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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________________ to ___________________
Commission File No. 000-23467
PENWEST PHARMACEUTICALS CO.
(Exact name of registrant as specified in its charter)
Washington 91-1513032
- ------------------------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
2981 Route 22, Patterson, NY 12563-9970
- ------------------------------------------ ------------------------------------
(Address of principal executive offices) (Zip Code)
(914) 878-3414
----------------------------------------------------
(Registrant's telephone number, including area code.)
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 10, 2000.
Class Outstanding
----------------------------- -----------
Common stock, par value $.001 12,610,975
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PENWEST PHARMACEUTICALS CO.
TABLE OF CONTENTS
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PAGE
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Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets................................. 3
Condensed Consolidated Statements of Operations....................... 4
Condensed Consolidated Statements of Cash Flows....................... 5
Notes to Condensed Consolidated Financial Statements.................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk............ 11
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds............................. 12
Item 6. Exhibits and Reports on Form 8-K...................................... 12
Signatures.............................................................................. 13
Exhibit Index........................................................................... 13
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PENWEST PHARMACEUTICALS CO.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
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MARCH 31, DECEMBER 31,
2000 1999
---------- ------------
(Unaudited) (Note 2)
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ASSETS
Current assets:
Cash and cash equivalents ................................... $ 9,954 $ 739
Trade accounts receivable, net of allowance for
doubtful accounts of $259 and $245 ...................... 6,506 5,043
Inventories:
Raw materials and other ..................................... 1,131 1,513
Finished goods .............................................. 5,610 6,136
-------- --------
6,741 7,649
Prepaid expenses and other current assets ................... 491 629
Deferred income taxes ....................................... 297 297
-------- --------
Total current assets ..................................... 23,989 14,357
Fixed assets, net ........................................... 18,696 18,942
Other assets ................................................ 5,125 5,118
-------- --------
Total assets ............................................. $ 47,810 $ 38,417
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 2,069 $ 3,296
Accrued expenses ............................................ 4,176 2,707
Taxes payable ............................................... 411 344
-------- --------
Total current liabilities .............................. 6,656 6,347
Loans payable refinanced in March 2000 ...................... -- 6,700
Deferred income taxes ....................................... 509 520
Other long-term liabilities ................................. 2,387 2,341
-------- --------
Total liabilities ...................................... 9,552 15,908
Shareholders' equity :
Preferred stock, par value $.001, authorized
1,000,000 shares, none outstanding ....................... -- --
Common stock, par value $.001, authorized
39,000,000 shares, issued and outstanding
12,610,975shares in 2000 and 11,148,718
shares in 1999 .......................................... 12 11
Additional paid in capital .................................. 76,944 59,718
Accumulated deficit ......................................... (37,450) (36,159)
Accumulated other comprehensive loss ........................ (1,248) (1,061)
-------- --------
Total shareholders' equity ............................. 38,258 22,509
-------- --------
Total liabilities and shareholders' equity ............. $ 47,810 $ 38,417
======== ========
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See accompanying notes to condensed consolidated financial statements.
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PENWEST PHARMACEUTICALS CO.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS
ENDED MARCH 31,
2000 1999
-------- ---------
(UNAUDITED)
Revenues
Product sales ..................................... $10,437 $ 9,737
Royalties and licensing fees ...................... 912 79
------- -------
Total revenues ................................ 11,349 9,816
Cost of product sales ............................... 6,773 6,944
------- -------
Gross profit .................................... 4,576 2,872
Operating expenses
Selling, general and administrative ............... 3,025 2,596
Research and product development .................. 2,620 1,737
------- -------
Total operating expenses ........................ 5,645 4,333
------- -------
Loss from operations ................................ (1,069) (1,461)
Interest expense .................................... 126 64
------- -------
Loss before income taxes ............................ (1,195) (1,525)
Income tax expense .................................. 96 16
------- -------
Net loss ............................................ $(1,291) $(1,541)
======= =======
Basic and diluted net loss per share ................ $ (.11) $ (.14)
======= =======
Weighted average shares of common stock
outstanding ...................................... 11,554 11,054
======= =======
See accompanying notes to condensed consolidated financial statements.
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PENWEST PHARMACEUTICALS CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS
ENDED MARCH 31,
2000 1999
------- -------
(UNAUDITED)
Net cash used in operating activities ................. $ (743) $ (806)
Investing activities:
Acquisitions of fixed assets, net ................... (490) (109)
Other ............................................... (56) (89)
------- -------
Net cash used in investing activities ................. (546) (198)
Financing activities:
Borrowings from credit facility ..................... 2,800 2,200
Repayments of credit facility ....................... (9,500) (1,600)
Issuance of common stock, net ....................... 17,227 398
------- -------
Net cash provided by financing activities ............. 10,527 998
Effect of exchange rate changes on cash and cash
equivalents .......................................... (23) (79)
------- -------
Net increase (decrease) in cash and cash equivalents .. 9,215 (85)
Cash and cash equivalents at beginning of period ...... 739 1,476
------- -------
Cash and cash equivalents at end of period ............ $ 9,954 $ 1,391
======= =======
See accompanying notes to condensed consolidated financial statements.
5
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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS
Penwest Pharmaceuticals Co. (the "Company" or "Penwest") is engaged in
the research, development, and commercialization of novel oral drug delivery
products and technologies. Based on its extensive expertise in developing
and manufacturing tableting ingredients for the pharmaceutical industry, the
Company has developed TIMERx, a proprietary controlled release drug delivery
technology and PROSOLV(TM) ("PROSOLV"), another drug delivery technology
which improves the performance characteristics of tablets. The Company's
product portfolio ranges from excipients that are sold in bulk, to more
technically advanced and patented excipients that are licensed to customers.
The Company has manufacturing facilities in Iowa and Finland and has
customers primarily throughout North America and Europe.
The Company is subject to the risks and uncertainties associated with a
drug delivery company actively engaged in research and development. These
risks and uncertainties include, but are not limited to, a history of net
losses, technological changes, dependence on collaborators and key
personnel, the successful completion of development efforts and of obtaining
regulatory approval, the successful commercialization of TIMERx controlled
release products, compliance with government regulations, patent
infringement litigation and competition from current and potential
competitors, some with greater resources than the Company.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a
fair presentation for the interim periods presented have been included. All
such adjustments are of a normal recurring nature. Operating results for the
three month period ended March 31, 2000 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2000. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.
