<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
- --------------------------------------------------------------------------------
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998.........................
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
- --------------------------------------------------------------------------------
COMMISSION FILE NUMBER
0-23641
ALLERGAN SPECIALTY THERAPEUTICS, INC.
A DELAWARE CORPORATION IRS EMPLOYER IDENTIFICATION
33-0779207
2525 DUPONT DRIVE, IRVINE, CALIFORNIA 92612
TELEPHONE NUMBER 714/246-4500
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.
(1) X yes no
------ ------
(2) X yes no
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of August 8, 1998 there were 3,272,690 shares of callable Class A common
stock outstanding, and 1,000 shares of Class B common stock outstanding.
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ALLERGAN SPECIALTY THERAPEUTICS, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Condensed Statements of Operations For the quarter ended
June 30, 1998 and for the period from commencement of
operations (March 10, 1998) to June 30, 1998 3
Condensed Balance Sheets at June 30, 1998
and December 31, 1997 4
Condensed Statements of Cash Flows For the quarter ended
June 30, 1998 and for the period from commencement of
operations (March 10, 1998) to June 30, 1998 5
Notes to Condensed Financial Statements 6-10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11-19
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 20
Signature 21
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PART I - FINANCIAL INFORMATION
Allergan Specialty Therapeutics, Inc.
(a development stage company)
Condensed Statements of Operations
For the quarter ended June 30, 1998
and for the period from commencement of
operations (March 10, 1998) to June 30, 1998
(In thousands, except share data)
<TABLE>
<CAPTION>
Commencement of
Quarter Ended Operations to
June 30, 1998 June 30,1998
------------- ---------------
<S> <C> <C>
Revenues:
Interest income $ 2,791 $ 3,508
Costs and expenses:
Research and development 6,516 16,128
Technology fees 1,375 3,770
General and administrative
expenses 115 130
------- --------
Total costs and expenses $ 8,006 $ 20,028
------- --------
Loss before income taxes (5,215) (16,520)
Provision for taxes 922 922
------- --------
Net loss $(6,137) $(17,442)
======= ========
Basic and diluted loss per share $ (1.87) $ (5.33)
======= ========
Basic and diluted
shares outstanding 3,273,690 3,273,690
</TABLE>
See accompanying notes to condensed financial statements.
3
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Allergan Specialty Therapeutics, Inc.
(a development stage company)
Condensed Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 72 $ 1
Investments 179,894 --
Prepaid technology fees 3,085 --
Other assets 522 --
-------- ---
$183,573 $ 1
======== ===
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Payable to Allergan, Inc. $ 3,377 $--
Accounts payable and
accrued liabilities 996 --
-------- ---
Total liabilities 4,373 --
Stockholders' equity:
Callable Class A Common stock,
$.01 par value; 6,000,000 shares
authorized, 3,272,690 issued
and outstanding 33 --
Class B Common stock,
$1.00 par value; 1,000 shares
authorized, issued and outstanding 1 --
Additional paid-in capital 196,752 1
Accumulated other comprehensive income (144) --
Deficit accumulated during
development stage (17,442) --
-------- ---
Total stockholders' equity 179,200 1
-------- ---
$183,573 $ 1
======== ===
</TABLE>
See accompanying notes to condensed financial statements.
4
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Allergan Specialty Therapeutics, Inc.
(a development stage company)
Condensed Statements of Cash Flows
For the quarter ended June 30, 1998
and for the period from commencement of
operations (March 10, 1998) to June 30, 1998
(In thousands)
<TABLE>
<CAPTION>
Commencement of
Quarter Ended Operations to
June 30, 1998 June 30, 1998
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (6,137) $(17,442)
Changes in operating assets
and liabilities:
Interest receivable 211 --
Other assets (379) (522)
Prepaid technology fee (1,125) (3,085)
Payable to Allergan, Inc. 695 996
Accounts payable and
accrued liabilities (2,059) 3,377
-------- --------
Net cash used in
operating activities (8,794) (16,676)
INVESTING ACTIVITIES:
Purchases of investments (180,038) (180,038)
-------- --------
Net cash used in
investing activities (180,038) (180,038)
FINANCING ACTIVITIES:
Issuance of common stock -- 200,000
Offering costs -- (3,215)
-------- --------
Net cash provided by
financing activities -- 196,785
-------- --------
Net increase (decrease)in cash
and equivalents (188,832) 71
Cash and equivalents at
beginning of period 188,904 1
-------- --------
Cash and equivalents at
end of period $ 72 $ 72
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
5
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Allergan Specialty Therapeutics, Inc.
Notes to Condensed Financial Statements
1. Basis of Presentation and Significant Accounting Policies
Allergan Specialty Therapeutics, Inc. ("ASTI" or "the Company") was
incorporated in Delaware on November 12, 1997 and commenced operations on
March 10, 1998. ASTI was formed for the purpose of conducting research and
development of potential human pharmaceutical products, and to commercialize
such products, most likely through licensing to Allergan, Inc. (Allergan).
The Company is subject to risks associated with development stage companies.
All of the Company's efforts to date have been limited to obtaining capital
and board review of various research and development proposals presented by
Allergan. The Company does not yet generate any revenues from product sales
or royalties. Research and development is performed by Allergan and the
costs incurred are reimbursed by ASTI.
