<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, 1999...........................
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 July 30, 1999, there were 3,272,690 shares of callable Class A common
stock outstanding, and 1,000 shares of Class B common stock outstanding.
<PAGE> 2
ALLERGAN SPECIALTY THERAPEUTICS, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Condensed Statements of Operations 3
Condensed Balance Sheets 4
Condensed Statements of Cash Flows 5
Notes to Condensed Financial Statements 6-12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13-17
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 18
CERTAIN FACTORS AND TRENDS AFFECTING ALLERGAN
SPECIALTY THERAPEUTICS, INC. AND ITS BUSINESSES 19-20
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 21
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 21
Signature 22
Exhibits
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Allergan Specialty Therapeutics, Inc.
(a development stage company)
Condensed Statements of Operations
(unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
Inception
(November 12, 1997)
Quarter Ended Six Months Ended to
June 30, June 30, June 30,
1999 1998 1999 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 2,342 $ 2,791 $ 4,492 $ 3,508 $ 13,535
Costs and expenses:
Research and
development 11,957 6,516 22,646 16,128 58,532
Technology fees 1,375 1,375 2,750 3,770 9,270
General and
administrative 327 115 611 130 1,544
-------- ------- -------- -------- --------
Total costs and
expenses 13,659 8,006 26,007 20,028 69,346
-------- ------- -------- -------- --------
Loss before income
taxes (11,317) (5,215) (21,515) (16,520) (55,811)
Provision for taxes 874 922 1,475 922 3,987
-------- ------- -------- -------- --------
Net loss $(12,191) $(6,137) $(22,990) $(17,442) $(59,798)
======== ======= ======== ======== ========
Basic and diluted
loss per share $ (3.72) $ (1.87) $ (7.02) $ (5.33) $ (18.27)
======== ======= ======== ======== ========
Basic and diluted
shares outstanding 3,273,690 3,273,690 3,273,690 3,273,690 3,273,690
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE> 4
Allergan Specialty Therapeutics, Inc.
(a development stage company)
Condensed Balance Sheets
(unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash $ 65 $ --
Investments 132,888 158,667
Prepaid technology fees 5,323 4,723
Other assets 2,228 1,747
-------- --------
$140,504 $165,137
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Payable to Allergan, Inc. $ 4,138 $ 4,509
Accounts payable and
accrued liabilities 26 295
-------- --------
Total liabilities 4,164 4,804
Stockholders' equity:
Callable Class A Common stock,
$.01 par value; 6,000,000 shares
authorized, 3,272,690 issued
and outstanding 33 33
Class B Common stock,
$1.00 par value; 1,000 shares
authorized, issued and outstanding 1 1
Additional paid-in capital 196,753 196,753
Accumulated other comprehensive
(loss)/income (649) 354
Deficit accumulated during
development stage (59,798) (36,808)
-------- --------
Total stockholders' equity 136,340 160,333
-------- --------
$140,504 $165,137
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE> 5
Allergan Specialty Therapeutics, Inc.
(a development stage company)
Condensed Statements of Cash Flows
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
Inception
(November 12, 1997)
Six Months Ended to
June 30, June 30,
1999 1998 1999
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (22,990) $ (17,442) $ (59,798)
Noncash item included in net loss:
Deferred income tax (335) -- (1,017)
Changes in operating assets
and liabilities:
Other assets 301 (522) (764)
Prepaid technology fees (600) (3,085) (5,323)
Payable to Allergan, Inc. (371) 3,377 4,138
Accounts payable and
accrued liabilities 3 996 26
--------- --------- ---------
Net cash used in
operating activities (23,992) (16,676) (62,738)
INVESTING ACTIVITIES:
Purchases of investments (4,373) (180,038) (191,524)
Sales and maturities of
investments 28,430 -- 57,540
--------- --------- ---------
Net cash provided by/
(used in) investing
activities 24,057 (180,038) (133,984)
FINANCING ACTIVITIES:
Issuance of common stock -- 200,000 200,001
Offering costs -- (3,215) (3,214)
--------- --------- ---------
Net cash provided by
financing activities -- 196,785 196,787
--------- --------- ---------
Net increase in cash 65 71 65
Cash - beginning of period -- 1 --
--------- --------- ---------
Cash - end of period $ 65 $ 72 $ 65
========= ========= =========
Supplemental disclosure of cash
paid for taxes $ 1,772 $ 431 $ 5,018
========= ========= =========
</TABLE>
See accompanying notes to condensed financial statements.