The balance sheet at December 31, 1999 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
Certain prior year amounts have been reclassified to conform with the
current year's presentation. These reclassifications had no effect on
previously reported results of operations.
3. RECENT ACCOUNTING DEVELOPMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 requires companies to recognize the receipt of certain
up-front non-refundable fees over the life of the related collaboration
agreement. The Company understands that the SEC intends to provide
additional guidelines during the second quarter of 2000 with respect to
interpretations of SAB 101 which may also affect the accounting for certain
milestone fees included in multi-element agreements. The Company intends to
make a change in its accounting policy for up-front non-refundable fees, as
required, in the second quarter of 2000, however, it is currently unknown
whether the additional guidelines from the SEC will affect the Company's
current accounting policies relating to milestone fees received in
connection with its multi-element collaboration agreements. Any changes made
for the adoption of SAB 101 will
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result in a non-cash charge to operations for the cumulative effect of the
change as of January 1, 2000. The effect of the change for up-front
non-refundable fees previously recognized is not expected to be material to
the results of operations for the year.
4. INCOME TAXES
The effective tax rates for each of the three month periods ended March
31, 2000 and 1999, were expenses of 8% and 1%, respectively. The effective
rates are higher than the federal statutory rate of a 34% benefit primarily
due to the valuation allowance recorded to offset deferred tax assets
relating to the Company's net operating losses, and state and foreign income
taxes.
5. COMPREHENSIVE LOSS
The components of comprehensive loss, for the three-month periods ended
March 31, 2000 and 1999 are as follows:
THREE MONTHS ENDED MARCH 31,
2000 1999
-------- --------
(IN THOUSANDS)
Net loss $(1,291) $(1,541)
Foreign currency translation adjustments (187) (283)
-------- --------
Comprehensive loss $(1,478) $(1,824)
======== ========
Accumulated other comprehensive loss equals the cumulative translation
adjustment which is the only component of other comprehensive loss included
in the Company's financial statements.
6. ISSUANCE OF COMMON STOCK
On March 6, 2000, the Company completed a private placement of its
common stock to selected institutional and other accredited investors,
resulting in the sale of 1,399,232 shares for approximately $18.2 million.
The Company received approximately $17 million after expenses. Approximately
$7.7 million of these proceeds was used to repay the existing outstanding
balance under the Company's unsecured revolving credit facility as required
by its terms. The credit facility is no longer available to the Company.
7. COLLABORATION AGREEMENT
On March 2, 2000, Mylan Pharmaceuticals Inc. ("Mylan") announced that
it had signed a supply and distribution agreement with Pfizer, Inc.
("Pfizer") to market a generic version of all three strengths (30 mg, 60 mg,
90 mg) of Pfizer's Procardia XL. As a result of the agreement, Pfizer agreed
to dismiss all pending litigation against Mylan. In connection with that
agreement, Mylan has agreed to pay Penwest a royalty on all future net sales
of Pfizer's 30 mg generic version of Procardia XL. The royalty percentage is
comparable to those called for in Penwest's original agreement with Mylan
for Nifedipine XL. Mylan has retained the marketing rights to the 30 mg
strength of Nifedipine XL. Mylan has also agreed to purchase from the
Company formulated bulk TIMERx manufactured for Nifedipine XL.
8. CONTINGENCIES
In 1994, the Boots Company PLC ("Boots") filed an opposition to a
patent granted by the European Patent Office (the "EPO") to the Company
relating to its TIMERx technology. In June 1996, the EPO dismissed Boots'
opposition, leaving intact all claims included in the patent. Boots has
appealed this decision to the EPO Board of Appeals. There can be no
assurance that the Company will prevail in this matter. An unfavorable
outcome could materially adversely affect the Company's business, financial
condition, cash flows and results of operations.
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Substantial patent litigation exists in the pharmaceutical industry.
Patent litigation generally involves complex legal and factual questions,
and the outcome frequently is difficult to predict. An unfavorable outcome
in any patent litigation affecting the Company could cause the Company to
pay substantial damages, alter its products or processes, obtain licenses
and/or cease certain activities. Even if the outcome is favorable to the
Company, the Company could incur substantial litigation costs. Although the
legal costs of defending litigation relating to a patent infringement claim
(unless such claim relates to TIMERx) are generally the contractual
responsibility of the Company's collaborators, the Company could nonetheless
incur significant unreimbursed costs in participating and assisting in the
litigation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Penwest Pharmaceuticals Co. is engaged in the research, development and
commercialization of novel oral drug delivery technologies. The Company has
extensive experience in developing and manufacturing tableting ingredients for
the pharmaceutical industry. The Company's product portfolio ranges from
excipients that are sold in bulk, to more technically advanced and patented
excipients that are licensed to customers. On August 31, 1998 (the "Distribution
Date"), Penwest became an independent, publicly owned company when Penford
Corporation ("Penford") the Company's former parent, distributed (the
"Distribution") to the shareholders of record of Penford common stock on August
10, 1998 all of the shares of the Company's common stock. Pursuant to the
Distribution, each Penford shareholder of record received three shares of the
Company's common stock for every two shares of Penford common stock held by
them.
The Company has incurred net losses since 1994. As of March 31, 2000, the
Company's accumulated deficit was approximately $37.5 million. The Company
expects net losses to continue at least into mid 2000. A substantial portion of
the Company's revenues to date have been generated from the sales of the
Company's pharmaceutical excipients. The Company's future profitability will
depend on several factors, including the successful commercialization of TIMERx
controlled release products, Mylan's sales of Pfizer's 30 mg generic version of
Procardia XL (as described later) and, to a lesser extent, an increase in sales
of its other pharmaceutical excipients products. There can be no assurance that
the Company will achieve profitability or that it will be able to sustain any
profitability on a quarterly basis, if at all.
