<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 March 31, 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 April 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 MARCH 31, 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 6-11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12-15
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 16
CERTAIN FACTORS AND TRENDS AFFECTING ALLERGAN
SPECIALTY THERAPEUTICS, INC. AND ITS BUSINESSES 17-18
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 19
Signature 20
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,
Quarter Ended 1997)
March 31, to
------------------------------- March 31,
1999 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Revenues $ 2,150 $ 717 $ 11,193
Costs and expenses:
Research and development 10,689 9,612 46,575
Technology fees 1,375 2,395 7,895
General and administrative
expenses 284 15 1,217
----------- ----------- -----------
Total costs and expenses $ 12,348 $ 12,022 $ 55,687
----------- ----------- -----------
Loss before income taxes (10,198) (11,305) (44,494)
Provision for taxes 601 -- 3,113
----------- ----------- -----------
Net loss $ (10,799) $ (11,305) $ (47,607)
=========== =========== ===========
Basic and diluted loss per share $ (3.30) $ (3.45) $ (14.54)
=========== =========== ===========
Basic and diluted shares outstanding 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>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
ASSETS
Cash $ 415 $ --
Investments 146,850 158,667
Prepaid technology fees 5,023 4,723
Other assets 1,581 1,747
--------- ---------
$ 153,869 $ 165,137
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Payable to Allergan, Inc. $ 4,571 $ 4,509
Accounts payable and accrued liabilities 306 295
--------- ---------
Total liabilities 4,877 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 income (loss) (188) 354
Deficit accumulated during development stage (47,607) (36,808)
--------- ---------
Total stockholders' equity 148,992 160,333
--------- ---------
$ 153,869 $ 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,
Quarter Ended 1997)
March 31, to
----------------------------- March 31,
1999 1998 1999
--------- --------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (10,799) $ (11,305) $ (47,607)
Noncash item included in net loss:
Deferred income tax 41 -- (641)
Changes in operating assets
and liabilities:
Other assets 270 (354) (795)
Prepaid technology fees (300) (1,960) (5,023)
Payable to Allergan, Inc. 62 2,682 4,571
Accounts payable and
accrued liabilities 283 3,054 306
--------- --------- ---------
Net cash used in
operating activities (10,443) (7,883) (49,189)
INVESTING ACTIVITIES:
Purchases of investments (2,333) -- (189,742)
Sales and maturities of
investments 13,191 -- 42,559
--------- --------- ---------
Net cash provided by
(used in) investing
activities 10,858 -- (147,183)
FINANCING ACTIVITIES:
Issuance of common stock -- 200,000 200,001
Offering costs -- (3,214) (3,214)
--------- --------- ---------
Net cash provided by
financing activities -- 196,786 196,787
--------- --------- ---------
Net increase in cash 415 188,903 415
Cash - beginning of period -- 1 --
--------- --------- ---------
Cash - end of period $ 415 $ 188,904 $ 415
========= ========= =========
Supplemental disclosure of cash
paid for taxes $ 255 $ -- $ 3,501
========= ========= =========
</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 March 31, 1999, December 31,
1998, and for the quarters ended March 31, 1999 and 1998 and for the
period from inception to March 31, 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 March 31, 1999 and for the
period from inception to March 31, 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.
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.
6
<PAGE> 7
Allergan Specialty Therapeutics, Inc.
Notes to Condensed Financial Statements
1. Basis of Presentation and Significant Accounting Policies (continued)
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 March 31, 1999, all excess cash
amounting to $146,850,000 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 quarters ended March 31, 1999 and 1998 and for the
period from inception (November 12, 1997) to March 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Quarter Ended March 31, Inception
------------------------------- (November 12, 1997)
1999 1998 to March 31, 1999
------------- ------------- -------------------
<S> <C> <C> <C>
Loss during period $(10,799,000) $(11,305,000) $(47,607,000)
Basic and diluted
shares outstanding 3,273,690 3,273,690 3,273,690
Per share loss
during period $(3.30) $(3.45) $(14.54)
</TABLE>
Reclassifications
Certain reclassifications have been made to prior periods in order to
conform with current period presentation.
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.
7
<PAGE> 8
Allergan Specialty Therapeutics, Inc.
Notes to Condensed Financial Statements
2. Arrangements with Allergan, Inc. (continued)
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 expenses were $10,689,000 for the quarter
ended March 31, 1999 which was comprised of $9,814,000 of costs
incurred pursuant to the R&D Agreement with Allergan and $875,000
incurred pursuant to two R&D collaborations. Research and development
expenses were $9,612,000 for the quarter ended March 31, 1998. Research
and development expenses were $46,575,000 for the period from inception
through March 31, 1999 which was comprised of $44,225,000 of costs
incurred pursuant to the R&D Agreement with Allergan and $2,350,000
incurred pursuant to three R&D collaborations. 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 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 March
31, 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. In the third
quarter of 1998, ASTI earned $500,000 of Pre-Selection Product Payments
in accordance with the letter agreement. Such amounts are included in
revenues in the accompanying condensed statement of
8
<PAGE> 9
Allergan Specialty Therapeutics, Inc.