5
<PAGE> 6
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 conducting research and development. 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, 1999, December 31, 1998,
for the quarter and six month periods ended June 30, 1999 and 1998 and for
the period from inception to June 30, 1999 are unaudited, and in the opinion
of management, include 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, 1999 and for the period from inception (November 12,
1997) to June 30, 1999 are not necessarily indicative of the results to be
expected for the year ending December 31, 1999.
Accounting for revenues and expenses
ASTI's revenues consist of interest and investment income and Pre-Selection
Product Payments (see Note 2). 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.
6
<PAGE> 7
Allergan Specialty Therapeutics, Inc.
Notes to Condensed Financial Statements
1. Basis of Presentation and Significant Accounting Policies (Continued)
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.
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
diversification and maturities in order to maintain safety and liquidity. At
June 30, 1999, all excess cash amounting to $132,888,000 was invested
primarily in debt securities. ASTI classifies 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
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," (EPS) 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 Company has no common equivalent shares or other items that are
dilutive. The reconciliations of the numerators and denominators of the basic
and diluted loss per share computations for the quarter and six month periods
ended June 30, 1999 and 1998 and for the period from inception to June 30,
1999 are as follows:
<TABLE>
<CAPTION>
Inception
Quarter Ended Six Months Ended (November 12, 1997)
June 30, June 30, to June 30,
1999 1998 1999 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Loss during period
(in thousands) $ (12,191) $ (6,137) $ (22,990) $ (17,442) $ (59,798)
Basic and
diluted shares
outstanding 3,273,690 3,273,690 3,273,690 3,273,690 3,273,690
Per share loss
during period $(3.72) $(1.87) $(7.02) $(5.33) $(18.27)
</TABLE>
Reclassifications
Certain reclassifications have been made to prior periods in order to conform
with current period presentation.
7
<PAGE> 8
Allergan Specialty Therapeutics, Inc.
Notes to Condensed Financial Statements
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, 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).
Research and development costs are comprised of costs incurred pursuant to
the R&D Agreement with Allergan and R&D Collaborations. The components of the
research and development costs for the quarter and six month periods ended
June 30, 1999 and 1998 and for the period from inception to June 30, 1999 are
as follows:
<TABLE>
<CAPTION>
Inception
Quarter Ended Six Months Ended (November 12, 1997)
June 30, June 30, to June 30,
1999 1998 1999 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(in thousands)
R&D Agreement
with Allergan $11,082 $ 6,266 $20,896 $14,653 $55,307
R&D
Collaborations 875 250 1,750 1,475 3,225
------- ------- ------- ------- -------
$11,957 $ 6,516 $22,646 $16,128 $58,532
======= ======= ======= ======= =======
</TABLE>
There were two existing R&D Collaborations for both six month periods ended
June 30, 1999 and 1998.
From time to time in the future, Allergan shall propose work plans, subject
to ASTI board approval, for the continued development of each ASTI Product as
well as other product candidates. ASTI is required to utilize the cash
initially contributed to ASTI by Allergan plus interest
8
<PAGE> 9
Allergan Specialty Therapeutics, Inc.
Notes to Condensed Financial Statements
2. Arrangements with Allergan, Inc. (Continued)
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, 1999,
no amounts have been earned by ASTI with respect to Developed Technology
Royalties.