The accompanying financial statements at June 30, 1998 and for the quarter
ended June 30, 1998 and for the period from commencement of operations to
June 30, 1998 are unaudited, and in the opinion of management, includes all
adjustments (consisting only of normal recurring accruals) necessary to
present fairly the financial information contained therein. These statements
do not include all disclosures required by generally accepted accounting
principles. The results of operations for the period ended June 30, 1998 and
for the period from commencement of operations to June 30, 1998 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1998.
Accounting for revenues and expenses
ASTI's revenues consist solely of interest and investment income. In later
years ASTI may also derive revenues from the sale or license of its
products, most likely through the sale of licensed products by Allergan.
Royalty and other product revenue will be recorded as earned.
ASTI incurs most of its expenses under its agreements with Allergan.
Research and development costs paid to Allergan under a Research and
Development Agreement (R&D Agreement) are recorded as research and
development expenses when incurred. Technology fees paid to Allergan under a
Technology License Agreement (Technology Agreement) are recorded as
technology fees on a straight-line basis over the life of the Technology
Agreement. Amounts paid to Allergan under a Services Agreement are recorded
as administrative expenses as incurred. See Note 2 for a description of the
agreements between ASTI and Allergan.
Use of estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
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Allergan Specialty Therapeutics, Inc.
Notes to Condensed Financial Statements
1. Basis of Presentation and Significant Accounting Policies (continued)
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. The Company invests
its excess cash in money market funds, equity securities and debt
instruments of financial institutions and corporations with strong credit
ratings. The Company has established guidelines with respect to the
diversification and maturities in order to maintain safety and liquidity. At
June 30, 1998, all excess cash amounting to $179,894,000 was invested
primarily in debt securities. ASTI classifies such investments as
available-for-sale securities with net unrealized gains or losses as a
component of other comprehensive income. Amounts classified as investments
are liquidated and used to pay operating expenses as needed.
Per share information
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," (EPS).
SFAS No. 128 requires calculations for "basic earnings per share" including
only actual weighted shares outstanding and "diluted earnings per share"
including the effect of any common equivalent shares or other items that are
dilutive. The reconciliations of the numerators and denominators of the
basic and diluted earnings per share computations for the quarter ended June
30, 1998 and for the period from commencement of operations (March 10, 1998)
to June 30, 1998 are as follows:
<TABLE>
<CAPTION>
Income (loss) Shares Per-share
(Numerator) (Denominator) Loss
------------- ------------- ---------
<S> <C> <C> <C>
Computation of basic
and diluted EPS:
Quarter ended
June 30, 1998 (6,137,000) 3,273,690 $(1.87)
Computation of basic and
diluted EPS:
Commencement of
operations to
June 30, 1998 (17,442,000) 3,273,690 $(5.33)
</TABLE>
2. Arrangements with Allergan, Inc.
On March 10, 1998, 3,272,690 shares of callable Class A Common Stock of
ASTI, representing all of the issued and outstanding shares of such class,
were distributed by Allergan to the holders of record of Allergan common
stock at the close of business on February 17, 1998 (the "Distribution").
Prior to the Distribution, Allergan contributed $200,000,000 in cash to ASTI
in exchange for all of the shares of ASTI Common Stock.
On March 10, 1998, 1,000 shares of Class B Common Stock of ASTI,
representing all of the issued and outstanding shares of such class,
7
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Allergan Specialty Therapeutics, Inc.
Notes to Condensed Financial Statements
2. Arrangements with Allergan, Inc. (continued)
were issued to Allergan. As sole holder of all of the issued and outstanding
shares of Class B Common Stock, Allergan has the option to repurchase all of
the outstanding Class A Common Stock under specified conditions.
In connection with the Distribution, ASTI and Allergan entered into a number
of agreements, including the R&D Agreement, Technology Agreement, Services
Agreement and License Option Agreement (License Agreement).
Pursuant to the R&D Agreement, ASTI reimbursed Allergan for research and
development costs of $6,516,000 incurred during the quarter ended June 30,
1998, with respect to the initial ASTI Products and Pre-Selection Work, as
defined. Research and development expenses were $16,128,000 during the
period from commencement of operations through June 30, 1998 which includes
reimbursement to Allergan for research and development services performed
during the period from October 24, 1997 through March 9, 1998. From time to
time thereafter, Allergan shall propose work plans, subject to ASTI board
approval, for the continued development of each of the initial ASTI Products
as well as other product candidates. ASTI is required to utilize the cash
initially contributed to ASTI by Allergan plus interest and investment
income thereon, less administrative expenses and technology fees to conduct
activities under the R&D Agreement. The R&D Agreement specifies payment of
Developed Technology Royalties and Pre-Selection Product Payments by
Allergan to ASTI under certain conditions. Through June 30, 1998, no amounts
have been earned by ASTI with respect to Developed Technology Royalties or
Pre-Selection Product Payments.
