pending United States and foreign
patents.
Alza Agreement. In 1993, the Company entered into a cross-license
agreement with Alza Corporation ("Alza"). Under the agreement, the companies,
among other things, exchanged non-exclusive,
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royalty free rights to certain patented technologies which each party believed
to be of significant strategic importance to the potential technological success
of many iontophoretic drug delivery applications. One patent sublicensed by Alza
to the Company under the agreement bears a nominal royalty rate if used.
University of Utah Agreement. In 1974, the Company entered into a
licensing agreement with the University of Utah Research Foundation (the
"University"). Under the agreement, which was amended in 1993, the Company
obtained an exclusive license to certain iontophoretic drug delivery
technologies developed at the University. Under the terms of the amended
license, the Company is obligated to pay the University a royalty on all sales
of its iontophoretic drug delivery products through the year 2007.
Laboratoires Fournier Agreement. In July 1993, the Company entered into
an agreement with Laboratoires Fournier, S.C.A. ("Laboratoires Fournier"), a
private French pharmaceutical company, for the joint research and development of
wearable integrated iontophoretic systems, with primary effort devoted to the
development of systems for the treatment of acute post operative pain and
patient controlled analgesia. The companies subsequently concluded that certain
United States patents issued to Alza for the iontophoretic delivery of fentanyl
and its analogs after the Company and Laboratoires Fournier had entered into
their agreement posed a potential barrier to the commercial viability of the
proposed system in the United States. As a result, the Company elected to
suspend development efforts in the area. In February 1996, the parties
terminated their collaborative research and development activities and amended
their initial agreement. Under the amended agreements, both companies have
rights to all jointly developed iontophoretic technologies and know-how, and
Laboratoires Fournier has a limited non-exclusive license to the Company's
previously existing proprietary iontophoretic technologies.
Boston University Agreement. In December 1997, the Company acquired a
non-exclusive, fully-paid, perpetual, non-royalty bearing license to certain
iontophoretic drug delivery technology developed by Boston University. The
agreement also provides the Company with the right to sublicense the technology
upon the payment of a sublicense fee.
MANUFACTURING
The Company's manufacturing activities primarily relate to its
manufacture of electrode kits, which are manufactured and assembled using
several proprietary materials, components, processes and production technologies
developed by the Company in conjunction with its equipment and materials
suppliers. The Company has manufactured internally all of the electrodes it has
sold, and believes its electrode manufacturing capacity can be expanded to meet
its needs for the foreseeable future.
The Company does not manufacture or repackage any drugs or compounds
used in its delivery systems and outsources the manufacture and assembly of its
Phoresor dose controllers. The Company's Phoresor employs a variety of
sub-assemblies and components that are designed or specified by the Company.
These components and subassemblies are manufactured by third parties, and then
shipped to a contract manufacturer for final assembly. The Company's
manufacturing activities for the Phoresor are limited to design, labeling,
inspection and packaging.
The Company's second and third generation dose controllers are in
various stages of design, research, and development and may require additional
clearance or a pre-market approval ("PMA") from the FDA prior to marketing. The
Company, alone or in conjunction with its development partners, will design the
products and, in combination with its suppliers, will manufacture and assemble
prototypes and clinical quantities. Upon completion of the design,
specifications and testing, the Company intends to subcontract the manufacture
and assembly of all commercial quantities of its dose controllers to electronics
companies that specialize in such work.
The Company and certain of its suppliers are required to comply with FDA
regulations governing manufacturing practices, including the Quality System
Regulations, which mandate controls for product design, control and quality. The
Company believes it is in compliance with the Quality System
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Regulations. The Company is also ISO 9001 and CE Mark certified and has good
manufacturing practices audits conducted on a regular basis.
SALES AND DISTRIBUTION
The Company's marketing strategy is to position its proprietary
iontophoretic drug delivery products in the marketplace as the preferred means
of drug delivery for a wide range of drugs. The strategy employs the use of
multiple sales and distribution channels, including (i) a network of medical
supply dealers; (ii) independent sales representatives; and (iii) collaborative
marketing partners. The Company intends to use these distribution channels, both
singly and, for certain products, in combination, to maximize the Company's
marketing resources.
The Company currently sells its drug delivery system for acute local
inflammatory conditions to the physical therapy, sports medicine, and related
specialty markets. The Company employs a nationwide network of distributors and
independent sales representatives to sell and distribute its products in those
markets. This distribution network is supported by regional business managers
and internal customer service representatives who are employees of the Company.
In addition to the Company's sales and distribution efforts for its local
inflammation products in the United States, it maintains marketing and sales
activities in international markets. These sales are made primarily through
independent distributors operating in those countries.
In 1997, the Company launched an iontophoretic drug delivery system for
Iontocaine and initially targeted its sales efforts for this product in the
pediatric hospital market under the name Numby Stuff. The Company's regional
business managers and internal customer service representatives along with
independent sales representatives facilitate the sales of Numby Stuff in the
pediatric hospital market. The Company is seeking collaborative marketing
partners or distributors to expand its marketing efforts for its Iontocaine
products for this market and to the general physician office and international
markets.
One distributor accounted for approximately 15% of the Company's product
sales for the fiscal year ended June 30, 1999. Although a valued distribution
channel, in the event of a loss of such customer, the Company believes that it
could continue to reach a substantial portion of its end user customers through
alternative distribution channels. No single distributor accounted for more than
10% of product sales in fiscal 1998 or 1997.
PATENTS AND PROPRIETARY RIGHTS
The Company's iontophoretic drug delivery technologies include patents,
trademarks, trade secrets and other proprietary know-how. These technologies are
used in various combinations in the testing, evaluation and formulation of
optimal ionic drug solutions and in the research, development, design and
manufacture of microprocessor controlled power supplies and iontophoretic
electrodes which are specifically designed and constructed for particular
therapeutic applications.
The Company has implemented a policy of actively patenting and
maintaining as trade secrets and proprietary information all inventions and
technologies which it believes are important to its business operations. The
Company generally seeks patent protection for its key proprietary technologies
and technological products in the United States, Canada, Europe and Japan. The
Company also relies on a number of trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
its competitive position.
As of June 30, 1999, the Company held or had rights to utilize
approximately 59 United States patents and 278 foreign patents relating to its
iontophoretic drug delivery technology, and has (or has the rights to utilize)
approximately 8 pending patent applications in the United States and 42 pending
patent applications in foreign countries for that technology. The Company also
owns or has licensed rights to issued and pending United States patents
governing the design and manufacture of certain myoelectric
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prosthetic devices which it has sublicensed to a third party in connection with
the sale of the Company's Motion Control division.
GOVERNMENT REGULATION
Both drugs and medical devices, including the Company's iontophoretic
drug delivery systems, are subject to extensive regulation by the FDA in the
United States and by comparable authorities in other foreign countries.
The Company's iontophoretic drug delivery products involve a medical
device component, thereby subjecting such products to compliance with the FDA's
regulations governing medical devices. Where such medical devices are labeled
for use with a specific pharmaceutical product for a specific therapeutic
indication, they are subject to the FDA's regulations governing both medical
devices and pharmaceutical products. The Company believes that most, if not all,
of its future iontophoretic drug delivery systems will involve a pharmaceutical
component or specific labeling for use with a pharmaceutical product.
Products regulated as medical devices may not be commercially
distributed in the United States unless they have been cleared or approved by
the FDA. Currently, there are two methods for obtaining FDA clearance or
approval of medical devices. Devices deemed to pose less risk are placed in
class I (general controls) or class II (general and special controls) and
qualify for 510(k) notification, a procedure under sec. 510(k) of the Federal
Food, Drug, and Cosmetic Act. A medical device that does not qualify for the
510(k) clearance is placed in class III, which is reserved for devices deemed by
the FDA to pose the greatest risk. A preamendment class III device is one that
was on the market before May 28, 1976. This status means that the device at
present can be marketed through a 510(k) clearance, but it remains subject to a
call for a PMA application under sec. 515 of the Drug Act. A PMA application
generally requires a much more complex submission than a 510(k) notification.
Typically, it requires a showing that the device is safe and effective based on
extensive and costly preclinical and clinical testing, as well as information
about the device and its components regarding, among other things,
manufacturing, labeling and promotion.
The regulatory status of iontophoretic devices is complex. The FDA has
classified them as class II devices eligible for marketing through 510(k)
premarket clearance when intended for use with a drug whose labeling bears
adequate directions for the device's use with that drug. However, if an
iontophoretic device is intended for use with a drug that is not labeled for use
with the device, the FDA considers the iontophoresis device to be a preamendment
class III device.
The Company's Phoresor received 510(k) clearance as a preamendment class
III device labeled for use with ions of soluble salts or other drugs. In 1995,
the FDA approved an NDA for Iontocaine to be used as a local anesthetic and
delivered iontophoretically by the Phoresor, which effectively moved the
Phoresor into class II for this intended use. Unlike Iontocaine, Dexamethasone
does not have an NDA approval allowing it to be labeled for iontophoretic
delivery. Thus, at the present time, the Company's Phoresor is a preamendment
class III device when used with Dexamethasone (or any drug other than
Iontocaine). No assurance can be given that the Company will ever obtain an
approved NDA for the iontophoretic delivery of Dexamethasone.
An even more lengthy and complex regulatory framework applies to the
labeling and marketing of specific drugs. Generally these pharmaceutical
products require the submission of an NDA. The NDA approval process generally
entails (i) conducting preclinical laboratory and animal testing to enable FDA
authorization of an IND application, (ii) initial IND clinical studies to define
safety and dose parameters, (iii) well controlled IND clinical trials to
demonstrate product safety and efficacy, and (iv) submission to the FDA of an
NDA. Preclinical studies involve laboratory evaluation of product
characteristics and animal studies to assess the efficacy and safety of the
drug. Human clinical trials are typically conducted in three sequential phases.
Phase I trials normally consist of testing the product in a small number of
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healthy volunteers for safety and pharmacokinetic parameters using single and
multiple dosing regimens. In Phase II trials, the manufacturer evaluates safety,
initial efficacy, and dose ranging of the product for specific indications in a
somewhat larger patient population. Phase III trials typically involve expanded
testing for safety and clinical efficacy in a broad patient population at
multiple clinical testing centers. The FDA under a series of regulations called
the Good Laboratory Practice regulations regulates the preclinical and clinical
studies. The results of the studies must be submitted to the FDA for review. In
responding, the FDA may grant marketing approval, require additional testing
and/or information, or deny the application altogether. The process of obtaining
FDA approval for a new product through the IND/NDA process may take several
years and typically involves substantial risks and the expenditure of
substantial resources.
The FDA regulates the Company's quality control and manufacturing
procedures by requiring the Company and its contract manufacturers to comply
with certain standards, including compliance with the Quality System Regulations
(for devices) and the current Good Manufacturing Practices ("GMP") regulations
(for drugs).
The Company may be subject to certain user fees that the FDA is
authorized to collect under the Food and Drug Modernization Act of 1997, which
reauthorized the user fees established in the Prescription Drug User Fees Act of
1992 for certain drugs.
Agencies similar to the FDA regulate medical devices and pharmaceutical
products in most foreign countries. The International Standards Organization
(ISO) has established regulations for medical devices in the European Union.
Currently the Company is in compliance with these ISO 9001 regulations and its
products are CE Marked. The Company will be required to meet the regulations of
any foreign country where it markets its products. In addition, various aspects
of the Company's business and operations are also regulated by a number of other
governmental agencies including the Drug Enforcement Agency, U.S. Department of
Agriculture, the Environmental Protection Agency, the Occupational Safety and
Health Administration as well as by other federal, state and local authorities.
Noncompliance with these various government regulatory requirements
could result in enforcement actions that could include fines, plant closure, a
recall of the Company's products or other civil or criminal sanctions.
Noncompliance as well as unanticipated changes in existing regulatory
requirements or adoption of new requirements could have a material adverse
effect on the Company.
