<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 September 30, 2000
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.
33-0779207
A DELAWARE CORPORATION IRS EMPLOYER IDENTIFICATION
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 November 3, 2000, 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 SEPTEMBER 30, 2000
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 6-8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9-11
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 12
CERTAIN FACTORS AND TRENDS AFFECTING ALLERGAN
SPECIALTY THERAPEUTICS, INC. AND ITS BUSINESSES 13-16
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 17
Signature 18
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
Quarter Ended Nine Months Ended (November 12, 1997)
September 30, September 30, to
----------------------------- ----------------------------- September 30,
2000 1999 2000 1999 2000
----------- ----------- ----------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 565 $ 1,293 $ 2,406 $ 5,785 $ 18,559
Costs and expenses:
Research and
development 15,561 12,762 45,567 35,408 130,653
Technology fees 1,375 1,375 4,125 4,125 16,145
General and
administrative 303 262 854 873 2,985
----------- ----------- ----------- ----------- -----------
Total costs and
expenses 17,239 14,399 50,546 40,406 149,783
----------- ----------- ----------- ----------- -----------
Loss before income
taxes (16,674) (13,106) (48,140) (34,621) (131,224)
Provision for taxes 230 2,003 1,026 3,478 7,556
----------- ----------- ----------- ----------- -----------
Net loss $ (16,904) $ (15,109) $ (49,166) $ (38,099) $ (138,780)
=========== =========== =========== =========== ===========
Basic and diluted
loss per share $ (5.16) $ (4.62) $ (15.02) $ (11.64) $ (42.39)
=========== =========== =========== =========== ===========
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>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Cash $ 98 $ 47
Investments 59,936 105,252
Prepaid technology fees 3,642 5,292
Other assets 447 1,431
--------- ---------
$ 64,123 $ 112,022
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Payable to Allergan, Inc. $ 6,207 $ 6,047
--------- ---------
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 (91) (1,198)
Deficit accumulated during
development stage (138,780) (89,614)
--------- ---------
Total stockholders' equity 57,916 105,975
--------- ---------
$ 64,123 $ 112,022
========= =========
</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
Nine Months Ended (November 12, 1997)
September 30, to
---------------------------- September 30,
2000 1999 2000
-------- -------- -------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(49,166) $(38,099) $(138,780)
Noncash item included in net loss:
Deferred income tax 91 433 (129)
Changes in operating assets
and liabilities:
Other assets 133 495 (257)
Prepaid technology fees 1,650 (900) (3,642)
Payable to Allergan, Inc. 160 (91) 6,207
Accounts payable and
accrued liabilities -- (23) --
-------- -------- ---------
Net cash used in operating
activities (47,132) (38,185) (136,601)
INVESTING ACTIVITIES:
Purchases of investments (2,767) (5,884) (195,292)
Sales and maturities of investments 49,950 44,169 135,204
-------- -------- ---------
Net cash provided by/
(used in) investing
activities 47,183 38,285 (60,088)
FINANCING ACTIVITIES:
Issuance of common stock -- -- 200,001
Offering costs -- -- (3,214)
-------- -------- ---------
Net cash provided by
financing activities -- -- 196,787
-------- -------- ---------
Net increase in cash 51 100 98
Cash - beginning of period 47 -- --
-------- -------- ---------
Cash - end of period $ 98 $ 100 $ 98
======== ======== =========
Supplemental disclosure of cash
paid for taxes $ 761 $ 3,485 $ 7,841
======== ======== =========
</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.
In the opinion of management, the accompanying unaudited financial
statements contain 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 accounting principles generally accepted in the United
States of America. The results of operations for the three and nine
month periods ended September 30, 2000 and for the period from
inception to September 30, 2000 are not necessarily indicative of the
results to be expected for the year ending December 31, 2000.
Use of estimates
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America 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.
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 three and nine month periods ended September 30,
2000 and 1999 and for the period from inception to September 30, 1999
are as follows:
6
<PAGE> 7
Allergan Specialty Therapeutics, Inc.