Notes to Condensed Financial Statements
2. Arrangements with Allergan, Inc. (continued)
operations for the period from inception to March 31, 1999. 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. Through March 31,
1999, ASTI paid $12,918,000 in technology fees, of which $5,023,000 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 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 March 31,
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 March 31, 1999, Allergan has not exercised
the Purchase Option.
9
<PAGE> 10
Allergan Specialty Therapeutics, Inc.
Notes to Condensed Financial Statements
2. Arrangements with Allergan, Inc. (continued)
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;
(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.
10
<PAGE> 11
Allergan Specialty Therapeutics, Inc.
Notes to Condensed Financial Statements
3. Comprehensive Income (Loss)
SFAS No. 130, "Reporting Comprehensive Income," established standards
for reporting comprehensive income and its components. Other
comprehensive loss for the quarters ended March 31, 1999 and 1998 were
comprised of unrealized loss on investments of $958,000 and $0,
respectively. Other comprehensive loss for the period from inception
through March 31, 1999 is comprised of unrealized loss on investments
of $332,000. Total comprehensive loss, net of tax for the quarters
ended March 31, 1999 and 1998 and for the period from inception to
March 31, 1999 was $11,341,000, $11,305,000 and $47,795,000,
respectively.
11
<PAGE> 12
Allergan Specialty Therapeutics, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED MARCH 31, 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 $2,150,000 and
$717,000 for the quarters ended March 31, 1999 and 1998, respectively, and
$10,693,000 for the period from ASTI's inception, November 12, 1997, through
March 31, 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. In the third quarter of 1998, $500,000 of
Pre-Selection Payments was earned by ASTI. In addition, ASTI is entitled to
royalties on net sales of developed products, depending on actual lead compound
selection and sales results.
Research and development expenses were $10,689,000 and $9,612,000 for the
quarters ended March 31, 1999 and 1998, respectively. Research and development
expenses were $46,575,000 for the period from inception through March 31, 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 $4,355,000 to Allergan during the quarters
12
<PAGE> 13
Allergan Specialty Therapeutics, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1999 (Continued)
RESULTS OF OPERATIONS (Continued)
ended March 31, 1999 and 1998, respectively. ASTI paid technology fees of
$12,918,000 for the period from inception to March 31, 1999.
General and administrative expenses for the quarters ended March 31, 1999 and
1998 and for the period from inception through March 31, 1999 were $284,000,
$15,000 and $1,217,000, respectively. 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 March 31, 1999 and 1998 were
$10,799,000 or $(3.30) per share and $11,305,000 or $(3.45) per share,
respectively. ASTI's net loss for the period from inception through March 31,
1999 was $47,607,000 or $(14.54) 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 $601,000 and $0 for the quarters ended March 31, 1999
and 1998, respectively. Provision for taxes for the period from inception
through March 31, 1999 was $3,113,000. 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.
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 March 31, 1999, ASTI had cash on hand of approximately $415,000. 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.
13
<PAGE> 14
Allergan Specialty Therapeutics, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1999 (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
At March 31, 1999, ASTI had $146,850,000 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 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.
14
<PAGE> 15
Allergan Specialty Therapeutics, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1999 (Continued)
YEAR 2000 COMPLIANCE (Continued)
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 will include 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.
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.
15
<PAGE> 16
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.
16
<PAGE> 17
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
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.
17
<PAGE> 18
Allergan Specialty Therapeutics, Inc.
CERTAIN FACTORS AND TRENDS AFFECTING ASTI AND ITS BUSINESSES (Continued)
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 operation 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.
18
<PAGE> 19
Allergan Specialty Therapeutics, Inc.
PART II - OTHER INFORMATION
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.
19
<PAGE> 20
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: May 13, 1999 ALLERGAN SPECIALTY THERAPEUTICS, INC.
By: /s/ Dwight J. Yoder
---------------------------
Dwight J. Yoder
Chief Financial Officer
and Duly Authorized Officer
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BOOKS
AND RECORDS OF ALLERGAN SPECIALTY THERAPEUTICS, INC.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 415
<SECURITIES> 146,850
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 153,869
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 153,869
<CURRENT-LIABILITIES> 4,877
<BONDS> 0
0
0
<COMMON> 34
<OTHER-SE> 148,958
<TOTAL-LIABILITY-AND-EQUITY> 153,869
<SALES> 0
<TOTAL-REVENUES> 2,150
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 12,348
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (10,198)
<INCOME-TAX> 601
<INCOME-CONTINUING> (10,799)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,799)
<EPS-PRIMARY> (3.30)
<EPS-DILUTED> (3.30)
</TABLE>