COMPETITION
The drug delivery, pharmaceutical and biotechnology industries are
highly competitive and rapidly evolving, with significant developments expected
to continue at a rapid pace. The Company's success will depend upon maintaining
a competitive position and developing products and technologies for efficient
and cost effective drug delivery. The Company's products will compete with other
formulations of drugs and with other drug delivery systems, including other
iontophoretic delivery systems. The Company believes its products will compete
on the basis of quality, efficacy, cost, convenience, safety and patient
compliance.
The Company is aware of many other competitors in the general field of
drug delivery, including competitors developing injectable or implantable drug
delivery systems, oral drug delivery technologies, passive transdermal systems,
oral transmucosal systems and intranasal and inhalation systems. The Company is
also aware of other companies that have developed or are currently developing
iontophoretic and other electrotransport drug delivery systems.
Alza, Becton Dickinson, and Empi, Inc. ("Empi") are engaged in the
development and/or marketing of iontophoretic devices. Alza, a licensee of the
Company, and Becton Dickinson are both undertaking the development of
iontophoretic drug delivery systems, but neither currently market any
iontophoretic products. Empi is the Company's primary competitor in the
treatment of acute local
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inflammation in the physical therapy market and, the Company estimates, controls
a majority of the retail iontophoresis market for that indication.
In connection with their collaboration, the Company granted Novartis a
perpetual, non-exclusive, royalty bearing license to certain of the Company's
iontophoretic technology which will survive the termination of the
collaboration. After the termination of the collaboration on December 31, 1998,
Novartis may, pursuant to the royalty-bearing license, independently develop
products using the licensed technology, including products which may compete
directly with those currently marketed or under development by the Company.
Currently, no other company has FDA approval to market an iontophoretic
system for the inducement of local anesthesia. The Company's iontophoretic
system for delivering Iontocaine for the inducement of local dermal anesthesia
will therefore primarily compete with traditional methods of delivering local
dermal anesthetics by needle injection or will be used in circumstances where
either no anesthesia is used, due to the pain associated with the needle
injection (including needle injections themselves), or where topical anesthetic
creams are used. The most effective and widely used topical anesthetic cream,
EMLA, is manufactured and sold by Astra Corporation, a large Swedish
pharmaceutical company. There can be no assurance that the Company can
effectively compete with these products or any other drug delivery system.
EMPLOYEES
The Company has assembled a team of medical-products managers and
scientists with considerable experience in iontophoresis encompassing all of the
key disciplines which the Company believes are necessary to further the
development and implementation of the Company's business.
As of June 30, 1999, the Company had 65 full-time employees, 3 of whom
hold doctorate degrees. Seven others hold advanced business or technical
degrees. Of the Company's 65 full-time employees on that date, 12 were engaged
in research and development, 33 in manufacturing and quality control, and 20 in
marketing and general administration. The Company's future success depends in
significant part upon the continued service of its key technical and senior
management personnel and its continuing ability to attract and retain highly
qualified technical and managerial personnel. None of the Company's employees is
represented by a labor union. The Company has not experienced any work stoppages
and considers its relations with its employees to be good.
ITEM 2. PROPERTIES
The Company maintains leased administrative, manufacturing and research
office space at two facilities. The Company's principal executive offices and
manufacturing facility, which consists of approximately 18,000 square feet of
useable space, are located at 3385 West 1820 South in Salt Lake City, Utah. Its
research facility, which consists of approximately 10,000 square feet of useable
space, is located at 1290 West 2320 South in Salt Lake City, Utah. These
facilities are leased to the Company until December 31, 2000 and 2004,
respectively. The Company believes its existing facilities are adequate and
suitable for its present needs and that additional space will be available as
needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in, nor is it aware of, any litigation or
impending litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this Report.
19
<PAGE> 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock has traded on the American Stock Exchange
(the "AMEX") since April 24, 1998, under the symbol "IOX". The following table
sets forth monthly information on the price range of the Company's common stock
since that date. This information indicates the high and low sales prices as
reported by the AMEX. These prices represent quotations between dealers and do
not include retail mark-up, mark-down or commission, and do not necessarily
represent actual transactions.
1999 1998
HIGH LOW HIGH LOW
-------- -------- -------- --------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
First Quarter $ 5.125 $ 1.438 N/A N/A
Second Quarter $ 3.750 $ 1.000 N/A N/A
Third Quarter $ 3.875 $ 1.750 N/A N/A
Fourth Quarter $ 2.750 $ 2.000 $ 8.250 $ 5.000
</TABLE>
As of June 30, 1999, there were approximately 134 shareholders of record
of the Company's common stock. Included in the number of shareholders of record
are shares held in "nominee" or "street" names. Because many of such shares are
held by brokers and other institutions on behalf of individual investors, the
Company is unable to estimate the total number of shareholders represented by
these record holders.
The Company has not paid dividends to date and does not anticipate or
contemplate paying cash dividends in the foreseeable future. It is the present
intention of management to utilize all available funds for the development and
growth of the Company's business.
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<PAGE> 21
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected statements of operations data for the years ended
June 30, 1999, 1998 and 1997, and the balance sheet data as of June 30, 1999 and
1998 are derived from the audited consolidated financial statements included in
this report and should be read in conjunction with those consolidated financial
statements and the notes thereto. The selected statement of operations data for
the years ended June 30, 1996 and 1995, and the balance sheet data as of June
30, 1997, 1996 and 1995 are derived from the audited consolidated financial
statements of the Company, which are not included herein and are qualified by
reference to such financial statements and the notes thereto. Certain
reclassifications have been made to prior year balances to conform to the
financial statement presentation included herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
---------- ---------- ---------- ---------- ----------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product Sales ................... $ 9,608,000 $ 8,489,000 $ 7,483,000 $ 6,829,000 $ 6,964,000
Contract research revenues,
royalties and license fees ..... 893,000 1,788,000 1,800,000 2,409,000 ---
------------ ------------ ------------ ----------- -----------
Total revenues ................ 10,501,000 10,277,000 9,283,000 9,238,000 6,964,000
Operating costs and expenses:
Cost of products sold ........... 3,961,000 3,659,000 3,147,000 2,984,000 3,221,000
Research and development ........ 1,860,000 1,790,000 1,679,000 1,253,000 1,615,000
Selling, general and
administrative .................. 5,393,000 5,389,000 3,501,000 3,283,000 3,338,000
Non-recurring charges ........... --- --- 15,059,000(1) 430,000(2) ---
------------ ------------ ------------ ----------- -----------
Total costs and expenses ...... 11,214,000 10,838,000 23,386,000 7,950,000 8,174,000
------------ ------------ ------------ ----------- -----------
Income (loss) from operations ..... (713,000) (561,000) (14,103,000) 1,288,000 (1,210,000)
Interest expense .................. 19,000 930,000 242,000 9,000 32,000
Interest income and other, net .... 867,000 402,000 291,000 167,000 120,000
------------ ------------ ------------ ----------- -----------
Income (loss) from continuing
operations before income taxes and
minority interest .............. 135,000 (1,089,000) (14,054,000) 1,446,000 (1,122,000)
Minority interest ................. --- 11,000 23,000 (17,000) ---
Income tax expense (benefit) ...... --- --- 5,000 (79,000) (173,000)
------------ ------------ ------------ ----------- -----------
Income (loss) from continuing
operations ........................ 135,000 (1,100,000) (14,082,000) 1,542,000 (949,000)
Income from discontinued
operations(3) ..................... --- --- 44,000 201,000 290,000
------------ ------------ ------------ ----------- -----------
Net income (loss) ................. $ 135,000 $ (1,100,000) $(14,038,000) $ 1,743,000 $ (659,000)
============ ============ ============ =========== ===========
DILUTED PER COMMON SHARE AMOUNTS:
Income (loss) from continuing
operations ........................ $0.02 $(0.29) $ (4.52) $0.42 $(0.47)
Income from discontinued
operations ........................ --- --- 0.01 0.05 0.14
------------ ------------ ------------ ----------- -----------
Net income (loss) ................. $ 0.02 $ (0.29) $ (4.51) $ 0.47 $ (0.33)
============ ============ ============ =========== ===========
Shares used in computing diluted
per share amounts(4) .............. 7,429,000 3,821,000 3,109,000 3,710,000 2,038,000
BALANCE SHEET DATA:
Cash and cash equivalents ......... $ 17,263,000 $ 16,709,000 $ 6,346,000 $ 4,507,000 $ 1,861,000
Total assets ...................... 20,154,000 20,200,000 8,664,000 7,251,000 4,770,000
Long-term obligations, including
current portion ................... 186,000 237,000 15,240,000(5) 44,000 3,099,000
Redeemable, convertible preferred --- --- 900,000 1,270,000 2,235,000
shares ............................
Accumulated deficit ............... (22,503,000) (22,638,000) (21,538,000) (7,500,000) (9,243,000)
Shareholders' equity (deficit) .... 18,791,000 18,651,000 (9,491,000) 3,992,000 (1,592,000)
</TABLE>
- -------------------------
(1) Reflects the write-off of certain in-process research and development
(including related transaction costs) purchased from Elan.
(2) Costs incurred in connection with the settlement of certain trade dress
litigation.
(3) Discontinued operations include the operating results of the Company's
prosthetics division, which was sold in December 1996.
(4) See Notes to Consolidated Financial Statements for information concerning
the computation of per share amounts.
(5) Reflects $15,240,000 (including accrued interest) in notes issued to Elan at
June 30, 1997.
21
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and the related Notes thereto included elsewhere in this
Report. The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements, within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, that involve risks and uncertainties. The
Company's actual results of operations could differ significantly from those
anticipated in such forward-looking statements as a result of numerous factors
discussed under Item 1 "Business" and elsewhere in this Report.
OVERVIEW
The Company develops, manufactures and commercializes controllable drug
delivery systems using iontophoretic technology. The majority of the Company's
revenues have been generated through the sale of its Phoresor system and related
iontophoretic drug delivery products in the physical therapy market for use in
the delivery of Dexamethasone and contract research revenues from the Company's
collaboration with Novartis. The Company recently introduced its local dermal
anesthesia products into the market place and, to date, has not realized
significant revenue from the sales of such products. Since its inception, the
Company has generally incurred operating losses and it expects to incur
additional operating losses over the next several years as a result of
anticipated costs associated with a significant increase in internally funded
research, development and clinical trial activities relating to new applications
for its iontophoretic drug delivery technologies, and the consolidation and
equipping of its facilities. As of June 30, 1999, the Company's accumulated
deficit was approximately $22.5 million. The Company's ability to achieve and
sustain profitability will depend on its ability to achieve market acceptance
and successfully expand sales of its existing products; successfully complete
the development of, receive regulatory approvals for, and successfully
manufacture and market its products under development; as well as successfully
negotiate and enter into agreements with collaborative partners, licensors,
licensees and other parties for the development, clinical testing, manufacture,
marketing or commercialization of certain of its products or products in
development, as to which there can be no assurance.
FISCAL YEARS ENDED JUNE 30, 1999 AND 1998
Revenues. Product sales increased 13% to $9.6 million in fiscal 1999
from $8.5 million in fiscal 1998. The increase can be attributed primarily to
higher sales of the Company's iontophoretic drug delivery products for the
treatment of local inflammation resulting from continued overall growth in this
market.
Contract research revenues, royalties and license fees were $893,000 in
fiscal 1999 compared to $1.8 million in fiscal 1998. This is attributable to a
decrease in research revenues pursuant to the Company's collaborative
development agreement with Novartis, which ended in December 1998. Accordingly,
this decrease in research revenue is expected to continue while the Company
seeks new collaborative development partnerships. The effect of the loss of
contract research revenue on the Company's future operating results may be
offset, in part, by a reduction in research and development expenditures
incurred in connection with the collaboration.
Costs of Products Sold. Costs of products sold increased 8% to $4.0
million in fiscal 1999 from $3.7 million in fiscal 1998, reflecting increased
material and labor costs associated with higher unit sales volumes and certain
non-recurring engineering and tooling costs. Costs of products sold decreased as
a percentage of product sales primarily as a result of lower fixed manufacturing
services costs spread over a larger sales volume offset, in part, by an increase
in labor and material costs.