Notes to Condensed Financial Statements
1. Basis of Presentation and Significant Accounting Policies (Continued)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended Inception
September 30, September 30, (November 12, 1997)
------------------------------ ------------------------------ to September 30,
2000 1999 2000 1999 2000
----------- ----------- ----------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
Loss during period
(in thousands) $ (16,904) $ (15,109) $ (49,166) $ (38,099) $ (138,780)
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 $ (5.16) $ (4.62) $ (15.02) $ (11.64) $ (42.39)
</TABLE>
2. Comprehensive Income (Loss)
SFAS No. 130, "Reporting Comprehensive Income," established standards
for reporting comprehensive income and its components. Other
comprehensive income (loss) for the three and nine month periods ended
September 30, 2000 and 1999 were comprised of unrealized gains (losses)
on investments. Other comprehensive income (loss) for the three and
nine month periods ended September 30, 2000 and 1999 and for the period
from inception to September 30, 2000 are as follows:
<TABLE>
<CAPTION>
Quarter Ended September 30,
-------------------------------------------------------------------------------------------------
(in thousands) 2000 1999
-------------------------------------------- ----------------------------------------------
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 holding gain
(loss) arising during
period $953 $(389) $ 564 $(75) $31 $ (44)
==== ===== ==== ===
Net loss (16,904) (15,109)
-------- -------
Total comprehensive loss $(16,340) $(15,153)
======== ========
</TABLE>
7
<PAGE> 8
Allergan Specialty Therapeutics, Inc.
Notes to Condensed Financial Statements
2. Comprehensive Income (Loss) (Continued)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------------------------------------------------------------------
(in thousands) 2000 1999
-------------------------------------------- -------------------------------------------
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 holding gain
(loss) arising during
period $1,868 $(761) $ 1,107 $(1,797) $750 $ (1,047)
====== ===== ======= ====
Net loss (49,166) (38,099)
-------- --------
Total comprehensive loss $(48,059) $(39,146)
======== ========
<CAPTION>
Inception to September 30, 2000
--------------------------------------------------
(in thousands) Before-tax Tax (expense) Net of
amount or benefit tax amount
---------- ------------- ----------
<S> <C> <C> <C>
Unrealized holding loss
arising during period $(152) $61 $ (91)
===== ===
Net loss (138,780)
---------
Total comprehensive loss $(138,871)
=========
</TABLE>
8
<PAGE> 9
ALLERGAN SPECIALTY THERAPEUTICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2000
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 Company's annual report on
Form 10-K for the year ended December 31, 1999 and with the Company's Financial
Statements and the notes thereto presented in Item 1 above. As used herein,
capitalized terms have the same meaning as set forth in the Company's annual
report on Form 10-K for the year ended December 31, 1999.
RESULTS OF OPERATIONS
Net interest and investment income earned on investments were $565,000 and
$1,293,000 for the quarters ended September 30, 2000 and 1999, respectively, and
$2,406,000 and $5,785,000 for the nine month periods ended September 30, 2000
and 1999, respectively. ASTI earned investment income of $18,559,000 for the
period from inception through September 30, 2000. Interest and investment income
were 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.
Research and development expenses were $15,561,000 and $12,762,000 for the
quarters ended September 30, 2000 and 1999, respectively, and $45,567,000 and
$35,408,000 for the nine month periods ended September 30, 2000 and 1999,
respectively. Research and development expenses were $130,653,000 for the period
from inception through September 30, 2000. ASTI has paid technology fees of
$825,000 and $1,675,000 to Allergan during the quarters ended September 30, 2000
and 1999, respectively, and $2,475,000 and $5,025,000 for the nine month periods
ended September 30, 2000 and 1999, respectively. ASTI has paid technology fees
of $19,787,000 for the period from inception to September 30, 2000.