On March 2, 2000, Mylan Pharmaceuticals ("Mylan") announced that it had
signed a supply and distribution agreement with Pfizer, Inc. ("Pfizer") to
market a generic version of all three strengths (30 mg, 60 mg, 90 mg) of
Pfizer's Procardia XL. As a result of the agreement, Pfizer agreed to dismiss
all pending litigation against Mylan. In connection with that agreement, Mylan
has agreed to pay Penwest a royalty on all future net sales of Pfizer's 30 mg
generic version of Procardia XL. The royalty percentage is comparable to those
called for in Penwest's original agreement with Mylan for Nifedipine XL. Mylan
has retained the marketing rights to the 30 mg strength of Nifedipine XL. Mylan
has also agreed to purchase from the Company formulated bulk TIMERx manufactured
for Nifedipine XL.
Under most of the Company's collaborative agreements, the Company is
entitled to receive milestone payments, royalties on the sale of the products
covered by such collaborative agreements and payments for the purchase of
formulated TIMERx material. Except for royalties from Mylan recorded in the
first quarter of 2000, relating to Mylan's sales of Pfizer's 30 mg generic
version of Procardia XL, substantially all of the drug delivery revenues
generated to date have been milestone fees received for products under
development as well as sales of formulated TIMERx. There can be no assurance
that the Company's controlled release product development efforts will be
successfully completed, that required regulatory approvals will be obtained or
that approved products will be successfully manufactured or marketed.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 requires companies to recognize the receipt of certain
up-front non-refundable fees over the life of the related collaboration
agreement. The Company understands that the SEC intends to provide additional
guidelines during the second quarter of 2000 with respect to interpretations of
SAB 101 which may also affect the accounting for certain milestone fees included
in multi-element agreements. The Company intends to make a change in its
accounting policy for up-front non-refundable fees, as required, in the second
quarter of 2000, however, it is currently unknown whether the additional
guidelines from the SEC will affect the Company's current accounting policies
relating to milestone fees received in connection with its multi-element
collaboration agreements. Any changes made for the adoption of SAB 101 will
result in a non-cash
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charge to operations for the cumulative effect of the change as of January 1,
2000. The effect of the change for up-front non-refundable fees previously
recognized is not expected to be material to the results of operations for the
year.
The Company's results of operations may fluctuate from quarter to quarter
depending on the volume and timing of orders of the Company's pharmaceutical
excipients and on variations in payments under the Company's collaborative
agreements, including payments upon the achievement of specified milestones. The
Company's quarterly operating results may also fluctuate depending on other
factors, including variations in gross margins of the Company's products, mix of
products sold, competition, regulatory actions, litigation and currency exchange
rate fluctuations.
The Company's business is conducted internationally and may be affected by
fluctuations in currency exchange rates, as well as by governmental controls and
other risks associated with international sales (such as export licenses,
collectibility of accounts receivable, trade restrictions and changes in
tariffs). The Company's international subsidiaries transact a substantial
portion of their sales and purchases in European currencies other than their
functional currency, which can result in the Company having gains or losses from
currency exchange rate fluctuations.
The Company does not use derivatives to hedge the impact of fluctuations in
foreign currencies.
RESULTS OF OPERATIONS
Quarter Ended March 31, 2000 and 1999
Total revenues increased 15.6% for the first quarter of 2000 to $11.3
million from $9.8 million for the first quarter of 1999. Product sales increased
to $10.4 million for the first quarter of 2000 compared to $9.7 million for the
first quarter of 1999, representing an increase of 7.2%. The increase in product
sales was primarily due to shipments of formulated bulk TIMERx to Mylan in
anticipation of their launch of Nifedipine XL and prior to their supply and
distribution agreement with Pfizer. On March 2, 2000, Mylan announced that it
had signed a supply and distribution agreement with Pfizer to market a generic
version of all three strengths (30 mg, 60 mg, 90 mg) of Pfizer's Procardia XL.
As a result of the agreement, Pfizer agreed to dismiss all pending litigation
against Mylan. In connection with that agreement, Mylan has agreed to pay
Penwest a royalty on all future net sales of Pfizer's 30 mg generic version of
Procardia XL. The royalty percentage is comparable to those called for in
Penwest's original agreement with Mylan for Nifedipine XL. Mylan has retained
the marketing rights to the 30 mg strength of Nifedipine XL. Mylan has also
agreed to purchase from the Company certain formulated bulk TIMERx manufactured
for Nifedipine XL, the remainder of which will be shipped in the third quarter
of 2000. The increase in royalties and licensing fee revenues was also primarily
attributable to royalties from Mylan on generic Procardia XL, earned in the
first quarter of 2000.
Gross profit increased to $4.6 million or 40.3% of total revenues for the
first quarter of 2000 from $2.9 million or 29.3% of total revenues for the first
quarter of 1999. Gross profit percentage on product sales increased to 35.1% for
the first quarter of 2000 from 28.7% for the first quarter of 1999. The increase
in overall gross profit percentage was primarily due to royalties from Mylan,
and increased sales of formulated bulk TIMERx and PROSOLV, which have higher
overall margins.
Selling, general and administrative expenses increased by 16.5% for the
first quarter of 2000 to $3.0 million from $2.6 million for the first quarter of
1999. The increase is primarily due to increased selling and marketing expenses
as the Company has increased the commercialization efforts of its technologies.
Research and product development expenses increased by 50.8% for the first
quarter of 2000 to $2.6 million from $1.7 million for the first quarter of 1999.
This increase was primarily due to the continuing development of a narcotic
analgesic product with Endo Pharmaceuticals Inc. ("Endo") which is currently in
Phase II clinical trials, as well as increased activity in the Company's drug
development pipeline.
The effective tax rates for each of the quarters ended March 31, 2000 and
1999, were expenses of 8% and 1%, respectively. The effective rates are higher
than the federal statutory rate of a 34% benefit primarily due to the valuation
allowance recorded to offset deferred tax assets relating to the Company's net
operating losses, and state and foreign income taxes.
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LIQUIDITY AND CAPITAL RESOURCES
Subsequent to the Distribution, the Company has funded its operations and
capital expenditures from cash from operations and advances under a credit
facility. The Company had an available revolving credit facility of $15.0
million of unsecured financing (the "Credit Facility"), which was guaranteed by
Penford.