22
<PAGE> 23
Research and Development Expense. Research and development expenditures
were approximately $1.9 million in fiscal 1999 and $1.8 million in fiscal 1998.
A reduction in research and development expenditures on Novartis related
activities during the current period was offset by increased discretionary
spending on internally funded research projects, including the Phase III
clinical trials for IontoDex for the treatment of acute local inflammatory
conditions.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $5.4 million in fiscal 1999 and 1998. Expenses in
fiscal 1999 included increased legal, professional and related costs incurred in
connection with investor relations and SEC compliance, increased patent
prosecution and maintenance costs, and executive recruiting costs associated
with the Company's efforts to fill positions in its executive management staff.
In addition, the Company incurred one-time costs associated with the
restructuring of the Company's field sales force and an increase in certain
marketing and promotional expenses. Expenses in fiscal 1998 included recruiting,
personnel and other sales and marketing costs associated with the Company's
ongoing investment in the market introduction of Numby Stuff. In addition, the
Company realized increased costs associated with the maintenance and prosecution
of the patent portfolio acquired from Elan.
Although the response to the Company's Numby Stuff product line by
medical professionals and medical organizations has been positive, the process
by which such products obtain administrative review and final approval for use
in the hospital environment is extremely complex and time consuming. Among other
things, such new products are subject to extensive evaluations within each
hospital and often each department, require review and approval by hospital
products and therapeutics committees, and must be accepted for inclusion on the
hospital's formulary. As a result, in August 1998, the Company restructured its
sales and marketing organization to reduce overall costs and bring them in line
with current product sales and the slower than anticipated rate of market
penetration of Numby Stuff. In addition, the Company is seeking to expand its
sales, marketing and distribution capabilities for all of its product lines
through collaborative partnerships and by broadening its current dealer
distribution network.
Other Costs and Expenses. Interest expense decreased to $19,000 in
fiscal 1999 from $930,000 in fiscal 1998. This decrease can be attributed to
lower interest expense resulting from the repayment of the Company's
indebtedness to Elan in transactions related to the initial public offering of
its common shares in April 1998. In contrast, in fiscal 1998, the Company
recognized non-cash interest expense on the $15.0 million in notes issued to
Elan in connection with the Elan Agreements. Interest income and other
miscellaneous income was $867,000 in fiscal 1999, compared to $402,000 in fiscal
1998, reflecting higher interest earnings on higher average invested cash
balances, which included the net proceeds from the Company's initial public
offering in April 1998.
Income (loss) from Continuing Operations. Income from continuing
operations of $135,000 in fiscal 1999 compares to a loss from continuing
operations of $1.1 million in fiscal 1998. The income in fiscal 1999 can be
attributed to the interest earnings on invested cash balances, while the loss in
fiscal 1998 can be attributed to the non-cash interest charges on the Elan
indebtedness and the Company's investment in the sales and marketing of Numby
Stuff, which, to date, has not generated significant revenues.
FISCAL YEARS ENDED JUNE 30, 1998 AND 1997
Revenues. Product sales increased 13% to $8.5 million in fiscal 1998
from $7.5 million in fiscal 1997. The increase can be attributed to higher sales
of the Company's iontophoretic drug delivery products for the treatment of local
inflammatory conditions resulting from overall market growth in this segment.
Contract research revenues, royalties and license fees were $1.8 million
in both fiscal 1998 and 1997. Contract revenues during fiscal 1998, included the
Company's receipt of royalty revenues pursuant to the sale of its Motion Control
division and during fiscal 1997 included a milestone payment from
23
<PAGE> 24
Novartis. Contract research revenues received during fiscal 1998 and 1997
pursuant to the Novartis agreement covered a substantial portion of the
Company's research and development expenses.
Costs of Products Sold. Costs of products sold increased 16% to $3.7
million in fiscal 1998 from $3.1 million in fiscal 1997, reflecting increased
material and labor costs associated with higher unit sales volumes. Costs of
products sold increased as a percentage of product sales primarily as a result
of higher royalty obligations and a less favorable product mix.
Research and Development Expense. Research and development expenditures
were approximately $1.8 million in fiscal 1998 and $1.7 million in fiscal 1997.
Fiscal 1998 includes a higher proportion of expenditures on internally financed
product development projects of the Company.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 54% to $5.4 million in fiscal 1998, from $3.5
million in fiscal 1997. This increase can be attributed primarily to recruiting,
personnel and other sales and marketing costs associated with the Company's
continued investment in the market introduction of Numby Stuff. In addition, the
Company realized increased costs associated with the maintenance and prosecution
of the patent portfolio acquired from Elan.
Non-Recurring Charges. In fiscal 1997, the Company entered into the Elan
Agreements pursuant to which the Company acquired certain rights to Elan's
in-process research and development relating to iontophoretic drug delivery,
including issued and pending United States and foreign patents, know-how and
clinical data. As a result of this transaction, the Company recorded a
non-recurring charge of approximately $15.1 million.
Other Costs and Expenses. Interest expense increased to $930,000 in
fiscal 1998 from $242,000 in fiscal 1997. This increase can be attributed to the
recognition of interest expense on $15.0 million in notes issued to Elan in
connection with the Elan Agreements. Interest income and other miscellaneous
income was $402,000 in fiscal 1998, compared to $291,000 in fiscal 1997,
reflecting higher interest earnings on higher average invested cash balances,
which included the net proceeds from the Company's initial public offering in
April 1998.
The Company has substantial net operating loss carryforwards. Income
taxes in fiscal 1997 reflect the estimated alternative minimum tax liability,
offset by the recognition of future tax benefits resulting from the allocation
of income tax expense, at statutory rates, to the pre-tax income of the
Company's discontinued operations.
Income (loss) from Continuing Operations. A loss from continuing
operations of $1.1 million in fiscal 1998 compares to a loss from continuing
operations of $14.1 million in fiscal 1997. The loss in fiscal 1998 can be
attributed to the non-cash interest charges on the Elan indebtedness and the
Company's investment in the sales and marketing of Numby Stuff, which, to date,
has not generated significant revenues. The loss in fiscal 1997 can be
attributed to the non-recurring charge resulting from the write-off of
in-process research and development acquired from Elan.
LIQUIDITY AND CAPITAL RESOURCES
Prior to fiscal 1996, the Company funded its operating losses primarily
through private equity financing, convertible debt arrangements, capital lease
financing, and collateralized bank loans. Beginning in fiscal 1996, the
Company's operating and research activities have been internally funded,
primarily as a result of the research and development revenues and license fees
the Company received from Novartis.
Novartis elected not to renew its collaborative research and development
agreement with the Company, which expired on December 31, 1998. Accordingly, the
Company's contract research revenues declined during fiscal 1999 and may
continue to decline in future years. The effect of the loss of contract
24
<PAGE> 25
research revenue on the Company's future operating results and cash flow may be
offset, in part, by a reduction in research and development expenditures
incurred in connection with the collaboration. In addition, the Company may earn
additional contract research revenues, if successful in its efforts to enter
into new collaborative research and development arrangements.
In April 1998, the Company consummated an initial registered public
offering pursuant to which the Company issued 1,850,000 common shares and raised
approximately $11,445,000, net of underwriters' discounts and estimated
expenses. As of June 30, 1999, the Company had cash and cash equivalents
totaling approximately $17.3 million. Cash in excess of immediate requirements
is invested in a manner which is intended to maximize liquidity and return while
minimizing investment risk, and, whenever possible, the Company seeks to
minimize the potential effects of concentration of credit risk.
The Company generated $789,000 in cash from operating activities during
fiscal 1999 compared to a use of $251,000 in fiscal 1998. Increased cash from
operating activities in fiscal 1999 can be attributed to higher net income with
a higher depreciation component as well as a decrease in the Company's net
investment in working capital during the current period. The Company consumed
$251,000 in cash for operating activities during fiscal 1998 compared to
providing $1.0 million in cash during fiscal 1997. This increased cash
consumption can be attributed to the higher cash loss in fiscal 1998 in
combination with the Company's continued net investment in working capital used
to finance its sales growth and expanded product offerings.
Historically, the Company's operations have not been capital intensive
and, therefore, its investment in property, plant and equipment during the
periods presented has not been significant. The Company anticipates however,
that its investment in facilities and equipment will increase in the future, due
to the Company's desire to consolidate its manufacturing, administrative and
research and development facilities and the need to increase the automation of
its electrode manufacturing processes to meet higher expected sales volumes. The
Company's expenditures for equipment and furniture were $189,000, $670,000 and
$231,000 in each of the fiscal years ended June 30, 1999, 1998 and 1997,
respectively.
Other sources and uses of cash during the periods included the
following. During fiscal 1999, the Company used $51,000 for payments on
long-term capital lease obligations. During fiscal 1998, the Company purchased a
license to certain iontophoretic drug delivery technology at a cost of $214,000,
including transaction expenses; received proceeds of $240,000 under a long-term
capital lease; and paid $180,000 for the mandatory redemption of a portion of
its Series C Preferred Shares. During fiscal 1997, the Company generated
$255,000 in cash from the private placement of its common shares; paid $70,000
to complete the mandatory redemption of its Series B Preferred Shares; and used
$39,000 for payments on long-term obligations
In other non-cash transactions related to the initial public offering,
(i) the Company granted warrants to purchase 170,000 common shares to the
underwriters, exercisable after April 23, 1999, at an initial exercise price of
$9.38 per share; (ii) Elan converted the amounts outstanding under the Elan
Notes, including accrued interest thereon, into 1,206,391 common shares and
893,901 shares of newly created Series D preferred shares, at the initial public
offering price of $7.50 per share; (iii) the 28,800 Series C preferred shares of
the Company which were outstanding immediately prior to the offering were
automatically converted, on a share-for-share basis, into common shares; and
(iv) the Company issued an additional 29,697 common shares to Laboratoires
Fournier, pursuant to the anti-dilution provisions of a prior stock purchase
agreement between the companies. Also during fiscal 1998, Novartis converted
their minority interest in Dermion, Inc. into common shares of the Company.
The Company expects to continue to incur substantial costs associated
with the expansion of its research and development activities, including
clinical trials, continued investment in sales and marketing of new product
lines, additional investment in working capital, and the cost of consolidating
and equipping its facilities. The Company anticipates that the net proceeds of
the Company's initial public offering, together with existing cash balances and
cash generated from operations will be sufficient to fund the
25
<PAGE> 26
operations of the Company at least through fiscal 2001. However, the Company may
be required or elect to raise additional capital before that time. The Company's
actual capital requirements will depend on many factors, some of which are
outside the Company's control.
DISCONTINUED OPERATIONS
Prior to January 1997, the Company provided state-of-the-art prosthetics
products to amputees throughout the United States, Canada and Western Europe
through its Motion Control division. Motion Control's principal products were
the Utah Artificial Arm and the ProControl II, advanced myoelectric prostheses
for above and below the elbow amputees.
In December 1996, the Company sold the assets of the Motion Control
division for $1.0 million and granted the purchaser an exclusive, worldwide
license and sublicense to the patents, trademarks, know-how and other
intellectual property of the Company relating to the Motion Control products.
Under the terms of that sublicense agreement, the Company will receive license
fees and royalties on future sales of the Motion Control products. There was no
significant gain or loss recognized on the sale. The results of operations of
the Motion Control division, exclusive of any corporate allocations, are
reported as discontinued operations in the consolidated financial statements for
all periods presented. See Note 11 of the Notes to the Consolidated Financial
Statements.
IMPACT OF THE YEAR 2000
Many computer systems experience problems handling dates beyond the year
1999. The Company has completed its evaluation of its primary operating systems
(including its financial systems, material requirements planning, and production
lot tracking systems) and believes, based upon its evaluation as well as
representations from its software suppliers, that its operating systems are
substantially year 2000 compliant. To the extent that any software applications
are not fully year 2000 compliant, the Company expects that software upgrades
made in the normal course of business will either minimize, isolate or possibly
eliminate any substantive risks associated with software or system failure.