Subject to certain limitations, the Technology Agreement grants ASTI an
exclusive license to research and develop all of Allergan's proprietary and
contractual rights with respect to certain retinoid and neuroprotective
technologies. As consideration for the exclusive license, ASTI will pay a
technology fee of $10,000,000 in year one; $6,700,000 in year two;
$3,300,000 in year three; and $2,000,000 in year four commencing October 24,
1997. The technology fee is charged to operations on a straight-line basis
over the life of the Technology Agreement. The technology fee is payable
monthly in arrears provided, however, that ASTI shall no longer be obligated
to make such payments beginning with any month following the date on which
the total number of ASTI Products either under development or licensed to
Allergan pursuant to the License Agreement is less than two. Through June
30, 1998, ASTI paid $6,855,000 in technology fees, of which $3,085,000 is
included in prepaid technology fees in the accompanying balance sheet.
ASTI has granted Allergan an option to acquire a license to each product
developed under the R&D Agreement, including the Initial Products on a
country-by-country basis at any time until (a) with respect to the United
States, 30 days after clearance by the FDA to commercially market such ASTI
Product and (b) with respect to any
8
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Allergan Specialty Therapeutics, Inc.
Notes to Condensed Financial Statements
2. Arrangements with Allergan, Inc. (continued)
other country, 90 days after the earlier of (i) clearance by the appropriate
regulatory agency to commercially market the product and (ii) clearance by
the FDA to market the product in the United States.
Upon exercise of the license option, Allergan will make Product Payments to
ASTI as defined in the R&D Agreement. Through June 30, 1998, no license
option has been exercised. The license option will expire to the extent not
previously exercised, 30 days after the expiration of Allergan's option to
purchase all of the outstanding ASTI Shares, described below.
In accordance with ASTI's Restated Certificate of Incorporation, Allergan
has the right to purchase all (but not less than all) of the ASTI Class A
Common Stock (the "Purchase Option"). Allergan may exercise the Purchase
Option by written notice to ASTI at any time during the period beginning
immediately after the Distribution and ending on December 31, 2002; provided
that such date will be extended for successive six month periods if, as of
June 30, 2001, ASTI has not paid or accrued expenses for at least 95% of all
Available Funds, as defined, pursuant to the R&D Agreement. In any event,
the Purchase Option will expire 90 days after Allergan receives notice that
the Available Funds (as defined in the R&D Agreement) held by ASTI is less
than $15 million. Through June 30, 1998, Allergan has not exercised the
Purchase Option.
If the Purchase Option is exercised, the exercise price will be the greatest
of:
(a)(i) 25 times the aggregate of (1) all worldwide payments with respect to
all Licensed Products, Developed Technology Products and Pre-Selection
Products for the four calendar quarters immediately preceding the quarter in
which the Purchase Option is exercised (Base Period) and (2) all payments
that would have been made and all payments due to be made by Allergan to
ASTI during the Base Period if Allergan had not previously exercised its
payment buy-out option with respect to any product; provided, however, that,
for the purposes of the foregoing calculation, for any product which has not
been commercially sold during each of the four calendar quarters in the Base
Period, Allergan will be deemed to have made Product Payments, Developed
Technology Royalties and Pre-Selection Product Payments to ASTI for each
such quarter equal to the average of the payments made during each of such
calendar quarters during which such product was commercially sold, less (ii)
any amounts previously paid to exercise any payment buy-out option for any
product;
(b)the fair market value of 500,000 shares of Allergan Common Stock
determined as the average of the closing sales price of Allergan Common
Stock on the New York Stock Exchange for the 20 trading days ending with the
trading day that is two trading days prior to the date of determination.
9
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Allergan Specialty Therapeutics, Inc.
Notes to Condensed Financial Statements
2. Arrangements with Allergan, Inc. (continued)
(c) $250 million less the aggregate amount of all technology fee payments
and research and development costs paid or incurred by ASTI as of the
date the Purchase Option is exercised; or
(d) $60 million.
In each case, the amount payable as the Purchase Option Exercise Price will
be reduced to the extent, if any, that ASTI's liabilities at the time of
exercise (other than liabilities under the R&D Agreement, Services Agreement
and the Technology Agreement) exceed ASTI's cash and cash equivalents and
short-term and long-term investments (excluding the amount of Available
Funds remaining at such time). Allergan must pay the Purchase Option
Exercise Price in cash.
ASTI and Allergan have entered into a Services Agreement pursuant to which
Allergan has agreed to provide ASTI with administrative services, including
accounting and legal services on a fully-burdened cost reimbursement basis.
The Services Agreement expires on December 31, 1998 and will be renewed
automatically for successive one year periods during the term of the R&D
Agreement. ASTI may terminate the Services Agreement at any time upon 60
days written notice.
3. New Accounting Standards
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued.
SFAS No. 130 established standards for reporting comprehensive income and
its components. Other comprehensive income for the quarter ended June 30,
1998 and for the period from commencement of operations through June 30,
1998 is comprised of unrealized loss on investments of $144,000.
4. Subsequent Events
Subsequent to June 30, 1998, Allergan announced that it had entered into a
multi-year research and development collaboration with Parke-Davis
Pharmaceutical Research Division of Warner-Lambert Company to identify,
develop and commercialize up to two RXR subtype selective retinoid compounds
for the treatment of metabolic diseases, including adult onset diabetes,
insulin resistant syndromes and dyslipidemias. RXR compounds have been
accepted by ASTI as Pre-Selection Work. As a result, ASTI is entitled to
receive a portion of the revenue stream paid by Warner-Lambert to Allergan.
ASTI intends to use the funds received for further research and development.