On March 6, 2000, the Company completed a private placement of its common
stock to selected institutional and other accredited investors, resulting in the
sale of 1,399,232 shares for approximately $18.2 million. The Company received
approximately $17 million after fees. Approximately $7.7 million was used to
repay the existing outstanding balance under the Company's Credit Facility as
required by its terms. The Credit Facility was subsequently terminated and is no
longer available to the Company.
As of March 31, 2000, the Company had cash and cash equivalents of $10.0
million. In April 2000, the Company paid approximately $1.3 million of expenses
associated with the private placement of its common stock. The Company has no
committed sources of capital. As of March 31, 2000, the Company did not have any
material commitments for capital expenditures. The Company has entered into a
strategic alliance agreement with Endo and the Company expects to expend an
additional $7 million, primarily in 2000 and 2001 on the development of a drug.
The Company expects to utilize available cash and cash from operations to fund
expenditures. However, the Company may be required to raise additional funds to
continue its development activities under the Endo agreement. However, either
the Company or Endo may terminate the agreement upon 30 days' prior written
notice, at which time the Company's funding obligations would cease.
The Company had negative cash flow from operations in each of the periods
presented primarily due to net losses for the periods, as well as significantly
higher trade receivables at March 31, as compared with December 31 trade
receivables. This was partially offset by reduced inventory levels from December
31, 1999. Funds expended for the acquisition of fixed assets were primarily
related to efforts at the Company's manufacturing facility in Iowa to increase
capacity. Funds expended for intangible assets include costs to secure and
defend patents on technology developed by the Company and secure trademarks.
The Company anticipates that its existing capital resources, as well as
internally generated funds, will enable it to maintain currently planned
operations at least into mid 2001. However, this expectation is based on the
Company's current operating plan, which could change as a result of many factors
and the Company could require additional funding sooner than anticipated. The
Company's requirements for additional capital could be substantial and will
depend on many factors, including (i) the timing and amount of payments received
under existing and possible future collaborative agreements; (ii) the structure
of any future collaborative or development agreements; (iii) the progress of the
Company's collaborative and independent development projects; (iv) revenues from
the Company's traditional excipients; (v) the costs to the Company of
bioequivalence studies for the Company's products; (vi) the prosecution, defense
and enforcement of patent claims and other intellectual property rights; and
(vii) the development of manufacturing, marketing and sales capabilities.
To the extent that additional capital is raised through the sale of equity
or convertible debt securities, the issuance of such securities could result in
dilution to the Company's shareholders. If adequate funds are not available, the
Company may be unable to comply with its obligations under its collaborative
agreements, which could result in the termination of such collaborative
agreements. In addition, the Company may be required to curtail operations
significantly or obtain funds through entering into collaborative agreements on
unfavorable terms. The Company's inability to raise capital would have a
material adverse effect on the Company's business, financial condition and
results of operations.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Quarterly Report on Form 10-Q contains certain 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. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes", "anticipates", "plans", "expects", "intends", "may", and other
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the Company's actual results
to differ materially from those indicated by forward-looking statements
contained in this report and presented elsewhere by management from time to
time. These factors include the matters discussed in the Overview to Item 2.
Management's Discussion and Analysis of Financial Condition and
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Results of Operations and the matters set forth under "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations - Risk
Factors" in the Company's Annual Report on Form 10-K for the year ended December
31, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK AND RISK MANAGEMENT POLICIES
The operations of the Company are exposed to financial market risks,
including changes in interest rates and foreign currency exchange rates. The
Company's interest rate risk has consisted of cash flow risk associated with
borrowing under its variable rate Credit Facility, which was paid off and
terminated in March 2000. The Company's international subsidiaries transact a
substantial portion of their sales and purchases in European currencies other
than their functional currency, which can result in the Company having gains or
losses from currency exchange rate fluctuations. The Company does not use
derivatives to hedge the impact of fluctuations in foreign currencies or
interest rates. The Company does not believe that the potential exposure is
significant in light of the size of the Company and its business.
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PART II. -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 6, 2000, the Company completed a private placement of its common
stock to selected institutional and other accredited investors resulting in the
sale of 1,399,232 shares for approximately $18.2 million.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits.
See exhibit index below for a list of the exhibits filed as part
of this Quarterly Report on Form 10-Q, which exhibit index is
incorporated herein by reference.
b. Reports on Form 8-K.
On March 10, 2000, the Company filed a report on Form 8-K
reporting the Company's private placement of common stock and
the Company's March 2000 agreement with Mylan Pharmaceuticals
Inc.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PENWEST PHARMACEUTICALS CO.
Date: May 12, 2000 /s/ Tod R. Hamachek
---------------------------------
Tod R. Hamachek
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
Date: May 12, 2000 /s/ Jennifer L. Good
--------------------------------
Jennifer L. Good
Vice President Finance and Chief
Financial Officer
(Principal Financial Officer)
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
27 Financial Data Schedule
99 Pages 31 through 40 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1999 as filed
with the Securities and Exchange Commission on March 21,
2000 (which is not deemed filed except to the extent
that portions thereof are expressly incorporated by
reference herein).
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EXHIBIT 99
RISK FACTORS
OUR CONTROLLED RELEASE PRODUCTS THAT ARE GENERIC VERSIONS OF BRANDED CONTROLLED
RELEASE PRODUCTS THAT ARE COVERED BY ONE OR MORE PATENTS MAY BE SUBJECT TO
LITIGATION
We expect that our collaborators will file ANDAs for our controlled
release products that are generic versions of branded controlled release
products that are covered by one or more patents. It is likely that the owners
of the patents covering the brand name product or the sponsors of the NDA with
respect to the branded product will sue or undertake regulatory initiatives to
preserve marketing exclusivity, as Pfizer did with respect to Nifedipine XL. Any
significant delay in obtaining FDA approval to market our product candidates as
a result of litigation, as well as the expense of such litigation, whether or
not we or our collaborators are successful, could have a material adverse effect
on our business, financial condition and results of operations.