To date, the Company has not incurred any significant costs associated
with the evaluation or modification of its systems relating to year 2000
compliance and does not anticipate the need to incur any costs outside the
normal course of business. In the event that any of the Company's systems should
fail due to a failure to identify and address a year 2000 exposure, the Company
believes that the size and scope of its operations would allow the Company to
revert to manual operating systems on a timely basis.
The custom circuitry and software utilized in the Company's
iontophoretic dose controllers do not include any date driven functions and
therefore will not exhibit any change in performance due to the arrival of the
year 2000. The Company has initiated procedures designed to evaluate the year
2000 exposure of its significant suppliers and other vendors whose systems may
impact the Company's operations. To date, the Company has not identified any
compliance deficiencies that might have a significant impact on the Company if
not rectified by such supplier or vendor on a timely basis. There can be no
assurance that such a deficiency will not be discovered or arise in the future
or that the Company would be able to identify and validate an alternative source
for any service or material which may be affected by such deficiency.
ADDITIONAL RISK FACTORS
Future results could differ materially from those currently anticipated
by the Company due to a number of factors, including those identified in this
section and elsewhere in this Form 10-K, any of which could have a material
adverse impact on the Company's business, financial condition or results of
operations.
26
<PAGE> 27
Continuing Operating Losses; Uncertainty of Future Profitability. Since
1991, the Company has sustained losses in each fiscal year, except fiscal years
1999 and 1996. The Company had an accumulated deficit of $22.5 million as of
June 30, 1999. The Company intends to expand its product lines, research and
development, business development and marketing efforts in the near future and,
therefore, does not anticipate being profitable in the near term. The Company's
ability to achieve and sustain profitability will depend on its ability to
achieve market acceptance, and successfully expand sales of its existing
products, as well as successfully complete the development of, receive
regulatory approvals for, and successfully manufacture and market, its products
under development, as to which there can be no assurance.
Uncertainty of Market Acceptance and Limited Market Penetration. The
Company has generated only limited revenues, primarily from sales to physical
therapists of its drug delivery system for delivery of Dexamethasone for the
treatment of acute local inflammation. The Company began marketing a local
dermal anesthetic product that uses Iontocaine, in January 1997, and has
generated only limited revenues from that product to date. For the Company to be
successful, its products will need to achieve broad market acceptance by the
medical profession. The Company's products use a method of active transdermal
drug delivery which, to date, has not gained significant market penetration, and
no assurance can be given that the Company's current or future products will
ever achieve broad market acceptance.
Uncertainties Related to Product Development. Two of the primary
components of the Company's business strategy are to develop and commercialize
iontophoretic drug delivery systems for new and existing drugs and to develop
additional applications for its existing products. The Company will be required
to undertake time-consuming and costly development activities and seek
regulatory approval for these new products and applications. Product revenues
may not be realized from the sale of any such products for several years, if at
all. The Company can give no assurance that its product development efforts,
either alone or in collaboration with other parties, will ever be successfully
completed, that it can obtain required regulatory approvals of its products,
that products under development can be manufactured at acceptable cost or with
appropriate quality, or that its products can meet market needs or achieve
market acceptance.
Reliance on Collaborative Partners. The Company's strategy is to enter
into arrangements with corporate partners, licensors, licensees and other
parties for the development, clinical testing, manufacture, marketing or
commercialization of certain of its products or products in development.
Since 1995, Novartis has funded a substantial portion of the total
research and development costs of the Company pursuant to the R&D Agreements.
Although the Company met all of the essential development objectives under the
R&D Agreements, in July 1998, Novartis advised the Company that it would not
renew the R&D Agreements beyond the scheduled December 31, 1998, expiration
date. Since December 31, 1998, and until the Company enters into additional
collaborative agreements, the Company will be required to internally fund all of
its research and development expenditures. The failure to enter into such
arrangements on a timely basis could have a material adverse effect on the
Company's product development efforts, business, financial condition and results
of operations.
Although the Company anticipates it will enter into additional
collaborative arrangements with other parties in the future, there can be no
assurance the Company will be able to negotiate any such additional
collaborative arrangements on terms which are acceptable to the Company, if at
all. To the extent the Company chooses not, or is not able, to establish such
collaborations, it could experience significantly increased business risk and
capital requirements in the development, clinical testing, manufacturing,
marketing and commercialization of its products. The Company could also
encounter significant delays in introducing products into markets or find that
the development, manufacture or sale of proposed products in such markets is
adversely affected by the absence of those collaborative arrangements.
Intense Competition and Rapid Technological Change. The drug delivery,
pharmaceutical and biotechnology industries are highly competitive and rapidly
evolving, with significant developments
27
<PAGE> 28
expected to continue at a rapid pace. The Company's success will depend on its
ability to maintain a competitive position and develop new products and
technologies for efficient and cost effective drug delivery. The Company's
products will compete with other formulations of drugs and with other drug
delivery systems, including other iontophoretic delivery systems. There can be
no assurance any of the Company's products will have advantages that will be
significant enough to cause medical professionals to prefer or even use them.
New drugs or further development of alternative drug delivery methods may
provide greater therapeutic benefits for a specific drug or indication, or may
offer comparable performance at lower cost, than that offered by the Company's
iontophoretic drug delivery systems, which could have a material adverse effect
on the Company's business, financial condition and results of operations.
Many competitors, including public and private corporations, academic
institutions, governmental agencies and other public and private research
organizations, are involved in the development of drug delivery systems,
including competing electrotransport-related drug delivery technologies. Many of
these competitors have substantially greater financial and other resources, are
more experienced, and are larger, more established organizations than the
Company. There can be no assurance the Company's competitors will not succeed in
more rapidly developing or marketing products that are more effective or
commercially attractive than the Company's current or future products, or that
would render the Company's products obsolete or noncompetitive. There can also
be no assurance the Company will have the financial resources, technical or
management expertise, or manufacturing or support capability to compete in the
future.
The Company has licensed certain rights to its iontophoretic drug
delivery technologies to other parties, including Alza, Laboratoires Fournier
and Novartis, that are or may become direct competitors of the Company. These
companies could compete with the Company for contracts with the Company's
collaborative partners and could also develop iontophoretic drug delivery
systems that will compete directly with many of those currently marketed or
being developed by the Company.
Reliance on Third Party Distribution. The Company presently markets its
drug delivery systems for the treatment of acute local inflammation primarily to
physical therapists through a nationwide network of distributors and independent
sales representatives. The Company is currently marketing its local dermal
anesthesia products in the United States hospital market through a limited
number of sales personnel who work directly for the Company and independent
manufacturers representatives.
In order to achieve broad distribution and market penetration of its
current and future products, the Company intends to enter into arrangements with
collaborative marketing partners or distributors that have national or
market-specific marketing capabilities. There can be no assurance that the
Company will be able to maintain its existing, or establish new, marketing
arrangements on terms favorable to the Company, if at all.
Dependence on Patents and Proprietary Technology. The Company's ability
to commercialize many of the products it has under development will depend, in
part, on its or its licensors' ability, both in the United States and in other
countries, to obtain patents, enforce those patents, preserve trade secrets and
operate without infringing on the proprietary rights of third parties.
The patent positions of drug delivery, pharmaceutical and biotechnology
companies are highly uncertain and involve complex legal and factual questions.
There can be no assurance the patents currently owned and licensed by the
Company, or any future patents, will prevent other companies from developing
similar or therapeutically equivalent products, or that other companies will not
be issued patents that may prevent the sale of Company products or require
licensing and the payment of significant fees or royalties by the Company.
Furthermore, there can be no assurance any of the Company's products or methods
will be patentable, will not infringe upon the patents of third parties, or that
the Company's patents or future patents will give the Company an exclusive
position in the subject matter claimed by those patents. The Company may be
unable to avoid infringement of third party patents and may have to obtain
licenses, defend infringement actions or challenge the validity of those patents
in court. There can be no assurance a
28
<PAGE> 29
license will be available to the Company, if at all, on terms and conditions
acceptable to the Company, or that the Company will prevail in any patent
litigation. There can be no assurance the Company's pending patent applications
will result in issued patents, patent protection will be secured for any
particular technology, any patents that have been or may be issued to the
Company or its licensors will be valid or enforceable or that the Company's
patents will provide meaningful protection to the Company.
The Company also relies on trade secrets and other unpatented
proprietary information in its product development activities. To the extent the
Company relies on confidential information to maintain its competitive position,
there can be no assurance other parties may not independently develop the same
or similar information.
In August 1993, the United States Patent and Trademark Office ("PTO")
issued a patent to Alza covering the iontophoretic delivery of fentanyl. A
similar patent application in Europe has thus far been rejected, although the
Company believes Alza has appealed that rejection. The United States patent was
the subject of a reexamination by the PTO and all of the substantive claims
within the patent were also rejected, however Alza has successfully appealed
that rejection to the United States Board of Patent Appeals and Interferences.
There can be no assurance Alza will not be successful in an appeal in Europe.
Therefore, if the Company develops a drug delivery system for fentanyl, the
Company would be required to obtain a license from Alza to market any
iontophoretic drug delivery system it develops for fentanyl in the United States
and possibly Europe. There can be no assurance such a license would be available
on terms acceptable to the Company, if at all. Presently, the Company has
discontinued any product development programs using fentanyl.
Need to Manage Expanding Operations. If the Company is successful in
achieving market acceptance of its products, it will be required to expand its
operations, particularly in the areas of research and development, sales and
marketing, and manufacturing. As the Company expands its operations in these
areas, those expansions will likely result in new and increased responsibilities
for management personnel and place significant strain on the Company's
management, operating and financial systems and other resources. To accommodate
any such growth and compete effectively, the Company will be required to
implement improved information systems, procedures and controls, and to expand,
train, motivate and manage its work force. The Company's future success will
depend to a significant extent on the ability of its current and future
management personnel to operate effectively both independently and as a group.
There can be no assurance the Company's personnel, systems, procedures and
controls will be adequate to support the Company's future operations.
Future Capital Needs; Uncertainty of Additional Funding. The further
development and commercialization of the Company's products and technology will
require a commitment of substantial funds to conduct research and development
activities, including preclinical and clinical studies, to expand distribution
and hire additional sales and marketing personnel and to expand and develop
manufacturing capabilities. The Company believes that existing cash balances and
cash generated from operations will be sufficient to fund the operations of the
Company for at least the next 24 months; however, the Company's actual capital
requirements will depend on many factors, and the Company may be required or
elect to raise additional capital before that time.
To satisfy its capital requirements, the Company may seek to raise funds
through public or private financings, collaborative relationships or other
arrangements. Any additional equity financing may be dilutive to shareholders
and debt financing may involve significant restrictive covenants. Collaborative
arrangements to raise additional funds may require the Company to relinquish its
rights to certain of its technologies, products or marketing territories. There
can be no assurance that any such financing, if required, will be available on
terms satisfactory to the Company, if at all.
Uncertainty of Government Regulation. The research, development,
manufacture and marketing of the Company's products are extensively regulated by
the FDA, which requires its approval of drugs and medical devices before they
can be marketed in the United States. Similar approvals are also required from
29
<PAGE> 30
other regulatory bodies in foreign countries. The regulatory processes
established by these government agencies are lengthy, expensive and uncertain.
In addition, once approval is obtained, that approval may be withdrawn.
The Company has received approval from the FDA on its NDA for
Iontocaine, and the FDA has allowed the Company to market its iontophoretic dose
controllers and electrode products for use with ions of soluble salts or other
drugs under the FDA's 510(k) regulations governing medical devices. However, in
1994, the FDA publicly stated that it intends to require manufacturers of
iontophoretic devices to obtain PMAs for marketed devices currently used with
drugs not specifically labeled for iontophoretic delivery, which would include
the Company's dose controller for use with ions of soluble salts or other drugs,
such as Dexamethasone. The agency to date has not published such a regulation.