Subsequent to June 30, 1998, ASTI's Board of Directors approved a plan to
fund Pre-Selection Work for androgen tears, which is being investigated for
the treatment of dry eye, and certain research aimed at diseases of the
retina.
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ALLERGAN SPECIALTY THERAPEUTICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1998
This Quarterly Report on Form 10-Q may contain certain projections, estimates
and other forward-looking statements that involve a number of risks and
uncertainties. While this outlook represents management's current judgment on
the future direction of the business, such risks and uncertainties could cause
actual results to differ materially from any future performance suggested below.
The Company undertakes no obligation to release publicly the results of any
revisions to these forward-looking statements to reflect events or circumstances
arising after the date hereof.
The following should be read in conjunction with "--Risks and Uncertainties"
below and the Company's Financial Statements and notes thereto in Item 1 above.
RESULTS OF OPERATIONS
- ---------------------
Revenues, consisting of net interest and investment income earned on investment
funds, were $2,791,000 for the quarter ended June 30, 1998 and $3,508,000 for
the period from ASTI's commencement of operations, March 10, 1998, through June
30, 1998. Interest income was earned during the period from March 10, the date
Allergan contributed $200 million to ASTI, and June 30, 1998. In the future, as
ASTI's funds are used pursuant to the R&D Agreement and to pay the Technology
Fee pursuant to the Technology Agreement, lower cash balances will be available
for investment and therefore interest and investment income is expected to
decrease. During the period in which products are under development and
applications for regulatory clearance are submitted and reviewed, ASTI does not
anticipate revenues other than from interest and investment income.
Research and development expenses were $6,516,000 for the quarter ended June 30,
1998. Research and development expenses were $16,128,000 during the period from
commencement of operations through June 30, 1998 which includes reimbursement
for services performed during the period from October 24, 1997 through March 9,
1998. During the quarter, ASTI's Board of Directors approved work plans and cost
estimates presented by Allergan in accordance with the R&D Agreement for the
remainder of the 1998 calendar year. The approved work plans and cost estimates
are similar to the estimates provided in ASTI's prospectus dated March 6, 1998.
ASTI paid technology fees of $2,500,000 to Allergan during the quarter ended
June 30, 1998. ASTI paid technology fees of $6,855,000 for the period from
commencement of operations to June 30, 1998 which includes technology fees
incurred during the period from October 24, 1997 through March 9, 1998.
General and administrative expenses for the quarter ended June 30, 1998 and for
the period from commencement of operations through June 30, 1998 were not
material. It is anticipated that such expenses will increase in future reporting
periods, particularly with respect to expenses under the Services Agreement
pursuant to which Allergan has agreed to provide ASTI with administrative
services, including accounting and legal services, on a fully-burdened cost
reimbursement basis.
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Allergan Specialty Therapeutics, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1998
RESULTS OF OPERATIONS (Continued)
- ---------------------------------
In its early years, the results of operations of ASTI are expected to reflect
primarily interest and investment income on the funds contributed by Allergan,
and research and development expenses related to development of ASTI Products
and the Technology Fee. ASTI's net loss for the quarter ended June 30, 1998 was
$6,137,000 or $(1.87) per share. ASTI's net loss for the period from
commencement of operations through June 30, 1998 was $17,442,000 or $(5.33) per
share. ASTI is expected to continue to record significant net losses in future
periods, as expenses under its agreements with Allergan are expected to continue
to exceed investment income.
Provision for taxes was $922,000 for both periods presented. ASTI expects to
have taxable income as a result of the requirement to capitalize technology fees
and its likely election to capitalize research and development expenses for tax
purposes.
Under its agreements with Allergan, ASTI depends upon Allergan's operating and
accounting systems. Allergan has indicated to ASTI that Allergan's operating and
accounting systems applicable to ASTI are year 2000 compliant. ASTI does not
currently expect its financial condition or results of operations to be
materially adversely affected by year 2000 issues.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
On March 9, 1998, Allergan contributed $200 million in cash to ASTI in exchange
for all of the issued and outstanding shares of callable Class A Common Stock of
ASTI. On March 10, 1998, Allergan distributed the Class A shares to holders of
Allergan common stock and ASTI commenced operations. The funds contributed by
Allergan, plus investment income earned thereon, will be used primarily to fund
the development of ASTI Products and to conduct related activities. Funds not
immediately required for development activities will be invested in low-risk
securities.
At June 30, 1998, ASTI had cash and cash equivalents of approximately $72,000.
The Company invests its excess cash in money market funds, equity securities and
debt instruments of financial institutions and corporations with strong credit
ratings. The Company has established guidelines with respect to the
diversification and maturities in order to maintain safety and liquidity. At
June 30, 1998, ASTI had $179,894,000 in investments. ASTI classifies such
investments as available-for-sale securities with net unrealized holding gains
or losses as a component of other comprehensive income. ASTI liquidates
investments to pay for operating expenses as needed.