WE ARE DEPENDENT ON MYLAN AND OTHER CORPORATE COLLABORATORS TO CONDUCT
FULL-SCALE BIOEQUIVALENCE STUDIES AND CLINICAL TRIALS, OBTAIN REGULATORY
APPROVALS FOR, AND MANUFACTURE, MARKET, AND SELL OUR TIMERx CONTROLLED RELEASE
PRODUCTS
We develop and commercialize our TIMERx controlled release products in
collaboration with pharmaceutical companies. We are parties to collaborative
agreements with third parties relating to certain of our principal products. We
are relying on Mylan to conduct full-scale bioequivalence studies and clinical
trials, obtain regulatory approvals for, and manufacture, market and sell one of
our TIMERx controlled release products, and Endo to develop and commercialize a
controlled release version of Numorphan. We are also dependent on Mylan with
respect to the marketing and sale of the 30 mg strength of Pfizer's generic
version of Procardia XL. Our collaborators may not devote the resources
necessary or may otherwise be unable to complete development and
commercialization of these potential products. Our existing collaborations are
subject to termination without cause on short notice under certain
circumstances.
If we cannot maintain our existing collaborations or establish new
collaborations, we would be required to terminate the development and
commercialization of our potential products or undertake product development and
commercialization activities at our own expense. Moreover, we have limited or no
experience in conducting full-scale bioequivalence studies and clinical trials,
preparing and submitting regulatory applications and manufacturing, marketing
and selling our TIMERx controlled release products. We may not be successful in
performing these activities.
<PAGE> 2
Our existing collaborations and any future collaborations with third
parties may not be scientifically or commercially successful. Factors that may
affect the success of our collaborations include the following:
- our collaborators may be pursuing alternative technologies or
developing alternative products, either on their own or in
collaboration with others, that may be competitive with the product
as to which they are collaborating with us, which could affect our
collaborator's commitment to the collaboration with us;
- reductions in marketing or sales efforts or a discontinuation of
marketing or sales of our products by our collaborators would
reduce our revenues, which will be based on a percentage of net
sales by the collaborator;
- our collaborators may terminate their collaborations with us, which
could make it difficult for us to attract new collaborators or
adversely affect our perception in the business and financial
communities; and
- our collaborators may pursue higher priority programs or change the
focus of their development programs, which could affect the
collaborator's commitment to us.
WE HAVE NOT BEEN PROFITABLE
We have incurred net losses since our inception, including net losses
of approximately $7.7 million, $8.8 million and $7.3 million during 1999, 1998
and 1997, respectively. As of December 31, 1999, our accumulated deficit was
approximately $36.2 million. A substantial portion of our revenues have been
generated from the sales of our pharmaceutical excipients. Our future
profitability will depend on several factors, including:
- the timing of the commercial launch by Mylan of Pfizer's generic
version of the 30 mg strength of its Procardia XL in the United
States;
- the successful commercialization of our controlled release products
for which regulatory approval currently is pending;
- the completion of the development of other pharmaceuticals using
our TIMERx controlled release technology;
- an increase in sales of our pharmaceutical excipient products; and
- our funding obligations under certain of our collaborations.
<PAGE> 3
WE FACE SIGNIFICANT COMPETITION, WHICH MAY RESULT IN OTHERS DISCOVERING,
DEVELOPING OR COMMERCIALIZING PRODUCTS BEFORE OR MORE SUCCESSFULLY THAN WE DO
The pharmaceutical industry is highly competitive and is affected by
new technologies, governmental regulations, health care legislation,
availability of financing, litigation and other factors. Many of our competitors
have longer operating histories and greater financial, marketing, legal and
other resources than we do and than certain of our collaborators do.
Our TIMERx business faces competition from numerous public and private
companies and their controlled release technologies, including ALZA's oral
osmotic pump (OROS(R)) technology, multiparticulate systems marketed by Elan and
Biovail, traditional matrix systems marketed by SkyePharma, plc and other
controlled release technologies marketed or under development by Andrx
Corporation, among others.
In addition to developing controlled release versions of immediate
release products, we have concentrated a significant portion of our initial
development efforts on generic versions of branded controlled release products.
The success of generic versions of branded controlled release products based on
our TIMERx technology will depend, in large part, on the intensity of
competition from the branded controlled release product, other generic versions
of the branded controlled release product and other drugs and technologies that
compete with the branded controlled release product, as well as the timing of
product approval. Competition from other generic versions of branded controlled
release products will also reduce the royalty rate to be paid to us under
several of our collaborations.
The generic drug industry is characterized by frequent litigation
between generic drug companies and branded drug companies. Those companies with
significant financial resources will be better able to bring and defend any such
litigation.
In our excipients business, we compete with a number of large
manufacturers and other distributors of excipient products, many of which have
substantially greater financial, marketing and other resources than the Company.
Our principal competitor in this market is FMC Corporation, which markets its
own line of MCC excipient products.
WE MAY REQUIRE ADDITIONAL FUNDING
Our requirements for additional capital could be substantial and will
depend on many factors, including:
- the timing and amount of payments received under existing and
possible future collaborative agreements;
- the structure of any future collaborative or development
agreements;
- the progress of our collaborative and independent development
projects;
<PAGE> 4
- revenues from our excipients business;
- the costs to us of clinical studies for our products;
- the prosecution, defense and enforcement of patent claims and other
intellectual property rights; and
- the development of manufacturing, marketing and sales capabilities.
After the March 6, 2000 financing (see Part II, Item 5), we have no
committed sources of capital. We may seek additional funds through collaborative
arrangements and public or private financing. Additional financing may not be
available to us on acceptable terms, if at all. If we raise additional funds by
issuing equity securities, further dilution to our then existing stockholders
will result. In addition, the terms of the financing may adversely affect the
holdings or the rights of such stockholders. If we are unable to obtain funding
on a timely basis, we may be required to significantly curtail one or more of
our research or development programs. We also could be required to seek funds
through arrangements with collaborators or others that may require us to
relinquish rights to certain of our technologies, product candidates or products
which we otherwise pursue on our own.
OUR SUCCESS DEPENDS ON OUR PROTECTING OUR PATENTS AND PATENTED RIGHTS
Our success depends in significant part on our ability to develop
patentable products, to obtain patent protection for our products, both in the
United States and in other countries, and to enforce these patents. The patent
positions of pharmaceutical firms, including us, are generally uncertain and
involve complex legal and factual questions. As a result, patents may not issue
from any patent applications that we own or license. If patents do issue, the
claims allowed may not be sufficiently broad to protect our technology. In
addition, issued patents that we own or license may be challenged, invalidated
or circumvented. Our patents also may not afford us protection against
competitors with similar technology.