If the FDA calls for PMAs for preamendment class III iontophoretic
devices, the Company would be required to have a PMA accepted for filing by the
FDA within 90 days after the date of the final regulation calling for PMAs.
There can be no assurance that the Company would be able to complete and file a
PMA within the prescribed time period, or that the FDA would approve it. The
Company's failure to submit a PMA within the required timeframe could result in
the Company being required to cease commercial distribution of the Phoresor for
use with any drug other than Iontocaine. Any interference with the Company's
ability to distribute its Phoresor system for use with Dexamethasone would have
a material adverse effect on the Company's financial condition and results of
operations.
Even if the Company obtains regulatory approval, a marketed product, its
manufacturer and its manufacturing facilities and pertinent operations are
subject to extensive regulation and periodic inspections. Discovery of
previously unknown problems with a product, manufacturer or facility could
result in FDA sanctions, restrictions on a product or manufacturer, or an order
to withdraw and/or recall a specific product from the market. There can also be
no assurance that changes in the legal or regulatory framework or other
subsequent developments will not result in the limitation, suspension or
revocation of regulatory approvals granted to the Company. Such events, were
they to occur, could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company and certain of its suppliers are also required to comply
with US and foreign regulations governing manufacturing practices, which mandate
procedures for extensive control and documentation of product design, control
and validation of the manufacturing process and overall product quality. If the
Company or its suppliers fail to comply with applicable regulations regarding
these manufacturing practices, the Company could be subject to sanctions.
Under the FDA's regulations, when a manufacturer changes or modifies a
device for which it has received a 510(k) clearance, it is required to obtain an
additional 510(k) clearance for the modified device if the modification
significantly affects the safety or efficacy of the device, or if the
modification results in a major change in intended use. In such cases, the
manufacturer is expected to make the initial determination as to whether the
modification is of a kind that would require a new 510(k) clearance. The FDA's
regulations provide only limited guidance in making this determination. The FDA
has cleared the Company's iontophoretic dose controller and electrode kits for
marketing under a 510(k) clearance. Since obtaining its 510(k) clearances, the
Company has made modifications to its products. Based on the checklist developed
by the FDA to assist manufacturers in determining whether they are required to
obtain a 510(k) clearance for a modified device, the Company has determined that
a new 510(k) submission was not required in connection with the commercial
introduction of such products. However, there can be no assurance that the FDA
will not require the Company to obtain additional 510(k) clearances with respect
to those products. If the FDA requires the Company to submit a new 510(k) notice
for any device modification, the Company may be prohibited from marketing the
modified device until the 510(k) notice is cleared by the FDA.
Dependence on Single Sources of Supply. A key material used in many of
the Company's current electrode products is available only from a single
supplier. In addition, the Company obtains Iontocaine
30
<PAGE> 31
from Abbott Laboratories under a contract which may be terminated with six
months notice. The Company also has the right to obtain Dexamethasone from
Luitpold Pharmaceuticals, Inc./American Regent Laboratories, Inc. under a
contract expiring in January 2005. The Company believes that, if necessary,
alternative sources can be developed or alternate materials can be substituted
for each of these single-sourced materials. Although the Company has not
experienced difficulty acquiring these materials on commercially reasonable
terms and in sufficient quantities to maintain required production levels, no
assurance can be given that price increases or interruptions in the supply of
these materials will not occur in the future or that the Company will not have
to seek alternate suppliers or obtain substitute materials, which may require
additional product validations and regulatory submissions. Any significant price
increase, interruption of supply, inability to secure an alternate source or
qualify a substitute material could have a material adverse effect on the
Company's ability to manufacture its products or to obtain or maintain
regulatory approval of its products.
The Company's current dose controllers are manufactured under a contract
with a third party electronics manufacturer. There can be no assurance that its
present supplier can manufacture sufficient quantities of dose controllers that
meet quality and performance standards on a timely basis. If the supplier cannot
meet the Company's requirements, or in the event of an interruption of its
supply, the Company would be required to identify, qualify and validate an
alternate source of supply within a reasonable period of time.
Limited Manufacturing Experience. The Company manufactures its
iontophoretic drug delivery electrodes in quantities sufficient to satisfy its
current level of product sales. To meet anticipated increases in sales, the
Company may need to increase its production significantly beyond its present
manufacturing capacity. Accordingly, the Company may be required to increase its
manufacturing capacities or to contract with another party to manufacture its
products. There can be no assurance the Company can successfully increase its
capacity on a profitable basis, or contract with another party on terms
acceptable to the Company, if at all.
Significant increases in production volume will likely require changes
in the Company's product and manufacturing process in order to facilitate
increased automation of the Company's production. There can be no assurance such
changes in products or processes or efforts to automate the Company's
manufacturing process will be successful.
The Company believes its facilities operate in accordance with the
Quality System Regulations currently prescribed by the FDA and in substantial
compliance with ISO 9001 and CE Mark standards. The Company has GMP audits
conducted by a qualified, independent organization on a regular basis and is ISO
9001 and CE Mark certified. There can be no assurance the Company will be able
to maintain such compliance, particularly if the scale of the Company's
manufacturing operations increases.
Uncertainty of Health Care Reimbursement. The Company's ability to
commercialize its products successfully will depend in part on the extent to
which reimbursement for the costs of those products and related treatments will
be available from government health administration authorities, private health
insurers and other organizations in the United States and in foreign markets
where the Company's products will be sold and used. Third party payors can
affect the pricing or relative attractiveness of the Company's products by
regulating the reimbursement they provide on the Company's or competing products
or therapies. There can be no assurance such reimbursement will continue at
present levels, if at all. Some insurance carriers do not reimburse health care
providers for use of the Company's products in certain applications.
Furthermore, significant uncertainty exists as to the reimbursement status of
new health care products.
Effective October 1, 1991, the Health Care Financing Administration
adopted new regulations providing for the treatment of capital related costs for
medical products. The Company is unable to predict what adverse impact on the
Company, if any, these or any additional government regulations, legislation or
31
<PAGE> 32
initiatives or changes by other payors affecting reimbursement or other matters
that may influence decisions to obtain medical devices may have.
Retention and Attraction of Key Employees. The Company is highly
dependent on its ability to continue to attract and retain qualified scientific,
managerial, manufacturing and sales and marketing personnel. There is intense
competition for qualified personnel in the Company's area of activity, and there
can be no assurance the Company will be able to continue to attract and retain
the qualified personnel necessary for the development of its business. The
Company does not carry key-man insurance with respect to any of its executives
or employees.
Risk of Product Liability, Product Recalls and Warranty Claims;
Availability of Insurance. The testing, marketing and sale of drug delivery and
related pharmaceutical products for use in humans involves unavoidable risks.
The use of the Company's products in clinical trials and the sale of its
products upon approval may expose the Company to potential product liability
resulting from the use of such products. In addition, the existence of a product
liability claim, a product recall or excessive warranty claims (in any such
case, whether arising from defects in design or manufacture or otherwise) could
have an adverse effect on the Company's sales of that product or require a
change in the indications for which it may be used.
Product liability insurance in the Company's industry is expensive and
difficult to obtain. Although the Company currently has product liability
insurance, there can be no assurance the existing coverage is adequate. The
Company will seek to maintain and appropriately increase its insurance coverage
as its product sales increase and the clinical development of its new product
applications progress. There can be no assurance, however, that the Company will
be able to maintain its current levels of insurance on acceptable terms, will be
able to secure increased coverage as the commercialization of its products
proceeds or that any particular level of insurance will provide adequate
protection against potential liabilities.
Anti-Takeover Provisions of Certain of the Company's Agreements. Certain
provisions of a cross-license agreement between the Company and Alza may have
the effect of deferring, delaying or preventing a change in control of the
Company, a merger involving the Company or the assignment or transfer of certain
technologies of the Company. Under the agreement, the Company and Alza, among
other things, exchanged non-exclusive, royalty free rights to certain patented
technologies which each party believed to be of significant strategic importance
to the potential technological success of many iontophoretic drug delivery
applications. Both parties are prohibited from assigning their rights under the
agreement to certain named companies or any other entity that derives more than
50 percent of its income from the development, licensing and/or sale of drug
delivery systems to other pharmaceutical companies without first receiving the
consent of the other party. Restrictions imposed on the Company's ability to
assign its rights under this agreement may have the effect of prohibiting a sale
of the Company to such named companies or entities, or may otherwise limit the
Company's ability to capitalize on the commercial and other economic potential
of these technologies through a technology license, asset sale, merger,
combination or similar transaction.
Environmental Matters. The Company's research and development activities
involve the controlled use of hazardous materials, chemicals and various
radioactive compounds. These materials, and their use, disposal and handling,
are extensively regulated by federal, state and local government authorities.
Although the Company believes its safety procedures for handling and disposing
of such materials comply in all material respects with the standards prescribed
by state and federal regulations, the risk of accidental environmental
contamination or personal injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages and any such liability could exceed the resources of the
Company. There can be no assurance the Company will not be required to incur
significant costs to comply with such environmental and health and safety laws
and regulations in the future, particularly if the Company develops additional
manufacturing or research facilities and capacity.
32
<PAGE> 33
ITEM 7a. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and its subsidiary
are included elsewhere in this Report.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
33
<PAGE> 34
Consolidated Financial Statements
IOMED, Inc.
June 30, 1999
34
<PAGE> 35
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
IOMED, INC.
<TABLE>
<CAPTION>
PAGE
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Auditors ................................................. 36
Consolidated Balance Sheets at June 30, 1999 and 1998 .......................... 37
Consolidated Statements of Operations for the Years Ended June 30, 1999,
1998 and 1997 .................................................................. 38
Consolidated Statements of Shareholders' Equity (Deficit) for the Years
Ended June 30, 1999, 1998 and 1997 ............................................. 39
Consolidated Statements of Cash Flows for the Years Ended June 30, 1999,
1998 and 1997 .................................................................. 40
Notes to Consolidated Financial Statements ..................................... 41-50
</TABLE>
35
<PAGE> 36
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
IOMED, Inc.
We have audited the accompanying consolidated balance sheets of IOMED, Inc. and
subsidiary as of June 30, 1999 and 1998, and the related consolidated statements
of operations, shareholders' equity (deficit), and cash flows for each of the
three years in the period ended June 30, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of IOMED, Inc. and
subsidiary at June 30, 1999 and 1998, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1999, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Salt Lake City, Utah
August 6, 1999
36
<PAGE> 37
IOMED, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents .......................................... $ 17,263,000 $ 16,709,000
Accounts receivable, less allowance for doubtful
accounts of $78,000 in 1999 and $54,000 in 1998 ................... 1,292,000 1,570,000
Inventories ........................................................ 782,000 876,000
Prepaid expenses ................................................... 43,000 53,000
------------- -------------
Total current assets ......................................... 19,380,000 19,208,000
Equipment and furniture, net ......................................... 603,000 783,000
Other assets ......................................................... 171,000 210,000
------------- -------------
Total assets ................................................. $ 20,154,000 $ 20,201,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable ............................................. $ 237,000 $ 626,000
Accrued liabilities ................................................ 940,000 687,000
Current portion of long-term obligations ........................... 57,000 50,000
------------- -------------
Total current liabilities .................................... 1,234,000 1,363,000
Long-term obligations ............................................... 129,000 187,000
Commitments
Shareholders' equity:
Common shares, no par value; 100,000,000 shares authorized; issued
and outstanding 6,507,744 shares in 1999 and 6,499,518 shares in
1998.............................................................. 34,413,000 34,408,000
Convertible preferred shares, no par value; 10,000,000 shares
authorized; issued and outstanding of all series 893,801 shares in
1999 and 1998 .................................................... 6,881,000 6,881,000
Accumulated deficit ................................................ (22,503,000) (22,638,000)
------------- -------------
Total shareholders' equity ................................... 18,791,000 18,651,000
------------- -------------
Total liabilities and shareholders' equity ................... $ 20,154,000 $ 20,201,000
============= =============
</TABLE>
See accompanying notes.