Based on anticipated spending levels for the continued development of all the
current ASTI Products, it is expected that ASTI's funds for product development
will be exhausted during the next few years. At that time, product development
funding by ASTI will cease. However, several factors
12
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Allergan Specialty Therapeutics, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1998
LIQUIDITY AND CAPITAL RESOURCES (Continued)
- -------------------------------------------
could impact the level and timing of ASTI funding, including the addition of any
new ASTI Products, the discontinuation of the development of any ASTI Products,
any commercial arrangements between Allergan and other companies which would
cause Allergan to exercise its License Option with respect to any ASTI Product,
any change in the number of projects advancing to or continuing in later stages
of development or any adjustments in the rate of spending on products currently
in development.
When ASTI's Available Funds (as defined in the R&D Agreement) is below $15
million, certain events will be triggered. First, Allergan's Purchase Option
with respect to all of the ASTI Class A Common Stock will terminate on the 90th
day after ASTI provides Allergan with a statement that, as of the end of any
calendar month, there are less than $15 million of Available Funds remaining.
Such statement will be accompanied by a report of ASTI's independent auditors.
In addition, Allergan has the right, for 30 days after expiration of the
Purchase Option, to license any or all ASTI Products which have not yet been
licensed, on a product-by-product and country-by-country basis. Allergan is
under no obligation to exercise the Purchase Option or the License Option with
respect to any ASTI Product. In the event that Allergan does not exercise the
Purchase Option or the License Option for all ASTI Products after ASTI's cash
available for product development is exhausted, ASTI will not have funds to
continue or complete development of any remaining products.
RISKS AND UNCERTAINTIES
- -----------------------
New Company. ASTI is a newly formed company and is subject to the risks inherent
in the establishment of a new business enterprise in the biotechnology industry.
ASTI will incur substantial losses for several years due to the long-term nature
of the research and development of pharmaceutical products through clinical
testing and the regulatory process, which losses may never be recovered.
No Assurance of Continued Research or Development of ASTI Products. There can be
no assurance that the ASTI Board of Directors will continue the funding of the
research and development of the initial ASTI Products, or that any ASTI Products
can be successfully researched, developed and/or commercialized within the
anticipated cost estimates or time frames, if at all. Certain of the ASTI
Products are at critical stages of research and development, and technical and
clinical outcomes are impossible to predict. Because of the long-range nature of
any pharmaceutical product research and development plan, research and
development of a particular product or products could accelerate, slow down or
be discontinued, and other unforeseen events could occur, all of which would
significantly affect the timing and amount of ASTI's expenditures on a
particular product, or in total. As a result, estimates of costs and timing of
research and development programs and for the use of Available Funds may not be
accurate. There can be no assurance that Allergan will recommend, or that ASTI
will approve, additional products for research and development as ASTI Products
beyond the initial ASTI Products.
13
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Allergan Specialty Therapeutics, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1998 (Continued)
RISKS AND UNCERTAINTIES (Continued)
- -----------------------------------
Although ASTI has received from Allergan a license to use Allergan Technology
for the purpose of researching, developing and commercializing ASTI Products,
some or all of the ASTI Products may require new technologies or enhancements or
modifications to existing Allergan Technology, and there can be no assurance
that such technology can or will be successfully developed or acquired. Even if
appropriate technology is available or developed, there can be no assurance that
such ASTI Products will be successfully researched or developed (or be
researched or developed in a timely fashion) or be proven to be safe and
efficacious in clinical trials.
Need for Regulatory Clearance. All ASTI Products, Developed Technology Products
and Pre-Selection Products will require FDA clearance before such products may
be lawfully marketed in the United States. Applications for FDA clearance must
be based on costly and extensive clinical trials designed to demonstrate safety
and efficacy. Clearance to market such products will also be required from
corresponding regulatory authorities in foreign countries before such products
may be marketed in those countries. Such clearance often involves pricing and
reimbursement approvals in addition to clearance based on safety and efficacy.
Delay in obtaining FDA and/or foreign regulatory clearance or pricing or
reimbursement approvals for any such product may have a material adverse effect
on the commercial success of such product. There can be no assurance that the
necessary regulatory clearances and approvals will be obtained in a timely
fashion or, if obtained, that such clearances and approvals will not be revoked
or withdrawn.
No Assurance of Sufficiency of Funds or Availability of Additional Funds.
Allergan has contributed $200 million in cash to ASTI. Allergan has no
obligation to contribute additional funds to ASTI, and has no present intention
to do so. It is anticipated that if ASTI were to fund the continued research and
development of the initial ASTI Products through FDA review for marketing
clearance, the funding of these activities, together with any Pre-Selection Work
undertaken by Allergan and/or ASTI and funded by ASTI, would require
substantially all of the Available Funds. There can be no assurance that ASTI
will have sufficient funds to complete the research and development of any or
all of the ASTI Products, including the four initial ASTI Products.
Allergan's rights under the Allergan/ASTI Agreements may limit ASTI's ability to
raise funds, or may prevent ASTI from doing so, if ASTI needs additional funds
to continue or complete research and development of any ASTI Product. If ASTI
were to attempt to raise funds following the expiration of the Purchase Option,
ASTI would have very little cash, few assets and an undeterminable number of
products under research and development. Allergan would at that time have the
unilateral option to license any or all ASTI Products for such countries for
which Allergan's License Option had not previously expired. Third parties might
therefore be reluctant to lend money to ASTI, or to invest in ASTI.