Provision for taxes were $230,000 and $2,003,000 for the quarters ended
September 30, 2000 and 1999, respectively and $1,026,000 and $3,478,000 for the
nine month periods ended September 30, 2000 and 1999, respectively. Provision
for taxes for the period from inception through September 30, 2000 was
$7,556,000. ASTI expects to have taxable income as a result of the U.S. Internal
Revenue Service requirement to capitalize technology fees and its election to
capitalize research and development expenses for tax purposes.
9
<PAGE> 10
Allergan Specialty Therapeutics, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2000 (Continued)
RESULTS OF OPERATIONS (Continued)
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 September 30, 2000 and 1999 were
$16,904,000 or $5.16 per share and $15,109,000 or $4.62 per share, respectively.
For the nine month periods ended September 30, 2000 and 1999, ASTI's net losses
were $49,166,000 or $15.02 per share and $38,099,000 or $11.64 per share,
respectively. ASTI's net loss for the period from inception through September
30, 2000 was $138,780,000 or $42.39 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.
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 as well as for all of ASTI Class B Common Stock. 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 research and
development of ASTI Products and to conduct related activities. Funds not
immediately required for research and development activities are invested in
investment grade securities.
At September 30, 2000, ASTI had $59,936,000 in investments. 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.
Additionally, 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.
At the time of its formation, ASTI was projected to spend its funds over a
five-year period. As previously reported, if ASTI's current research and
development plan is executed in its entirety, spending on ASTI's research and
development programs will be accelerated as compared to the projection provided
at the time of ASTI's formation. This potential accelerated spending is the
result of the acceptance by ASTI of more research and development projects as
well as more rapid research and development of compounds than anticipated at the
time of ASTI's formation. ASTI anticipates the acceleration of spending could
result in the use of substantially all of the funds available for research and
development remaining in ASTI as early as the first half of 2001. Pursuant to
ASTI's
10
<PAGE> 11
Allergan Specialty Therapeutics, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2000 (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
Restated Certificate of Incorporation and Allergan's rights as the sole holder
of all of the ASTI Class B Common Stock, Allergan has certain rights (but no
obligation) to purchase all of the ASTI Class A Common Stock. Allergan's
purchase rights, which expire if not exercised by the 90th day after the date on
which Allergan receives notice that the amount of cash and marketable securities
held by ASTI is less than $15 million, are summarized in ASTI's Prospectus dated
March 6, 1998.
11
<PAGE> 12
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. 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.
12
<PAGE> 13
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, 1999, 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 commenced operations in 1998 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.
13
<PAGE> 14
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 Patent protection generally has been important in the pharmaceutical
industry. Therefore, ASTI's financial success may depend in part upon
Allergan obtaining 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 paid by ASTI during the term 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.
14
<PAGE> 15
Allergan Specialty Therapeutics, Inc.
CERTAIN FACTORS AND TRENDS AFFECTING ASTI AND ITS BUSINESSES (Continued)
Allergan licenses certain intellectual property from third parties which it
will sublicense to ASTI pursuant to the Technology License Agreement. Under
the terms of 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 their rights 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.
o 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 and Canada under the brand name "Tazorac" and outside
of the United States and Canada under the brand name "Zorac."
o 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
15
<PAGE> 16
Allergan Specialty Therapeutics, Inc.
CERTAIN FACTORS AND TRENDS AFFECTING ASTI AND ITS BUSINESSES (Continued)
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 not determined on an arm's-length basis. 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.
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 Products will be based solely on
sublicensing revenues received from such third parties.
o Each of the current executive officers of ASTI is employed by or retained
as a consultant to Allergan and receives compensation solely from Allergan,
which may further contribute to Allergan's ability to influence
significantly or control the outcome of actions taken by ASTI.
o 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, Allergan performs 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.
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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.
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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: November 13, 2000 ALLERGAN SPECIALTY THERAPEUTICS, INC.
/s/ James M. Hindman
---------------------------
James M. Hindman
Chief Financial Officer
and Duly Authorized Officer
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EXHIBIT INDEX
Exhibit
Number Description
------- -----------
27.1 Financial Data Schedule