37
<PAGE> 38
IOMED, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Product sales ................................. $ 9,608,000 $ 8,489,000 $ 7,483,000
Contract research revenue, royalties and
license fees ................................ 893,000 1,788,000 1,800,000
------------ ------------ ------------
Total revenues ........................... 10,501,000 10,277,000 9,283,000
Operating costs and expenses:
Cost of products sold ......................... 3,961,000 3,659,000 3,147,000
Research and development ...................... 1,860,000 1,790,000 1,679,000
Selling, general and administrative ........... 5,393,000 5,389,000 3,501,000
Non-recurring charges ......................... -- -- 15,059,000
------------ ------------ ------------
Total costs and expenses ................. 11,214,000 10,838,000 23,386,000
------------ ------------ ------------
Loss from operations ............................ (713,000) (561,000) (14,103,000)
Interest expense ................................ 19,000 930,000 242,000
Interest income and other, net .................. 867,000 402,000 291,000
------------ ------------ ------------
Income (loss) from continuing operations before
income taxes and minority interest ............ 135,000 (1,089,000) (14,054,000)
Minority interest ............................... -- 11,000 23,000
Income tax expense .............................. -- -- 5,000
------------ ------------ ------------
Income (loss) from continuing operations ........ 135,000 (1,100,000) (14,038,000)
Income from discontinued operations, net of
income taxes .................................. -- -- 44,000
------------ ------------ ------------
Net income (loss) ............................... $ 135,000 $ (1,100,000) $(14,038,000)
============ ============ ============
Basic and diluted income (loss) per common share:
Income (loss) from continuing operations ........ $ .02 $ (.29) $ (4.52)
Income from discontinued operations ............. -- -- .01
------------ ------------ ------------
Net income (loss) ............................... $ .02 $ (.29) $ (4.51)
============ ============ ============
</TABLE>
See accompanying notes.
38
<PAGE> 39
IOMED, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON SHARES CONVERTIBLE
------------------------------- PREFERRED ACCUMULATED
SHARES AMOUNT SHARES DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1996 .... 2,925,056 $ 11,492,000 $ $ (7,500,000) $ 3,992,000
Stock options exercised ... 6,483 5,000 -- -- 5,000
Conversion of redeemable,
convertible preferred
shares .................. 165,651 300,000 -- -- 300,000
Sale of common shares for
cash .................... 37,202 250,000 -- -- 250,000
Net loss .................. -- -- -- (14,038,000) (14,038,000)
------------ ------------ ------------ ------------ ------------
BALANCE AT JUNE 30, 1997 .... 3,134,392 12,047,000 -- (21,538,000) (9,491,000)
Stock options exercised ... 11,786 25,000 -- -- 25,000
Conversion of redeemable,
convertible preferred
shares .................. 28,800 720,000 -- -- 720,000
Sale of common shares for
cash .................... 1,850,000 11,445,000 -- -- 11,445,000
Conversion of subordinated,
convertible debt ........ 1,206,391 9,287,000 6,881,000 -- 16,168,000
Exchange of minority
interest and other ...... 268,149 884,000 -- -- 884,000
Net loss .................. -- -- -- (1,100,000) (1,100,000)
------------ ------------ ------------ ------------ ------------
BALANCE AT JUNE 30, 1998 .... 6,499,518 34,408,000 6,881,000 (22,638,000) 18,651,000
Stock options exercised ... 8,226 5,000 -- -- 5,000
Net income ................ -- -- -- 135,000 135,000
------------ ------------ ------------ ------------ ------------
BALANCE AT JUNE 30, 1999 .... 6,507,744 $ 34,413,000 $ 6,881,000 $(22,503,000) $ 18,791,000
============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
39
<PAGE> 40
IOMED, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ................................... $ 135,000 $ (1,100,000) $(14,038,000)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization ..................... 407,000 289,000 267,000
Write-off of in-process research and development... -- -- 15,059,000
Non-cash interest expense ......................... -- 928,000 240,000
Minority interest and other non-cash charges ...... 30,000 62,000 34,000
Changes in assets and liabilities:
Accounts receivable ............................. 249,000 (432,000) (444,000)
Inventories ..................................... 94,000 (162,000) (196,000)
Prepaid expenses and other assets ............... 10,000 (34,000) (6,000)
Trade accounts payable .......................... (389,000) 455,000 53,000
Other current liabilities ....................... 253,000 (257,000) 25,000
------------ ------------ ------------
Net cash provided by (used in) operating activities.. 789,000 (251,000) 994,000
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment and furniture ................ (189,000) (670,000) (231,000)
Purchase of patent license .......................... -- (214,000) --
Proceeds from sale of discontinued operations ....... -- -- 1,000,000
------------ ------------ ------------
Net cash provided by (used in) investing activities.. (189,000) (884,000) 769,000
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common shares ............. 5,000 11,470,000 255,000
Proceeds from long-term obligations ................. -- 240,000 --
Payments on long-term obligations ................... (51,000) (5,000) (39,000)
Redemptions of redeemable preferred shares .......... -- (180,000) (70,000)
Other ............................................... -- (27,000) (70,000)
------------ ------------ ------------
Net cash provided by (used in) financing activities.. (46,000) 11,498,000 76,000
Net increase in cash and cash equivalents ........... 554,000 10,363,000 1,839,000
Cash and cash equivalents at beginning of year ...... 16,709,000 6,346,000 4,507,000
------------ ------------ ------------
Cash and cash equivalents at end of year ............ $ 17,263,000 $ 16,709,000 $ 6,346,000
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest .............................. $ 19,000 $ 2,000 $ 2,000
Cash paid for income taxes .......................... $ -- $ -- $ 61,000
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Issuance of subordinated, convertible debt for
purchase of in-process research and development ... $ -- $ -- $ 15,000,000
Preferred shares converted to common shares ......... $ -- $ 720,000 $ 300,000
Subordinated debt converted to common and preferred
shares .............................................. $ -- $ 16,168,000 $ --
Minority interest converted to common shares ........ $ -- $ 909,000 $ --
</TABLE>
See accompanying notes.
40
<PAGE> 41
IOMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
IOMED, Inc., a Utah corporation (the "Company"), develops, manufactures
and commercializes controllable drug delivery systems using iontophoresis
technology.
Discontinued Operations
On December 31, 1996, the Company sold the assets of its Motion Control
division, which was engaged in the research, development, manufacture and sale
of advanced myoelectric prosthetic devices. The results of operations of the
Motion Control division prior to its sale have been classified as discontinued
operations in the accompanying consolidated statements of operations.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary Dermion, Inc. ("Dermion"). Dermion was
formed in April 1996 to conduct advanced research and development of
iontophoretic systems on its own behalf and on behalf of third party clients.
All significant intercompany transactions and accounts have been eliminated.
Prior to November 1997, Novartis Pharmaceuticals Corporation ("Novartis") owned
a 20% interest in Dermion which is reflected as minority interest in the
accompanying financial statements.
Cash Equivalents
The Company considers all highly-liquid investments with maturities of
three months or less, when purchased, to be cash equivalents.
Concentrations of Credit Risk
The Company's financial instruments that are exposed to concentrations
of credit risk consist primarily of cash, cash equivalents and trade accounts
receivable. Cash and cash equivalents are held in federally insured financial
institutions or invested in high grade short-term commercial paper issued by
major United States corporations. The Company sells its products primarily to,
and has trade accounts receivable with, independent durable medical equipment
dealers in the United States and abroad. Less than 10% of product sales are to
foreign customers. As a general policy, collateral is not required for accounts
receivable; however, the Company maintains an allowance for losses based upon
expected collections of accounts receivable. Additionally, customers' financial
condition and credit worthiness are regularly evaluated and historical losses
have not been material. Sales to one customer accounted for approximately 15% of
the Company's product sales for the year ended June 30, 1999. At June 30, 1999,
amounts due from such customer accounted for approximately 18% of trade
receivables, all of which was current. No single customer accounted for more
than 10% of such sales in fiscal 1998 or 1997. The Company considers
concentrations of credit risk with respect to trade accounts receivable to be
low.
41
<PAGE> 42
IOMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method. Inventories consisted of the
following:
JUNE 30,
-----------------------
1999 1998
-------- --------
<TABLE>
<CAPTION>
<S> <C> <C>
Raw materials ........ $469,000 $665,000
Work-in-progress ..... 25,000 52,000
Finished goods ....... 288,000 159,000
-------- --------
$782,000 $876,000
======== ========
</TABLE>
Equipment and Furniture
Equipment and furniture are stated at cost. Depreciation and
amortization is computed using the straight-line method over estimated useful
lives of three to five years. Leasehold improvements are amortized over the term
of the lease or the useful life of the improvements, whichever is shorter.
Equipment and furniture consisted of the following:
JUNE 30,
------------------------------
1999 1998
----------- -----------
Manufacturing equipment ........... $ 965,000 $ 951,000
Office and research and development
equipment ......................... 1,477,000 1,346,000
Leasehold improvements ............ 708,000 683,000
----------- -----------
3,150,000 2,980,000
Less accumulated depreciation and
amortization ...................... (2,547,000) (2,197,000)
----------- -----------
$ 603,000 $ 783,000
=========== ===========
Revenue Recognition
Revenues on product sales are generally recognized upon shipment.
Contract research revenue and license fees are recognized as earned.
Patent Development Costs
In connection with its research and development efforts, the Company
incurs certain costs in the preparation, application, filing, maintenance and
defense of patents and trademarks. Where such costs primarily relate to patents
and trademarks covering technologies or products which are under development or
in the early stages of commercialization, the Company expenses such costs as
incurred.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion
No. 25-Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for its employee stock options rather than
adopting the alternative fair value accounting provided for under FASB Statement
No. 123, Accounting for Stock-Based Compensation (SFAS 123). Under APB 25,
because the exercise price of the Company's stock options equals the market
price of the underlying shares on the date of grant, the Company does not
recognize any compensation expense.
42
<PAGE> 43
IOMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Income Taxes
The Company accounts for income taxes using the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases, operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Earnings (Loss) Per Share
The Company's net income (loss) per share has been calculated in
accordance with SFAS No. 128-Earnings Per Share and accordingly includes a
computation of both basic and diluted earnings per share. Earnings (loss) from
continuing operations as presented in the statements of operations represents
the numerator used in computing earnings per share and the following table sets
forth the computation of the weighted average shares used in determining basic
and diluted earnings per share:
<TABLE>
<CAPTION>
1999 1998 1997
---------- -------------- ---------
(in thousands)
<S> <C> <C> <C>
Denominator for basic earnings per share --
weighted average shares ...................... 6,503 3,821 3,109
Dilutive securities: preferred stock,
convertible debt, warrants and stock options.. 926 -- --
----- ----- -----
Denominator for diluted earnings per share --
adjusted weighted average shares and assumed
conversions .................................. 7,429 3,821 3,109
===== ===== =====
</TABLE>
At June 30, 1999, the following securities were outstanding but were not
included in the computation of diluted earnings per share due to their
anti-dilutive effect: options to purchase 271,932 common shares at a weighted
average exercise price of $5.32 per share; warrants to purchase 339,792 common
shares at a weighted average price of $13.70 per share.
Estimates
Preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain reclassifications have been made to prior year balances to
conform to the financial statement presentation included herein.
43
<PAGE> 44
IOMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS IN MARKETABLE DEBT SECURITIES
Debt securities are classified as held-to-maturity when the Company has
the intent and ability to hold the security to maturity. Held-to-maturity
securities are stated at amortized cost, adjusted for amortization of premiums
and accretion of discounts to maturity, which approximates quoted fair market
values. Such amortization as well as interest earned is included in interest
income. As of June 30, 1999 and 1998, all investments were classified as
held-to-maturity and consisted primarily of United States corporate securities
totaling $16,195,000 and $16,502,000, respectively, and are included with cash
and cash equivalents.
3. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
JUNE 30,
-----------------------
1999 1998
-------- --------
<TABLE>
<CAPTION>
<S> <C> <C>
Payroll and related benefits.. $500,000 $403,000
Professional fees ............ 122,000 134,000
Royalties .................... 88,000 60,000
FDA user fees ................ 96,000 --
Warranty ..................... 10,000 10,000
Other ........................ 124,000 80,000
-------- --------
$940,000 $687,000
======== ========
</TABLE>
4. SUBORDINATED, CONVERTIBLE DEBT
In connection with the purchase of in-process research and development
from Elan Corporation, plc ("Elan") (see Note 10), the Company issued two
subordinated convertible notes to Elan (the "Elan Notes"), an A Note and a B
Note, each bearing interest at 9.5%, in the amount of $10,000,000 and
$5,000,000, respectively. On April 28, 1998, concurrent with the closing of the
initial public offering of the Company's common shares, the Elan Notes,
including accrued interest thereon, were converted at $7.50 per share into an
aggregate of 1,206,391 common shares and 893,801 Series D preferred shares of
the Company.
5. COMMITMENTS
Operating Leases
The Company leases space and certain equipment under noncancellable
operating lease agreements that expire at various dates through December 2004.
Rental expense for such leases was $248,000, $239,000 and $218,000 for the years
ended June 30, 1999, 1998 and 1997, respectively. It is generally expected that,
in the normal course of business, operating leases that expire will be renewed
or replaced by other leases with similar terms. Future minimum lease payments
under noncancellable operating leases at June 30, 1999 were $776,000. These
obligations mature as follows: fiscal 2000 -- $229,000; fiscal 2001 -- $159,000;
fiscal 2002 -- $113,000; fiscal 2003 -- $109,000; and thereafter $166,000.
44
<PAGE> 45
IOMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Long-Term Obligations
The Company has acquired various equipment and furniture under capital
lease agreements. The capitalized cost of such equipment is $240,000 and
accumulated amortization was $78,000 at June 30, 1999.
Future minimum payments under capital leases consisted of the following
at June 30, 1999:
<TABLE>
<CAPTION>
<S> <C>
YEAR ENDING JUNE 30:
2000 72,000
2001 72,000
2002 67,000
2003 3,000
--------
Total minimum lease payments 214,000
Amounts representing interest 28,000
--------
Present value of net minimum lease payments 186,000
Less current portion of capital lease obligations 57,000
--------
Noncurrent portion of capital lease obligations $129,000
========
</TABLE>
Royalty Agreements
The Company is the licensee under royalty agreements which provide for
the payment of royalties to the licensor based upon net sales of the products
under royalty. Royalty expense in each of the three years in the period ended
June 30, 1999 was not material.
6. SHAREHOLDERS' EQUITY
Reverse Stock Split
On November 7, 1997, pursuant to a vote of the shareholders, the Company
effected a one for 4.8 reverse share split for each common and preferred share
then outstanding and amended and restated its Articles of Incorporation and
Corporate Bylaws. Among other things, these amendments changed the par value of
the Company's common shares from $0.001 per share to no par value common shares;
increased the number of authorized common shares from 40,000,000 shares to
100,000,000 shares; and increased the number of authorized preferred shares from
4,215,618 shares to 10,000,000 shares. For comparative purposes, all share
amounts in the accompanying financial statements and related footnotes have been
retroactively restated to reflect the effects of the reverse stock split and the
increases in the authorized shares of the Company's common and preferred shares.
Initial Public Offering
During fiscal 1998, the Company consummated an initial registered public
offering pursuant to which the Company issued 1,850,000 common shares and raised
approximately $11,445,000, net of underwriters' discounts and estimated
expenses.
45
<PAGE> 46
IOMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In other transactions related to the initial public offering, (i) the
Company granted warrants to purchase 170,000 common shares to the underwriters,
exercisable after April 23, 1999, at an initial exercise price of $9.38 per
share; (ii) Elan converted the amounts outstanding under the Elan Notes,
including accrued interest thereon, into 1,206,391 common shares and 893,901
shares of newly created Series D preferred shares, at the initial public
offering price of $7.50 per share; (iii) the 28,800 Series C preferred shares of
the Company which were outstanding immediately prior to the offering were
automatically converted, on a share-for-share basis, into common shares; and
(iv) the Company issued an additional 29,697 common shares to Laboratoires
Fournier, pursuant to the anti-dilution provisions of a prior stock purchase
agreement between the companies.
Redeemable, Convertible Preferred Shares
In connection with a reorganization of the Company in fiscal 1988, the
Company issued 878,254 shares of $.001 par value redeemable convertible
preferred shares in three series; Series A, Series B and Series C. Pursuant to
the terms of such preferred shares, the 14,000 Series A shares were redeemed in
five equal annual installments beginning in July 1992 through July 1996 for an
aggregate redemption price of $350,000 and the Series B shares (828,254 shares
with a carrying value of $1,500,000) were converted prior to July 15, 1996, into
common shares on a share for share basis at the equivalent of $1.81 per share.
The Series C preferred shares were comprised of 36,000 shares with an
aggregate redemption value of $900,000. Pursuant to mandatory redemption
requirements, 7,200 Series C preferred shares were redeemed in July 1997 for an
aggregate redemption price of $180,000. The remaining 28,800 Series C preferred
shares were subject to mandatory conversion, on a share-for-share basis, into
common shares upon the closing of the initial public offering of the Company.
Series D Convertible Preferred Shares
In April 1998, the Company issued 893,801 Series D preferred shares to
Elan in connection with the conversion of the Elan Notes. The Series D preferred
shares are convertible at the option of the holder into common shares, on a
share-for-share basis, subject to adjustment for certain corporate transactions.
Further, the Series D preferred shares are non-voting and have no dividend,
liquidation or similar preferences over common shares but are entitled to a pro
rata share of any such distribution as if the Series D preferred shares had been
converted into common shares.
Warrants
The Company has issued five warrants which entitle the holders thereof
to acquire common shares of the Company. In April 1998, the Company issued a
warrant to Everen Securities to acquire up to 170,000 shares for an initial
exercise price of $9.38 per share. In November 1997, the Company issued a
warrant to Novartis to acquire up to 18,750 shares for an exercise price of
$21.60 per share. In March 1997, the Company issued a warrant to Elan to acquire
up to 104,167 shares for an exercise price of $21.60 per share. In December
1996, the Company issued a warrant to the Alliance of Children's Hospitals, Inc.
to acquire up to 44,792 shares for an exercise price of $8.88 per share. In June
1995, the Company issued a warrant to the Silicon Valley Bank to acquire up to
2,083 shares for an exercise price of $4.80 per share. The warrants expire in
April 2003, November 2002, April 2002, December 2003, and June 2002,
respectively. At June 30, 1999, the Company had 339,792 shares of its
authorized, unissued common shares reserved for issuance pursuant to these
warrant obligations.
46
<PAGE> 47
IOMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock Options
The Company has adopted and approved two incentive compensation plans. The
Company's 1988 Stock Option Plan was approved by the shareholders in November
1988 and Company's 1997 Share Incentive Plan was approved by the shareholders in
November 1997. The 1988 Stock Option Plan expired in August 1998 and no further
grants were made under the Plan following the adoption of the 1997 Share
Incentive Plan. A summary of the activity under the Plans during each of the
three years ended June 30, 1999, is as follows:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
SHARES ------------------------------ WEIGHTED-
AVAILABLE NUMBER OF PRICE AVERAGE
FOR GRANT SHARES PER SHARE EXERCISE PRICE
---------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Balance at June 30, 1996 3,684 328,610 $ .38-$6.72 $ 4.51
Additional authorization 1,112,500 -- -- --
Options granted (15,417) 15,417 $ 6.72 $ 6.72
Options exercised -- (6,483) $ .72-$4.80 $ 1.01
Options canceled 7,163 (7,163) $2.16-$4.80 $ 4.18
---------- ---------- ------------ --------
Balance at June 30, 1997 1,107,930 330,381 $ .38-$6.72 $ 4.70
Options granted (15,758) 15,758 $8.88-$9.00 $ 8.91
Options exercised -- (11,786) $ .38-$8.88 $ 2.09
Options canceled 3,016 (3,016) $4.80-$8.88 $ 6.58
---------- ---------- ------------ --------
Balance at June 30, 1998 1,095,188 331,337 $ .72-$9.00 $ 4.96
Options granted (540,000) 540,000 $2.25-$2.63 $ 2.28
Options exercised -- (8,226) $ .72 $ .72
Options canceled 1,000 (20,734) $ .72-$9.00 $ 6.41
---------- ---------- ------------ --------
Balance at June 30, 1999 556,188 842,377 $ .72-$9.00 $ 3.25
========== ========== ============ ========
</TABLE>
The weighted average fair value of options granted in the years ended June 30,
1999, 1998 and 1997, were $2.06, $1.24 and $2.11, respectively. Additional
information regarding the options outstanding at June 30, 1999 follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------- -------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------ ----------- ---------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$ .72 3,540 1.09 years $ .72 3,540 $ .72
$2.16-$ 2.63 566,958 9.13 years $ 2.27 86,958 $ 2.22
$3.60-$ 4.80 200,125 4.31 years $ 4.67 196,428 $ 4.67
$6.72-$ 9.00 71,754 7.23 years $ 7.12 46,056 $ 6.99
- ------------ ------- ---------- -------- ------- --------
$2.50-$17.50 842,377 7.79 years $ 3.25 332,982 $ 4.31
============ ======= ========== ======== ======= ========
</TABLE>
47
<PAGE> 48
IOMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that Statement.
The effect on the Company's pro forma results for each of the fiscal years 1999,
1998 and 1997 was not material (less than $.01 per share).
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. The fair value of these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumptions for 1999, 1998 and 1997,
respectively: risk-free interest rates of 5.6%, 5.7% and 6.3%; dividend yield of
0%; volatility factors of the expected market price of the Company's common
stock of 1.42, 0 and 0; and a weighted-average expected life of the option of 6
years. Because the effect of SFAS 123 is prospective, the initial impact on pro
forma net income (loss) may not be representative of compensation expense in
future years.
7. RESEARCH & DEVELOPMENT
In July 1995, the Company entered into a research and development
agreement with Novartis, a Swiss pharmaceutical company, to evaluate the
feasibility of delivering certain Novartis compounds using the Company's
iontophoretic drug delivery technologies. Research funding payments and license
fees paid pursuant to the agreement with Novartis totaled $716,000, $1,640,000
and $1,750,000, respectively, in fiscal years ended June 30, 1999, 1998 and
1997. As of June 30, 1998, the Company had a receivable, in the amount of
$360,000, due from Novartis, for research services rendered, which is included
in accounts receivable in the accompanying balance sheet.
The term of the research and development agreement ended on December 31,
1998, and Novartis did not renew the agreement beyond that date.
In March 1996, in connection with the research and development
agreement, the Company formed Dermion, a wholly-owned subsidiary established to
conduct advanced iontophoretic drug delivery systems development. The Company
contributed cash, fixed assets and non-exclusive licenses to certain technology,
valued at a historical cost of approximately $1,300,000 to Dermion, in exchange
for common shares. Concurrently, Novartis acquired a 20% equity interest in
Dermion for $1,000,000 in cash. Effective November 1, 1997, the Company entered
into an Exchange Agreement with Novartis. Among other things, the Exchange
Agreement provided for the exchange of Novartis' 20% minority interest in
Dermion for 238,541 common shares of the Company and warrants to purchase, under
certain conditions, through November 1, 2002, an additional 18,750 common shares
at an exercise price equal to $21.60 per share, making Dermion a wholly owned
subsidiary of IOMED, Inc.
8. EMPLOYEE BENEFIT PLAN
The Company has established a 401(k) savings plan for its full-time
employees. The Company makes a matching contribution based on a percentage of
the contributions of participating employees. The Company contributed
approximately $20,000, $21,000 and $19,000 over the years ended June 30, 1999,
1998 and 1997, respectively.