14
<PAGE> 15
Allergan Specialty Therapeutics, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1998 (Continued)
RISKS AND UNCERTAINTIES (Continued)
- -----------------------------------
No Assurance of Successful Manufacturing or Marketing. Even if ASTI Products are
developed and receive necessary regulatory clearances and approvals, there can
be no assurance that the ASTI Products will be successfully manufactured for
clinical trials or successfully manufactured or marketed for commercial sale. To
be successfully marketed, any ASTI Product must be manufactured in commercial
quantities in compliance with regulatory requirements and at an acceptable cost.
Any significant delays in the completion of validation and licensing of expanded
or new facilities could have a material adverse effect on the ability to
continue clinical trials of and ultimately to market ASTI Products on a timely
and profitable basis. If Allergan does not exercise its License Option for an
ASTI Product (and does not exercise the Purchase Option), ASTI will have to make
alternative arrangements for manufacturing that ASTI Product, and there can be
no assurance that ASTI will be able to do so.
If Allergan exercises its License Option for any ASTI Product, Allergan may need
to develop and/or expand its marketing capabilities to commercialize such
Licensed Product effectively. If Allergan exercises its License Option for any
ASTI Product, and does not at the time the product is to be commercialized have
a sales force in the relevant country or countries, Allergan will need to
arrange for marketing by third parties outside of the United States, and, if the
product is not within Allergan's target markets at such time, within the United
States. If Allergan does not exercise its License Option for an ASTI Product
(and does not exercise the Purchase Option), ASTI will need to find other means
to commercialize that ASTI Product not involving Allergan, and there can be no
assurance that ASTI will be able to do so.
At the present time, ASTI does not have, nor, through the development stage of
the ASTI Products, does it expect to develop, any manufacturing or marketing
capability. If ASTI decides to manufacture or market one or more ASTI Products
itself, ASTI will need substantial additional funds. There is no assurance that
additional funds will be available, or will be available on attractive terms,
and Allergan has no obligation to supply any additional funds to ASTI. In
addition, ASTI may not use Available Funds for this purpose without Allergan's
consent.
If either Allergan or ASTI seeks a third party to manufacture or market an ASTI
Product, there can be no assurance that satisfactory arrangements can be
successfully negotiated or that any such arrangements will be on commercial
terms acceptable to Allergan or ASTI. In addition, even if ASTI decides to
license any ASTI Product to a third party, agreements with that third party, if
available, may be on terms less favorable to ASTI than the terms of the
Allergan/ASTI Agreements.
Even if acceptable manufacturing and marketing resources are available, there
can be no assurance that any ASTI Products will be accepted in the marketplace.
There can be no assurance that there will be adequate reimbursement by health
insurance companies or other third party payors for any ASTI Products that are
marketed.
15
<PAGE> 16
Allergan Specialty Therapeutics, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1998 (Continued)
RISKS AND UNCERTAINTIES (Continued)
- -----------------------------------
No Assurance of Exercise of Allergan's Options. Allergan is not obligated to
exercise the License Option for any ASTI Product or to exercise the Purchase
Option, and Allergan will exercise any such option only if it is in Allergan's
best interest to do so. The timing of the exercise of the Purchase Option is
within Allergan's sole discretion, and Allergan may choose to exercise the
Purchase Option at a time when the Purchase Option Exercise Price is as low as
possible. Because the contractual relationship between Allergan and ASTI
contemplates that Allergan will perform research and development activities on
behalf of ASTI, in the event of Allergan's failure to exercise the Purchase
Option, ASTI would be required to seek alternative research and development
facilities, either independently or with a third party. There can be no
assurance that ASTI would be able to obtain access to adequate research and
development facilities in such event on a timely basis, on acceptable terms, or
at all. The timing of the exercise of the License Option with respect to any
Licensed Product is also within Allergan's sole discretion and thereafter
research, development and funding of any such product will be controlled by
Allergan.
Reliance on Proprietary Technologies; Unpredictability of Patent Protection.
Patent protection generally has been important in the pharmaceutical industry.
Therefore, ASTI's financial success may depend in part upon Allergan obtaining
strong patent protection for the technologies incorporated in ASTI Products.
Allergan will determine which patent applications to pursue, and the expense of
obtaining and maintaining patents covering Developed Technology will be shared
equally by Allergan and ASTI during the terms of the Research and Development
Agreement.
However, there can be no assurance that patents will be issued covering any
products, or that any existing patents or patents issued in the future will be
of commercial benefit. In addition, it is impossible to anticipate the breadth
or degree of protection that any such patents will afford, and there can be no
assurance that any such patents will not be successfully challenged in the
future. If Allergan is unsuccessful in obtaining or preserving patent
protection, or if any products rely on unpatented proprietary technology, there
can be no assurance that others will not commercialize products substantially
identical to such products.
Patents have been issued to third parties covering various therapeutic agents,
products and technologies. There can be no assurance that any ASTI Products,
Developed Technology Products or Pre-Selection Products will not infringe
patents held by third parties. In such event, licenses from such third parties
would be required, or their patents would have to be designed around. There can
be no assurance that such licenses would be available or that they would be
available on commercially attractive terms, or that any necessary redesign could
be successfully completed.
Allergan licenses certain intellectual property from third parties which it will
sublicense to ASTI pursuant to the Technology License Agreement. Specifically,
Allergan has licensed certain rights to its retinoid technology from Allergan
Ligand Retinoid Therapeutics, Inc. (ALRT) and certain rights to the technology
underlying Memantine from Children's Medical Center Corporation and Merz + Co.