In July 1998, Allergan 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
(Collaboration Agreement). The technologies involved in the collaboration
were previously licensed by ASTI from Allergan pursuant to the Technology
Agreement. In accordance with a letter agreement between Allergan and ASTI,
ASTI is entitled to receive Pre-Selection Product Payments representing ten
percent of the potential $104 million in technology access fees and
development milestones to be received by Allergan pursuant to Allergan's
agreement with Warner-Lambert. For the quarter and six month period ended
June 30, 1999, ASTI earned $400,000 of Pre-Selection Product Payments in
accordance with the letter agreement. For the period from inception to June
30, 1999, ASTI earned $900,000. Such amounts are included in revenues in the
accompanying condensed statement of operations. There were no Pre-Selection
Product Payments earned for the quarter or six months ended June 30, 1998. In
addition, ASTI is entitled to royalties on net sales of developed products,
depending on actual lead compound selection and sales results.
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. From Period of Inception
through June 30, 1999, ASTI paid $14,593,000 in technology fees, of which
$5,323,000 is included in prepaid technology fees in the accompanying
condensed balance sheet.
9
<PAGE> 10
Allergan Specialty Therapeutics, Inc.
Notes to Condensed Financial Statements
2. Arrangements with Allergan, Inc. (Continued)
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 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, 1999, 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, 1999, 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
10
<PAGE> 11
Allergan Specialty Therapeutics, Inc.
Notes to Condensed Financial Statements
2. Arrangements with Allergan, Inc. (Continued)
ending with the trading day that is two trading days prior to the date of
determination;
(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, 1999 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. Comprehensive Income (Loss)
SFAS No. 130, "Reporting Comprehensive Income," established standards for
reporting comprehensive income and its components. Other comprehensive loss
is comprised of unrealized loss on investments. Other comprehensive loss for
the quarters and six month periods ended June 30,1999 and 1998 and for the
period from inception to June 30, 1999 are as follows:
<TABLE>
<CAPTION>
Quarter Ended June 30,
---------------------------------------------------------------------------------------------------
(in thousands) 1999 1998
--------------------------------------------- ---------------------------------------------------
Tax Tax
Before-tax (expense) Net-of-tax Before-tax (expense) Net-of-tax
amount or benefit amount amount or benefit amount
------ ---------- ------ ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Unrealized holdings loss
arising during period $(764) $303 $ (461) $(144) -- $ (144)
===== ==== =====
Net loss (12,191) (6,137)
-------- -------
Total comprehensive loss $(12,652) $(6,281)
======== =======
</TABLE>
11
<PAGE> 12
Allergan Specialty Therapeutics, Inc.
Notes to Condensed Financial Statements
3. Comprehensive Income (Loss) (Continued)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------------------------------------------------------------------------
(in thousands) 1999 1998
--------------------------------------------- --------------------------------------------
Tax Tax
Before-tax (expense) Net-of-tax Before-tax (expense) Net-of-tax
amount or benefit amount amount or benefit amount
------ ---------- ------ ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Unrealized holdings loss
arising during period $(1,723) $720 $ (1,003) $(144) -- $ (144)
======= ==== =====
Net loss (22,990) (17,442)
-------- --------
Total comprehensive loss $(23,993) $(17,586)
======== ========
</TABLE>
<TABLE>
<CAPTION>
Inception to June 30, 1999
-------------------------------------------------
(in thousands)
Before-tax Tax (expense) Net of
amount or benefit tax amount
------ ---------- ----------
<S> <C> <C> <C>
Unrealized holdings loss
arising during period $(1,096) $447 $ (649)
======= ====
Net loss (59,798)
--------
Total comprehensive loss $(60,447)
========
</TABLE>
12
<PAGE> 13
ALLERGAN SPECIALTY THERAPEUTICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1999
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 the section entitled "--Risks
and Uncertainties" included in the Company's annual report on Form 10-K for the
year ended December 31, 1998 and the Company's Financial Statements and notes
thereto in Item 1 above.
RESULTS OF OPERATIONS
- ---------------------
Net interest and investment income earned on investments were $1,942,000 and
$2,791,000 for the quarters ended June 30, 1999 and 1998, respectively, and
$4,092,000 and $3,508,000 for the six month periods ended June 30, 1999 and
1998, respectively. ASTI earned investment income of $12,635,000 for the period
from inception through June 30, 1999. Interest and investment income was earned
subsequent to March 10, 1998, the date Allergan contributed $200 million to
ASTI. 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.