Our success also depends on our not infringing patents issued to
competitors or others. We are aware of patents and patent applications belonging
to competitors and others that may require us to alter our products or
processes, pay licensing fees or cease certain activities.
We may not be able to obtain a license to any technology owned by a
third party that we require to manufacture or market one or more products. Even
if we can obtain a license, the financial and other terms may be
disadvantageous.
Our success also depends on our maintaining the confidentiality of our
trade secrets and patented know-how. We seek to protect such information by
entering into confidentiality agreements with employees, consultants, licensees
and pharmaceutical companies. These agreements may be breached by such parties.
We may not be able to
<PAGE> 5
obtain an adequate, or perhaps, any remedy to such a breach. In addition, our
trade secrets may otherwise become known or be independently developed by our
competitors.
WE ARE INVOLVED IN AND MAY BECOME INVOLVED IN ADDITIONAL PATENT LITIGATION OR
OTHER INTELLECTUAL PROPERTY PROCEEDINGS RELATING TO OUR PRODUCTS OR PROCESSES
WHICH COULD RESULT IN LIABILITY FOR DAMAGE OR STOP OUR DEVELOPMENT AND
COMMERCIALIZATION EFFORTS
The pharmaceutical industry has been characterized by significant
litigation and interference and other proceedings regarding patents, patent
applications and other intellectual property rights. In addition to the recently
dismissed litigation involving Mylan, Pfizer and the still pending litigation
involving Mylan and Bayer, we may become parties to, or our products (or
products based on our TIMERx controlled release technology) may become the
subject of, additional patent litigation and other proceedings in the future.
The types of situations in which we may become parties to such litigation or
proceedings include:
- We or our collaborators may initiate litigation or other
proceedings against third parties to enforce our patent rights.
- We or our collaborators may initiate litigation or other
proceedings against third parties to seek to invalidate the patents
held by such third parties or to obtain a judgment that our
products or processes do not infringe such third parties' patents.
- If our competitors file patent applications that claim technology
also claimed by us, we or our collaborators may participate in
interference or opposition proceedings to determine the priority of
invention.
- If third parties initiate litigation claiming that our processes or
products infringe their patent or other intellectual property
rights, we and our collaborators will need to defend against such
proceedings.
An adverse outcome in any litigation or other proceeding could subject
us to significant liabilities to third parties and require us to cease using the
technology that is at issue or to license the technology from third parties. We
may not be able to obtain any required licenses on commercially acceptable terms
or at all.
The cost of any patent litigation or other proceeding, even if resolved
in our favor, could be substantial. Although the legal costs of defending
litigation relating to a patent infringement claim (unless such claim relates to
TIMERx in which case such costs are our responsibility) are generally the
contractual responsibility of our collaborators, we could nonetheless incur
significant unreimbursed costs in participating and assisting in the litigation.
Some of our competitors may be able to sustain the cost of such litigation and
proceedings more effectively than we can because of their substantially greater
resources. Uncertainties resulting from the initiation and continuation of
patent litigation
<PAGE> 6
or other proceedings could have a material adverse effect on our ability to
complete in the marketplace. Patent litigation and other proceedings may also
absorb significant management time.
In 1994, the Boots Company PLC filed in the European Patent Office, or
the EPO, an opposition to a patent granted by the EPO to us relating to our
TIMERx technology. In June 1996, the EPO dismissed Boots' opposition, leaving
intact all claims included in the patent. Boots has appealed this decision to
the EPO Board of Appeals, but no judgment has been rendered. We can provide no
assurance that we will prevail in this matter.
IF OUR CLINICAL TRIALS ARE NOT SUCCESSFUL OR TAKE LONGER TO COMPLETE THAN WE
EXPECT, WE MAY NOT BE ABLE TO DEVELOP AND COMMERCIALIZE CERTAIN OF OUR PRODUCTS
In order to obtain regulatory approvals for the commercial sale of
certain of our potential products, including controlled release versions of
immediate release drugs and new chemical entities, our collaborators will be
required to complete clinical trials in humans to demonstrate the safety and
efficacy of the products. Our collaborators may not be able to obtain authority
from the FDA or other regulatory agencies to commence or complete these clinical
trails.
The results from preclinical testing of a product that is under
development may not be predictive of results that will be obtained in human
clinical trials. In addition, the results of early human clinical trials may not
be predictive of results that will be obtained in larger scale advanced stage
clinical trials. Furthermore, we, one of our collaborators, or the FDA may
suspend clinical trails at any time if the subjects or patients participating in
such trails are being exposed to unacceptable health risks, or for other
reasons.
<PAGE> 7
The rate of completion of clinical trials is dependent in part upon the
rate of enrollment of patients. Patient accrual is a function of many factors
including the size of the patient population, the proximity of patients to
clinical sites, the eligibility criteria for the study and the existence of
competitive clinical trials. Delays in planned patient enrollment may result in
increased costs and program delays.
We and our collaborators may not be able to successfully complete any
clinical trial of a potential product within any specified time period. In some
cases, we may not be able to complete the trial at all. Moreover, clinical
trials may not show any potential product to be safe or efficacious. Thus, the
FDA and other regulatory authorities may not approve any of our potential
products for any indication.
Our business, financial condition, or results of operations could be
materially adversely affected if:
- we or our collaborators are unable to complete a clinical trial of
one of our potential products;
- the results of any clinical trial are unfavorable; or
- the time or cost of completing the trial exceeds our expectations.
WE MAY NOT OBTAIN REGULATORY APPROVAL; THE APPROVAL PROCESS CAN BE
TIME-CONSUMING AND EXPENSIVE
The development, clinical testing, manufacture, marketing and sale of
pharmaceutical products are subject to extensive federal, state and local
regulation in the United States and other countries. This regulatory approval
process can be time-consuming and expensive.