GmbH & Co. ("Merz"). Under the terms of
16
<PAGE> 17
Allergan Specialty Therapeutics, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1998 (Continued)
RISKS AND UNCERTAINTIES (Continued)
- -----------------------------------
certain of its license agreements, Allergan may be obligated to exercise
diligence and make certain royalty and milestone payments as well as incur costs
related to filing and prosecuting the underlying patents. Each agreement is
terminable by either party upon notice if the other party defaults in its
obligations. Should Allergan default under any of its agreements, Allergan and
therefore ASTI may lose its right to market and sell products based upon such
licensed technology. In addition, there can be no assurance that Allergan's
licensors will meet their obligations to Allergan pursuant to such licenses. In
such event, ASTI's results of operations and business prospects would be
materially and adversely affected.
Competition. ASTI Products, Developed Technology Products and Pre-Selection
Products are likely to face competition from other therapies for the same
indications. Competitors potentially include any of the world's pharmaceutical
and biotechnology companies. Many pharmaceutical companies have greater
financial resources, technical staffs and manufacturing and marketing
capabilities than Allergan or ASTI. A number of companies have developed and are
developing competing technologies and products. To the extent that ASTI
Products, Developed Technology Products and Pre-Selection Products incorporate
therapeutic agents that are off-patent or therapeutic agents marketed by
multiple companies, such products will face more competition than products
incorporating proprietary therapeutic agents.
The fundamental technology underlying retinoids licensed to ASTI is also
cross-licensed to Ligand Pharmaceuticals Incorporated (Ligand) and therefore
competition from similar activities by Ligand and its collaborators in retinoids
is likely. In addition, pursuant to an agreement between Allergan and Ligand,
each party has been granted non-exclusive rights to use any unsynthesized
compounds developed by ALRT provided that such license will become exclusive
with respect to any compound for which an IND is filed with and accepted by the
FDA. Accordingly, no assurance can be given that Ligand will not be the first
party to file an IND with respect to any retinoid compound under research by
ASTI, thereby preventing ASTI and Allergan from undertaking any further
research, development or commercialization with respect to such compound.
Potential Conflicts of Interest Between Allergan and ASTI. Because Allergan may
develop and/or market products (including Developed Technology Products and
Pre-Selection Products) for its own account, independent of ASTI, that compete
directly with ASTI Products, Allergan and ASTI may have conflicting interests
with respect to certain products and/or certain markets. In addition, ASTI
Products, Developed Technology Products and Pre-Selection Products may compete
with one another. Allergan Technology excludes, and ASTI will have no rights
with respect to, any topical formulation of Tazarotene. Allergan is currently
marketing a topical formulation of Tazarotene for the treatment of psoriasis and
acne in the United States under the brand name "Tazorac" and outside of the
United States under the brand name "Zorac".
17
<PAGE> 18
Allergan Specialty Therapeutics, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1998 (Continued)
RISKS AND UNCERTAINTIES (Continued)
- -----------------------------------
Dependence on Allergan for Personnel and Facilities. ASTI will depend
substantially on Allergan for research and development activities to be
performed under the Research and Development Agreement. Although ASTI may
perform directly, or engage other third parties to perform on its behalf, some
of these activities, it is likely that Allergan will be responsible for
executing substantially all of ASTI's research and development activities. While
Allergan believes that its current and planned personnel and facilities will be
adequate for the performance of its duties under the R&D Agreement, such
personnel will perform services in the same facilities for Allergan itself.
Subject to Allergan's obligation to use diligent efforts under the R&D
Agreement, Allergan may allocate its personnel and facilities as it deems
appropriate. Allergan's own research and development activities may restrict the
resources that otherwise would be available for performing Allergan's duties
under the Research and Development Agreement.
Relationship Between ASTI and Allergan May Limit ASTI's Activities and Market
Value. The terms of the Allergan/ASTI Agreements and ASTI's Restated Certificate
of Incorporation were not determined on an arm's-length basis and certain terms
may limit ASTI's activities and its market value.
ASTI's Restated Certificate of Incorporation prohibits ASTI from taking or
permitting any action that might impair Allergan's rights under the Purchase
Option. Prior to the expiration of the Purchase Option, ASTI may not, without
the consent of the holders of ASTI Class B Common Stock, merge or liquidate, or
sell, lease, exchange, transfer or dispose of any substantial assets, or amend
its Restated Certificate of Incorporation to alter the Purchase Option, ASTI's
authorized capitalization, or the provisions of the Restated Certificate of
Incorporation governing ASTI's Board of Directors. Because Allergan owns all of
the outstanding Class B Common Stock, Allergan is able to influence
significantly or control the outcome of any of the foregoing actions requiring
approval by the Class B stockholders of ASTI. The ability of Allergan to
significantly influence or control such matters, together with the provisions of
ASTI's Restated Certificate of Incorporation eliminating the right of the ASTI
stockholders to call special meetings of stockholders, could affect the
liquidity of the ASTI Shares and have an adverse effect on the price of the ASTI
Shares, and may have the effect of delaying or preventing a change in control of
ASTI, including transactions in which stockholders might otherwise receive a
premium for their shares over the current market price. Neither the terms of the
ASTI/Allergan Agreements nor ASTI's Restated Certificate of Incorporation
prohibit Allergan from transferring its ASTI Class B Common Stock. The special
rights accorded to the holder or holders of the ASTI Class B Common Stock will
expire upon expiration of the Purchase Option.