In July 1998, Allergan 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
(Collaboration Agreement). The technologies involved in the collaboration were
previously licensed by ASTI from Allergan pursuant to the Technology Agreement.
As a result, ASTI is entitled to receive Pre-Selection Product Payments
representing ten percent of the potential $104 million in technology access fees
and development milestones to be received by Allergan pursuant to Allergan's
agreement with Warner-Lambert. For the quarter and six month period ended June
30, 1999, ASTI earned $400,000 of Pre-Selection Product Payments in accordance
with the letter agreement. For the period from inception to June 30, 1999, ASTI
earned $900,000. There were no Pre-Selection Product payments earned for the
quarter or six month period ended June 30, 1998. In addition, ASTI is entitled
to royalties on net sales of developed products, depending on actual lead
compound selection and sales results.
13
<PAGE> 14
Allergan Specialty Therapeutics, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1999 (Continued)
RESULTS OF OPERATIONS (Continued)
- ---------------------------------
Research and development expenses were $11,957,000 and $6,516,000 for the
quarters ended June 30, 1999 and 1998, respectively, and $22,646,000 and
$16,128,000 for the six month periods ended June 30, 1999 and 1998,
respectively. Research and development expenses were $58,532,000 for the period
from inception through June 30, 1999. 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 1999 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 $1,675,000 and $2,500,000 to
Allergan during the quarters ended June 30, 1999 and 1998, respectively, and
$3,350,000 and $6,855,000 for the six month periods ended June 30, 1999 and
1998, respectively. ASTI paid technology fees of $14,593,000 for the period from
inception to June 30, 1999, of which $5,323,000 is included in prepaid
technology fees in the accompanying condensed balance sheet.
General and administrative expenses for the quarters ended June 30, 1999 and
1998 were $327,000 and $115,000, respectively, and were $611,000 and $130,000
for the six month periods ended June 30, 1999 and 1998, respectively. For the
period from inception through June 30, 1999, general and administrative expenses
were $1,544,000. Expenses are incurred primarily under the Services Agreement
pursuant to which Allergan provides ASTI with administrative services, including
accounting and legal services, on a fully-burdened cost reimbursement basis.
ASTI did not incur significant general and administrative expenses in the first
quarter of 1998 as ASTI operated from March 10 to March 31 in 1998.
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 quarters ended June 30, 1999 and 1998 were
$12,191,000 or $3.72 per share and $6,137,000 or $1.87 per share, respectively.
For the six month periods ended June 30, 1999 and 1998, ASTI's net losses were
$22,990,000 or $7.02 per share and $17,442,000 or $5.33 per share, respectively.
ASTI's net loss for the period from inception through June 30, 1999 was
$59,798,000 or $18.27 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 were $874,000 and $922,000 for the quarters ended June 30,
1999 and 1998, respectively and $1,475,000 and $922,000 for the six month
periods ended June 30, 1999 and 1998, respectively. Provision for taxes for the
period from inception through June 30, 1999 was $3,987,000. ASTI expects to have
taxable income as a result of the requirement to capitalize technology fees and
its election to capitalize research and development expenses for tax purposes.
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, 1999 (Continued)
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 investment
grade securities.
At June 30, 1999, ASTI had cash on hand of approximately $65,000. 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 diversification
and maturities in order to maintain safety and liquidity of its investment
portfolio.
At June 30, 1999, ASTI had $132,888,000 in investments. ASTI classifies all
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 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) are 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
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, 1999 (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
- -------------------------------------------
for product development is exhausted, ASTI will not have funds to continue or
complete development of any remaining products.
YEAR 2000 COMPLIANCE
- --------------------
Most businesses, including the Company, are faced with a potentially serious
threat to their operations, known as the "year 2000 issue" which has been widely
publicized. The year 2000 issue is a general term used to describe the various
problems arising from the inability of computers to properly identify the year
associated with information. This problem could potentially cause system
interruptions or failures or result in systems providing incorrect data. The
effect of the year 2000 issue could impact the performance of operations within
the Company as well as the Company's relationships with third parties, including
vendors and customers who could also experience year 2000 compliance issues.