48
<PAGE> 49
IOMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES
Deferred taxes result from differences in the carrying value of various
assets and liabilities between income tax reporting and financial reporting
purposes. These differences arise from differing depreciation methods, and other
reserves that are deductible in different periods for tax and financial
reporting purposes.
The approximate tax effect of temporary differences, net operating loss
carryforwards and tax credit carryforwards as of June 30, 1999 and 1998, is as
follows:
1999 1998
----------- -----------
<TABLE>
<CAPTION>
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ... $ 2,430,000 $ 2,312,000
Book in excess of tax depreciation.. 227,000 210,000
Book in excess of tax amortization.. 4,767,000 5,134,000
Tax credit carryforwards ........... 516,000 520,000
Reserves ........................... 290,000 261,000
----------- -----------
Total deferred tax assets ............. 8,230,000 8,437,000
Valuation allowance ................... (8,230,000) (8,437,000)
----------- -----------
Net deferred tax assets ............... $ -- $ --
=========== ===========
</TABLE>
There were no significant deferred tax liabilities in 1999 or 1998. The
valuation allowance decreased by $207,000 during the fiscal year.
There were no net deferred income tax provisions in any of the years
presented. The Company recorded no current federal or state income tax provision
for fiscal 1999 and 1998 and a $5,000 provision for current federal income taxes
attributable to continuing operations in fiscal 1997.
The reconciliation of income taxes at the statutory United States
federal income tax rate and the Company's effective income tax rate attributable
to continuing operations is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ -------- --------
<S> <C> <C> <C>
United States statutory rate (percentage) .......... 34.0% (34.0)% (34.0)%
State tax, net of federal tax benefit .............. 3.3 (3.3) (3.3)
Non-deductible interest and other expenses ......... 22.7 15.3 0.2
Credits ............................................ -- -- (0.4)
Effect of NOL carryforward and valuation allowance.. (60.0) 22.0 37.3
Other .............................................. -- -- 0.2
------- -------- --------
Effective income tax rate (percentage) ............. --% -- % -- %
======= ======== ========
</TABLE>
As of June 30, 1999, the Company had approximately $6,294,000 and
$2,485,000 in federal and state net operating loss carryforwards, respectively,
and $485,000 in federal tax credit carryforwards, that expire from 2003 through
2019. Utilization of the Company's net operating loss and credit carryforwards
is limited to the future taxable income of the Company. Under the "change of
ownership" provisions of the Internal Revenue Code, utilization of these net
operating loss and credit carryforwards may be subject to substantial annual
limitation.
49
<PAGE> 50
IOMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. PURCHASE OF IN-PROCESS RESEARCH AND DEVELOPMENT
In March 1997, the Company entered into agreements with Elan, an
international developer of advanced drug delivery systems, to obtain an
exclusive, worldwide license for the commercial development of certain of Elan's
technologies in the field of iontophoretic drug delivery, including both issued
and pending patents, know-how and clinical data. Pursuant to the agreements, the
Company paid Elan a one time fee of $15,000,000, issued warrants to purchase up
to 104,167 common shares at a price of $21.60 per share and agreed to pay Elan
certain royalties on net revenues derived from sales of its iontophoretic drug
delivery products. Payment of the fee was funded by the issuance of the Elan
Notes (see Note 4).
The intended clinical applications, as well as alternative future
applications, of the technologies purchased from Elan are in the early stages of
research, design and clinical development, subject to numerous technological,
regulatory, and commercial risks and, therefore, represent in-process research
and development. Accordingly, during fiscal 1997, the Company recorded a
non-recurring charge of $15,059,000 reflecting the write-off of the in-process
research and development purchased, including the fee paid and related
transaction costs.
11. DISCONTINUED OPERATIONS
In December 1996, the Company sold the assets of its Motion Control
division, which was engaged in the research, development, manufacture and sale
of myoelectric prosthetic devices. In addition, the Company granted a worldwide,
exclusive license to certain patent rights covering the products manufactured by
the division to the purchaser. Proceeds from the sale, which closed in January
1997, were $1,000,000. No significant gain or loss was recognized on the sale.
Additionally, the Company is entitled to receive royalties on future product
sales of the purchaser. The results of operations of the Motion Control division
prior to its sale during fiscal 1997 have been classified as discontinued
operations in the accompanying statements of operations. No interest expense has
been allocated to discontinued operations and income taxes have been allocated
based upon statutory rates. A summary of the results of discontinued operations
for fiscal 1997 is as follows:
JUNE 30, 1997
-------------
<TABLE>
<CAPTION>
<S> <C>
Net product sales ................... $957,000
Income taxes ........................ 26,000
Income from discontinued operations.. 44,000
</TABLE>
50
<PAGE> 51
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this item is included under "Election of
Directors," "The Board of Directors and Committees," and "Executive Officers" in
the Company's Proxy Statement to be filed in connection with its Annual Meeting
of Shareholders, to be held on November 19, 1999, and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under "Compensation of
Directors and Executive Officers" in the Company's Proxy Statement to be filed
in connection with its Annual Meeting of Shareholders, to be held on November
19, 1999, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under "Security
Ownership of Certain Beneficial Owners and Management" in the Company's Proxy
Statement to be filed in connection with its Annual Meeting of Shareholders, to
be held on November 19, 1999, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under "Certain
Relationships and Related Transactions" in the Company's Proxy Statement to be
filed in connection with its Annual Meeting of Shareholders, to be held on
November 19, 1999, and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
The consolidated financial statements of the Company and its subsidiary
are included elsewhere in this Report.
FINANCIAL STATEMENT SCHEDULES
No schedules are required in connection with the filing of this Report
as amounts are either immaterial or are otherwise disclosed in the financial
statements.
EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
<S> <C>
3.1** Amended and Restated Articles of Incorporation of the Company
3.2* Amended and Restated Bylaws of the Company
4.1* Reference is made to Exhibit 3.1
4.2* Specimen of Common Share Certificate
10.1* Lease between the Company and Hayter Properties, Inc., dated
September 1, 1997
10.2* License Agreement between the Company and Elan International
Services, Ltd., dated April 14, 1997
10.3* License Agreement between the Company and Drug Delivery Systems,
Inc., dated April 14, 1997
</TABLE>
51
<PAGE> 52
10.4* Promissory Note issued by the Company to Elan International
Management, Ltd., in the principal amount of $10,000,000, dated
April 14, 1997
10.5* Promissory Note issued by the Company to Elan International
Management, Ltd., in the principal amount of $5,000,000, dated
April 14, 1997
10.6* Note Purchase and Warrant Agreement among the Company, Elan
International Services, Ltd. And Elan International Management,
Ltd. dated April 14, 1997
10.7* Warrant issued to Elan International Services, Ltd., dated April
14, 1997
10.8* Registration Rights Agreement between the Company and Elan
International Services, Ltd., dated April 14, 1997
10.9* Asset Acquisition Agreement between the Company and Fillauer, Inc.,
dated December 27, 1996
10.10* License Agreement between the Company and Fillauer, Inc., dated
December 26, 1996
10.11* Warrant issued to Alliance of Children's Hospitals, Inc., dated
December 1, 1996
10.12* Stock Purchase Agreement between the Company and Child Health
Investment Corporation, dated November 29, 1996
10.13* Manufacturing Agreement between the Company and KWM Electronics
Corporation, dated November 1, 1996
10.14* Contribution Agreement between the Company and Dermion, Inc., dated
March 29, 1996
10.15* Patent License Agreement between the Company and Dermion, Inc.,
dated March 29, 1996
10.16* Research and Development Agreement among the Company, Dermion, Inc.
and Ciba-Geigy Corporation, dated March 29, 1996
10.17* Stock Purchase Agreement among the Company, Dermion, Inc. and
Ciba-Geigy Corporation, dated March 29, 1996
10.18* Stockholders' Agreement among the Company, Dermion, Inc. and
Ciba-Geigy Corporation, dated March 29, 1996
10.19* Agreement between the Company and Laboratoires Fournier S.C.A.,
dated February 20, 1996
10.20* Agreement between the Company and ALZA Corporation, dated July 28,
1993
10.21* Supply Agreement between the Company and Abbot Laboratories, Inc.,
dated April 27, 1993
10.22* Stock Purchase Agreement between the Company and The CIT
Group/Venture Capital, Inc., dated March 8, 1993
10.23* Stock Purchase Agreement between the Company and certain investors,
dated February 19, 1993
10.24* License Agreement between the Company and the University of Utah
Research Foundation, dated October 1, 1992
10.25* Warrant issued to Silicon Valley Bank, dated June 25, 1992
10.26* Company 1997 Share Incentive Plan
10.27* Preferred Stock Purchase Agreement between the Company, Newtek
Ventures, MBW Venture Partners, Michigan Investment Fund, Utah
Ventures, Cordis Corporation, Ian R.N. Bund, James R. Weersing and
Robert J. Harrington, dated August 4, 1987
10.28* Exchange Agreement among the Company, Novartis Pharmaceuticals
Corporation and Dermion, Inc., dated November 1, 1997
10.29* Warrant to Purchase Shares of Common Stock in favor of Novartis
Pharmaceuticals Corporation, dated November 1, 1997
10.30* First Amendment of Research & Development Agreement among the
Company, Novartis Pharmaceuticals Corporation and Dermion, Inc.
dated November 1, 1997
10.31* Supply Agreement between the Company and Luitpold Pharmaceuticals,
Inc./American Regent Laboratories, Inc. dated December 4, 1994
11.1**** Statement re computation of earnings per share
21.1* Schedule of Subsidiaries
27.1*** Financial Data Schedule
- ----------------
* Filed as an exhibit to the Registration Statement on Form S-1, filed by
the Company on April 23, 1998.
** Filed as an exhibit to the Annual Report on Form 10-K, filed by the
Company on September 28, 1998.
52
<PAGE> 53
*** Filed herewith.
**** Information included in consolidated financial statements.
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended June 30,
1999.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION PAGE
<S> <C>
27.1 Financial Data Schedule 55
</TABLE>
53
<PAGE> 54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
IOMED, INC.
Date: September 28, 1999 By /s/ JAMES R. WEERSING
-----------------------------
James R. Weersing
Chairman
Date: September 28, 1999 By: /s/ ROBERT J. LOLLINI
-----------------------------
Robert J. Lollini
Vice President, Finance and
Chief Financial Officer
SIGNATURES
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
Signature Capacity Date
- --------- -------- ----
/s/ JAMES R. WEERSING Chairman September 28, 1999
- -----------------------------
James R. Weersing
/s/ JOHN W. FARA, PH.D. Director September 28, 1999
- -----------------------------
John W. Fara, Ph.D.
/s/ MICHAEL SEMBER Director September 28, 1999
- -----------------------------
Michael Sember
/s/ STEVEN P. SIDWELL Director September 28, 1999
- -----------------------------
Steven P. Sidwell
/s/ PETER J. WARDLE Director September 28, 1999
- -----------------------------
Peter J. Wardle
/s/ WARREN WOOD Director September 28, 1999
- -----------------------------
Warren Wood
54
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
IOMED, INC. CONDENSED CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS
FOR THE TWELVE MONTHS ENDED JUNE 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 17,263,000
<SECURITIES> 0
<RECEIVABLES> 1,370,000
<ALLOWANCES> 78,000
<INVENTORY> 782,000
<CURRENT-ASSETS> 19,380,000
<PP&E> 3,150,000
<DEPRECIATION> 2,574,000
<TOTAL-ASSETS> 20,154,000
<CURRENT-LIABILITIES> 1,234,000
<BONDS> 129,000
0
6,881,000
<COMMON> 34,413,000
<OTHER-SE> (22,503,000)
<TOTAL-LIABILITY-AND-EQUITY> 20,154,000
<SALES> 9,608,000
<TOTAL-REVENUES> 10,501,000
<CGS> 3,961,000
<TOTAL-COSTS> 11,214,000
<OTHER-EXPENSES> 867,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,000
<INCOME-PRETAX> 135,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 135,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 135,000
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
</TABLE>