So long as the Purchase Option is exercisable, the market value of the ASTI
Shares will be limited by the Purchase Option Exercise Price. The Purchase
Option Exercise Price was determined by Allergan, giving consideration to the
structure of the Distribution, ASTI's planned business, the Allergan/ASTI
Agreements, advice given by Merrill Lynch, Pierce, Fenner & Smith Incorporated,
and such other factors as Allergan deemed appropriate.
18
<PAGE> 19
Allergan Specialty Therapeutics, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1998 (Continued)
RISKS AND UNCERTAINTIES (Continued)
- -----------------------------------
The Purchase Option Exercise Price was not determined on an arm's-length basis.
The existence of the Purchase Option and Allergan's rights as holder of the ASTI
Class B Common Stock may inhibit ASTI's ability to raise capital. Additional
capital raised by ASTI, if any, would most likely reduce the per share proceeds
available to holders of ASTI Shares if the Purchase Option were exercised. The
existence of the Purchase Option and Allergan's rights as the holder of the ASTI
Class B Common Stock may inhibit a change of control and may make an investment
in ASTI Shares less attractive to certain potential stockholders, which could
adversely affect the liquidity and market value of ASTI Shares.
If Allergan exercises its License Option for any ASTI Product, Allergan will
have the right to commercialize the product with third parties on such terms as
Allergan deems appropriate. In such event, payments from Allergan to ASTI with
respect to the ASTI Product will be based solely on Sublicensing Revenues
received from such third parties.
Limitation on ASTI's Ability to License Products to Third Parties. ASTI has
granted Allergan the License Option, which is exercisable on a
product-by-product and country-by-country basis. During the term of the License
Option for each ASTI Product, ASTI will not be able to license such ASTI Product
to any party other than Allergan. Furthermore, ASTI may perform research with
respect to product candidates which become ASTI Products only if recommended by
Allergan and accepted by ASTI. In particular, it is expected that Allergan will
perform Pre-Selection Work with respect to various product candidates. If such
product candidates do not become ASTI Products, ASTI will have no rights with
respect thereto except the right to receive limited royalties from Allergan on
commercial sales of such products, if any.
Possible Dilution; Reduction of Per Share Purchase Option Exercise Price. All
ASTI Shares issued by ASTI after the Distribution will be subject to the
Purchase Option, and the Purchase Option Exercise Price will not increase as a
result of any such issuance. Accordingly, if additional ASTI Shares were to be
issued, the percentage of the Purchase Option Exercise Price payable with
respect to each ASTI Share in the event Allergan exercises the Purchase Option
would be reduced. Liabilities, including any debt issued by ASTI, but excluding
any accounts payable to Allergan, will reduce the Purchase Option Exercise Price
to the extent that such liabilities exceed ASTI's cash, cash equivalents, and
short-term and long-term investments (excluding Available Funds), unless repaid
or discharged by ASTI prior to exercise of the Purchase Option.
No Dividends. ASTI's Restated Certificate of Incorporation prohibits the payment
of dividends from Available Funds.
19
<PAGE> 20
Allergan Specialty Therapeutics, Inc.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- Exhibits
27.1 Financial Data Schedule.
27.1.B Financial Data Schedule 1st Quarter.
- Reports on Form 8-K. None.
20
<PAGE> 21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 10, 1998 ALLERGAN SPECIALTY THERAPEUTICS, INC.
/s/ Dwight J. Yoder
-------------------------------------
Dwight J. Yoder
Chief Financial Officer
and Duly Authorized Officer
21
<PAGE> 22
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
27.1 Financial Data Schedule.
27.1.B Financial Data Schedule 1st Quarter.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF OPERATIONS AND BALANCE SHEET OF ALLERGAN SPECIALTY THERAPEUTICS,
INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 72
<SECURITIES> 179,894
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 183,573
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 183,573
<CURRENT-LIABILITIES> 4,373
<BONDS> 0
0
0
<COMMON> 34
<OTHER-SE> 179,166
<TOTAL-LIABILITY-AND-EQUITY> 183,573
<SALES> 0
<TOTAL-REVENUES> 2,791
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,006
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,215)
<INCOME-TAX> 922
<INCOME-CONTINUING> (6,137)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,137)
<EPS-PRIMARY> (1.87)
<EPS-DILUTED> (1.87)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF OPERATIONS AND BALANCE SHEET OF ALLERGAN SPECIALTY THERAPEUTICS,
INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> MAR-10-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 188,904
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 191,218
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 191,218
<CURRENT-LIABILITIES> 5,737
<BONDS> 0
0
0
<COMMON> 34
<OTHER-SE> 185,481
<TOTAL-LIABILITY-AND-EQUITY> 191,218
<SALES> 0
<TOTAL-REVENUES> 717
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 12,022
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (11,305)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,305)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,305)
<EPS-PRIMARY> (3.45)
<EPS-DILUTED> (3.45)
</TABLE>