We may encounter delays or rejections during any stage of the
regulatory approval process based upon the failure of clinical data to
demonstrate compliance with, or upon the failure of the product to meet, the
FDA's requirements for safety, efficacy and quality; and those requirements may
become more stringent due to changes in regulatory agency policy or the adoption
of new regulations. After submission of a marketing application, in the form of
an NDA or an ANDA, the FDA may deny the application, may require additional
testing or data and/or may require postmarketing testing and surveillance to
monitor the safety or efficacy of a product. While the U.S. Food, Drug and
Cosmetic Act, or FDCA, provides for a 180-day review period, the FDA commonly
takes one to two years to grant final approval to a marketing application (NDA
or ANDA). Further, the terms of approval of any marketing application, including
the labeling content, may be more restrictive than we desire and could affect
the marketability of products incorporating our controlled release technology.
Many of the controlled release products that we are developing with our
collaborators are generic versions of branded controlled release products, which
require the filing of ANDAs. Certain ANDA procedures for generic versions of
controlled
<PAGE> 8
release products are the subject of petitions filed by brand name drug
manufacturers, which seek changes from the FDA in the approval process for
generic drugs. These requested changes include, among other things, tighter
standards for certain bioequivalence studies and disallowance of the use by a
generic drug manufacturer in its ANDA of proprietary data submitted by the
original manufacturer as part of an original new drug application. Any changes
in FDA regulations that make ANDA approvals more difficult may have a material
adverse effect on our business, financial condition and results of operations.
Other products containing our TIMERx controlled release technology
require the filing of an NDA. A full NDA must include complete reports of
preclinical, clinical and other studies to prove adequately that the product is
safe and effective, which involves, among other things, full clinical testing,
and as a result requires the expenditure of substantial resources. In certain
cases involving controlled release versions of FDA-approved immediate release
drugs, we may be able to rely on existing publicly available safety and efficacy
data to support an NDA for controlled release products under Section 505(b)(2)
of the FDCA when such data exists for an approved immediate release version of
the same chemical entity. However, we can provide no assurance that the FDA will
accept such section 505(b)(2) NDA, or that we will be able to obtain publicly
available data that is useful. The section 505(b)(2) NDA process is a highly
uncertain avenue to approval because the FDA's policies on section 505(b)(2)
NDAs have not yet been fully developed. There can be no assurance that the FDA
will approve an application submitted under section 505(b)(2) in a timely manner
or at all.
The FDA also has the authority to revoke or suspend approvals of
previously approved products for cause, to debar companies and individuals from
participating in the drug-approval process, to request recalls of allegedly
violative products, to seize allegedly violative products, to obtain injunctions
to close manufacturing plants allegedly not operating in conformity with current
Good Manufacturing Practices (GMP) and to stop shipments of allegedly violative
products. The FDA may seek to impose pre-clearance requirements on products
currently being marketed without FDA approval, and there can be no assurance
that the Company or its third-party manufacturers or collaborators will be able
to obtain approval for such products within the time period specified by the
FDA.
EVEN IF WE OBTAIN MARKETING APPROVAL, OUR PRODUCTS WILL BE SUBJECT TO ONGOING
REGULATORY REVIEW
If regulatory approval of a product is granted, such approval may be
subject to limitations on the indicated uses for which the product may be
marketed or contain requirements for costly post-marketing follow-up studies. As
to products for which marketing approval is obtained, the manufacturer of the
product and the manufacturing facilities will be subject to continual review and
periodic inspections by the FDA and other regulatory authorities. The subsequent
discovery of previously unknown problems with the product, manufacturer or
facility may result in restrictions on the product or manufacturer, including
withdrawal of the product from the market.
<PAGE> 9
If we fail to comply with applicable regulatory requirements, we may be
subject to fines, suspension or withdrawal of regulatory approvals, product
recalls, seizure of products, operating restrictions and criminal prosecution.
THE MARKET MAY NOT BE RECEPTIVE TO PRODUCTS INCORPORATING OUR TIMERx CONTROLLED
RELEASE TECHNOLOGY
The commercial success of products incorporating our controlled release
technology that are approved for marketing by the FDA and other regulatory
authorities will depend upon their acceptance by the medical community and third
party payors as clinically useful, cost-effective and safe.
Other factors that we believe could materially affect market acceptance
of these products include:
- the timing of the receipt of marketing approvals and the countries
in which such approvals are obtained;
- the safety and efficacy of the product as compared to competitive
products; and
- the cost-effectiveness of the product and the ability to receive
third party reimbursement.
WE HAVE ONLY LIMITED MANUFACTURING CAPABILITIES AND WILL BE DEPENDENT ON THIRD
PARTY MANUFACTURERS.
We lack commercial scale facilities to manufacture our TIMERx material
in accordance with current GMP requirements prescribed by the FDA. We currently
rely on a third party pharmaceutical company for the bulk manufacture of our
TIMERx material for delivery to our collaborators.
There are a limited number of manufacturers that operate under GMP
regulations capable of manufacturing our TIMERx material. We have not yet
qualified a second source of supply. In the event that our current manufacturer
is unable to manufacture the TIMERx material in the required quantities or at
all, we may be unable to obtain alternative contract manufacturing, or obtain
such manufacturing on commercially reasonable terms.
If our third party manufacturer fails to perform its obligations, we
may be adversely affected in a number of ways, including:
- our collaborators may not be able to meet commercial demands for
our products on a timely basis;
- our collaborators may not be able to initiate or continue clinical
trials of products that are under development; and
<PAGE> 10
- our collaborators may be delayed in submitting applications for
regulatory approvals of our products.
We have limited experience in manufacturing TIMERx material on a
commercial scale and no facilities or equipment to do so. If we determine to
develop our own manufacturing capabilities, we will need to recruit qualified
personnel and build or lease the requisite facilities and equipment. We may not
be able to successfully develop our own manufacturing capabilities. Moreover, it
may be very costly and time consuming for us to develop such capabilities.
The manufacture of any of our products (both TIMERx material and
excipients) is subject to regulation by the FDA and comparable agencies in
foreign countries. Any delay in complying or failure to comply with such
manufacturing requirements could materially adversely affect the marketing of
our products and our business, financial condition and results of operations.