ASTI understands the importance of identifying and addressing year 2000
compliance issues and places a high priority on the project. However, inasmuch
as ASTI relies almost entirely upon Allergan's operating and accounting systems,
ASTI relies upon Allergan's efforts to ensure that its systems will be year 2000
compliant. Allergan has formed a year 2000 task force (the "Y2K Task Force")
which includes an ASTI officer as a member. The Y2K Task Force is assessing
internal operations and the operations of significant suppliers, vendors, and
other providers of goods and services.
Although the certification process is not yet complete, it has begun and, based
on the findings to date, Allergan has indicated that its Y2K Task Force
currently believes Allergan's operating and accounting systems will be year 2000
compliant without material impact on the financial position, results of
operations or cash flows of either Allergan or ASTI. However, given that
Allergan cannot control or thoroughly assess the compliance of its third party
suppliers, vendors, providers of goods and services, or governmental agencies
with which it interacts or upon which it relies, no assurance can be made that
Allergan, and in turn, ASTI, will not be affected by the inability of some
computer systems and programs to properly process the year 2000 and beyond.
ASTI has not incurred expenses to date to promote or ensure year 2000
compliance. ASTI has not yet estimated its future costs to remedy any year 2000
issues but does not anticipate that any future expenses would be material to
ASTI's financial position, results of operations or cash flows.
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, 1999 (Continued)
YEAR 2000 COMPLIANCE (Continued)
- --------------------------------
In the event that Allergan's operating and accounting systems are not year 2000
compliant or if any of Allergan's significant suppliers, vendors, other
providers of goods or services, or governmental agencies with which it interacts
or upon which it relies, are not year 2000 compliant, ASTI's financial condition
and/or results of operations could be materially adversely affected. ASTI has
not yet prepared any contingency plans in the event of a problem relating to the
year 2000 issue. Once the Y2K Task Force completes its contingency plans, ASTI
will determine whether additional contingencies are necessary.
17
<PAGE> 18
ALLERGAN SPECIALTY THERAPEUTICS, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASTI does not use derivative financial instruments in its non-trading investment
portfolio. The Company's primary investment objective is preservation of capital
in order to fund research and development of potential pharmaceutical products
incurred pursuant to the Company's agreement with Allergan, Inc. (See note 2 to
Condensed Financial Statements). As such, the Company invests its excess cash in
investment grade securities consisting of money market funds, equity securities
and debt instruments. Interest and investment income earned on the Company's
investment portfolio is most sensitive to fluctuations in the general level of
U.S. interest rates. The Company mitigates interest rate risk by a program of
diversification so that exposure to risks relating to a single security or
investment manager is minimal. Further, the Company invests in money market
funds and debt instruments with varying maturity dates to correspond to
anticipated research and development expenses. These securities typically bear
minimal credit risk and ASTI has not experienced any losses on its investments
to date due to credit risk.
The Company's investments in equity securities, which are subject to price risk,
are generally invested in companies that have a history of paying dividends. The
Company addresses price risk by a program of diversification so that exposure to
risks relating to a single security is minimal.
18
<PAGE> 19
ALLERGAN SPECIALTY THERAPEUTICS, INC.
CERTAIN FACTORS AND TRENDS AFFECTING ASTI AND ITS BUSINESSES
The Company believes that certain statements made by the Company in this report
and in other reports and statements released by the Company constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, such as comments which express the Company's
opinions about trends and factors which may impact future operating results.
Disclosures which use words such as the Company "believes," "anticipates,"
"expects" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from expectations. Any such
forward-looking statements, whether made in this report or elsewhere, should be
considered in context with the various disclosures made by the Company in its
press releases and publicly filed reports such as the Company's Annual Report on
Form 10-K for the year ended December 31, 1998, which disclosures are
incorporated herein by this reference. In addition to those risks identified
elsewhere in this report on Form 10-Q and those risks described in the Company's
press releases and publicly filed reports, the Company's business and results of
operations are subject to other risks, including the following risk factors:
o 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.
o There can be no assurance that the ASTI Board of Directors will continue
the funding of the research and development of all of the current ASTI
Products or Pre-Selection Work, 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 project 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.
o 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
19
<PAGE> 20
Allergan Specialty Therapeutics, Inc.
CERTAIN FACTORS AND TRENDS AFFECTING ASTI AND ITS BUSINESSES (Continued)
regulatory authorities in foreign countries before such products may be
marketed in those countries. 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.
o Allergan has contributed $200 million in cash to ASTI. Allergan has no
obligation to contribute additional funds to ASTI, and, to the best of
ASTI's knowledge, has no present intention to do so. For the foreseeable
future, ASTI's only ongoing source of revenue will be investment income and
certain milestone payments. 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.
o 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. 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.
o 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. A number of companies have developed and are
developing competing technologies and products.
o In February 1999, the Financial Accounting Standards Board released a
revised Exposure Draft of a Proposed Statement of Financial Accounting
Standards - Consolidated Financial Statements: Purpose and Policy. If
adopted as a SFAS, the terms of this Exposure Draft could require Allergan
to include the financial position and results of operations of ASTI in its
consolidated results on a retrospective basis. ASTI is currently evaluating
the effect that implementation of this proposed statement may have on ASTI.
20
<PAGE> 21
Allergan Specialty Therapeutics, Inc.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders of the registrant was held on April 23,
1999. At such meeting, five directors, constituting the entire Board of
Directors, were re-elected to serve on the Board of Directors until the next
annual meeting of stockholders. The names of the persons elected as directors
are:
William C. Shepherd
Lester J. Kaplan, Ph.D.
Alan J. Lewis, Ph.D.
Gary L. Neil, Ph.D.
Marvin E. Rosenthale, Ph.D.
The only other matter considered by the stockholders at the annual meeting
was ratification of the selection of KPMG LLP as independent auditors of the
registrant for the fiscal year ended December 31, 1999.
A summary of the voting follows:
<TABLE>
<CAPTION>
Broker
Election of Directors For Withheld Non-Votes
--------------------- --- -------- ---------
<S> <C> <C> <C>
William C. Shepherd 2,620,411 6,116 0
Lester J. Kaplan, Ph.D. 2,620,711 5,816 0
Alan J. Lewis, Ph.D. 2,620,304 6,223 0
Gary L. Neil, Ph.D. 2,621,221 5,306 0
Marvin E. Rosenthale, Ph.D. 2,620,163 6,364 0
</TABLE>
<TABLE>
Broker
Other Matter(s) For Against Abstain Non-Votes
--------------- --- ------- ------- ---------
<S> <C> <C> <C> <C>
Ratification of
KPMG LLP as
Auditors for 1999 2,617,458 7,098 1,971 0
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
- Exhibits
(numbered in accordance with Item 601 of Regulation S-K)
27.1 Financial Data Schedule
- Reports on Form 8-K. None.
21
<PAGE> 22
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 13, 1999 ALLERGAN SPECIALTY THERAPEUTICS, INC.
---------------
/s/ Dwight J. Yoder
--------------------------------------
Dwight J. Yoder
Chief Financial Officer
and Duly Authorized Officer
22
<PAGE> 23
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Statements
of Operations and Balance Sheets.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 65
<SECURITIES> 132,888
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 140,504
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 140,504
<CURRENT-LIABILITIES> 4,164
<BONDS> 0
0
0
<COMMON> 34
<OTHER-SE> 136,306
<TOTAL-LIABILITY-AND-EQUITY> 140,504
<SALES> 0
<TOTAL-REVENUES> 2,342
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (11,317)
<INCOME-TAX> 874
<INCOME-CONTINUING> (12,191)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,191)
<EPS-BASIC> (3.72)
<EPS-DILUTED> (3.72)
</TABLE>