WE ARE DEPENDENT UPON A SOLE SOURCE SUPPLIER FOR THE GUMS USED IN OUR TIMERx
MATERIAL AND UPON A LIMITED NUMBER OF SUPPLIERS FOR THE WOOD PULP USED IN THE
MANUFACTURE OF OUR EXCIPIENTS
Our TIMERx drug delivery system is a hydrophilic matrix combining
primarily two polysaccharides, xanthan and locust bean gums, in the presence of
dextrose. We purchase these gums from a sole source supplier. Emcocel and
Prosolv, our two largest selling excipients, are manufactured from a specialty
grade of wood pulp. We have qualified alternate suppliers with respect to these
materials, but we can provide no assurance that interruptions in supplies will
not occur in the future or that we will not have to obtain substitute suppliers.
Any interruption in these supplies could have a material adverse effect on our
ability to manufacture bulk TIMERx for delivery to our collaborators or to
manufacture these excipients.
IF OUR COLLABORATORS FAIL TO OBTAIN AN ADEQUATE LEVEL OF REIMBURSEMENT BY THIRD
PARTY PAYORS FOR OUR CONTROLLED RELEASE PRODUCTS, THEY MAY NOT BE ABLE TO
SUCCESSFULLY COMMERCIALIZE CONTROLLED RELEASE PRODUCTS IN CERTAIN MARKETS
The availability of reimbursement by governmental and other third party
payors affects the market for any pharmaceutical product. These third party
payors continually attempt to contain or reduce the costs of health care by
challenging the prices charged for medical products and services. In certain
foreign countries, particularly the countries of the European Union, the pricing
of prescription pharmaceuticals is subject to governmental control.
The generic versions of controlled release products being developed by
us and our collaborators may be assigned an AB rating if the FDA considers the
product to be therapeutically equivalent to the branded controlled release drug.
Failure to obtain an AB
<PAGE> 11
rating from the FDA would indicate that for certain purposes the drug would not
be deemed to be therapeutically equivalent, would not be fully substitutable for
the branded controlled release drug and would not be relied upon by Medicaid and
Medicare formularies for reimbursement.
In both the U.S. and certain foreign jurisdictions, there have been a
number of legislative and regulatory proposals to change the health care system.
Further proposals are likely. The potential for adoption of these proposals may
affect our ability to raise capital, obtain additional collaborative partners
and market our products.
If we or our collaborators obtain marketing approvals for our products,
we expect to experience pricing pressure due to the trend toward managed health
care, the increasing influence of health maintenance organizations and
additional legislative proposals. We may not be able to sell our products
profitably if reimbursement is unavailable or limited in scope or amount.
WE WILL BE EXPOSED TO PRODUCT LIABILITY CLAIMS AND MAY NOT BE ABLE TO OBTAIN
ADEQUATE PRODUCT LIABILITY INSURANCE
Our business exposes us to potential product liability risks which are
inherent in the testing, manufacturing, marketing and sale of pharmaceutical
products. Product liability claims might be made by consumers, health care
providers or pharmaceutical companies or others that sell our products. These
claims may be made even with respect to those products that are manufactured in
licensed and regulated facilities or that otherwise possess regulatory approval
for commercial sale.
We are currently covered by primary product liability insurance in the
amount of $1.0 million per occurrence and $2.0 million annually in the aggregate
on a claims-made basis and by umbrella liability insurance in excess of $25.0
million which can also be used for product liability insurance. This coverage
may not be adequate to cover any product liability claims. Product liability
coverage is expensive. In the future, we may not be able to maintain or obtain
such product liability insurance at a reasonable cost or in sufficient amounts
to protect us against losses due to liability claims. Any claims that are not
covered by product liability insurance could have a material adverse effect on
our business, financial condition and results of operations.
THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE
The market price of our common stock, like the market prices for
securities of pharmaceutical, biopharmaceutical and biotechnology companies,
have historically been highly volatile. The market from time to time experiences
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. Factors such as fluctuations in our
operating results, future sales of our common stock, announcements of
technological innovations or new therapeutic products by us or our competitors,
announcements regarding collaborative agreements, clinical trial results,
government regulation, developments in patent or other proprietary rights,
public concern as to the safety of drugs developed by us or others, changes in
reimbursement policies,
<PAGE> 12
comments made by securities analysts and general market conditions may have a
significant effect on the market price of the common stock.
CERTAIN PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND OF
WASHINGTON LAW, AS WELL AS THE RIGHTS AGREEMENT TO WHICH WE ARE A PARTY, MAKE A
TAKEOVER OF PENWEST MORE DIFFICULT
Provisions of our Certificate of Incorporation, our Bylaws and
Washington law, as well as the Rights Agreement to which we are a party, may
have the effect of deterring hostile takeovers or delaying or preventing changes
in control or management of our company, including transactions in which our
stockholders might otherwise receive a premium for their shares over then
current market prices. In addition, these provisions may limit the ability of
stockholders to approve transactions that they may deem to be in their best
interest.
RESIDUAL YEAR 2000 ISSUES MAY ADVERSELY AFFECT OUR BUSINESS, FINANCIAL POSITION,
RESULTS OF OPERATIONS AND RELATIONSHIPS WITH CUSTOMERS AND SUPPLIERS
Prior to January 1, 2000, there was a great deal of concern regarding
the ability of computer programs and hardware and other equipment to adequately
recognize 21st century dates from 20th century dates due to the two-digit date
fields used by many systems. For example, computer programs that have
time-sensitive components may recognize a date represented as "00" as the year
1900 rather than the year 2000. In addition, programs may have failed to
recognize February 29, 2000 as a leap year date as a result of an exception to
the calculation of leap years that did occur in the year 2000 and otherwise
occurs only once every 400 years. As of March 7, 2000, our computer programs and
hardware and other equipment are functioning normally and the compliance and
remediation work performed by us appears to be effective to prevent any
problems. However, computer experts have warned that there may still be residual
consequences of the change in centuries. If residual Year 2000 issues cause the
failure of any of the computer programs and hardware and other equipment
necessary to operate our business, our business, financial position and results
of operations, as well as our relationships with customers and suppliers, may be
adversely affected. Furthermore, if third parties of business importance to us
do not successfully and timely anticipate and address their own residual Year
2000 issues, any residual Year 2000 issues that arise could have a material
adverse effect on our business, financial position and results of operations.
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT MARCH 31, 2000 AND THE CONDENSED
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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