<PAGE>
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 fiscal period ended: September 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 001-16033
ESPERION THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 2834 38-3419139
(State of incorporation) (Primary Standard Industrial (IRS Employer Identification No.)
Classification Code No.)
</TABLE>
3621 S. State Street, 695 KMS Place
Ann Arbor, MI 48108
(734) 332-0506
(Address of principal executive offices, including zip
code, and telephone number, including area code)
Indicate by 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.
[X] Yes [_] No
The number of outstanding shares of the Registrant's common stock, as of
November 1, 2000, was 25,767,476.
<PAGE>
ESPERION THERAPEUTICS, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999............................................................... 3
Condensed Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2000 and 1999, and the period from inception
to September 30, 2000........................................................... 4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2000 and 1999, and the period from inception to
September 30, 2000.............................................................. 5
Notes to Condensed Consolidated Financial Statements................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................ 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings......................................................................... 15
Item 2. Changes in Securities and Use of Proceeds................................................. 15
Item 3. Defaults Upon Senior Securities........................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders....................................... 15
Item 5. Other Information......................................................................... 15
Item 6. Exhibits and Reports on Form 8-K.......................................................... 15
SIGNATURES............................................................................................... 16
INDEX TO EXHIBITS........................................................................................ 17
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ESPERION THERAPEUTICS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
in thousands 2000 1999
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets: (Unaudited)
Current assets:
Cash and cash equivalents $ 75,638 $ 5,904
Prepaid expenses and other 766 139
-----------------------------------------------------------------------------------------------------------------
Total current assets 76,404 6,043
-----------------------------------------------------------------------------------------------------------------
Furniture and equipment, net 2,222 1,956
Goodwill, net 3,687 0
Deposits and other assets 559 0
-----------------------------------------------------------------------------------------------------------------
Total assets $ 82,872 $ 7,999
=================================================================================================================
Liabilities and Stockholders' Equity:
Current liabilities:
Current portion of long term debt $ 495 $ 495
Accounts payable 2,642 1,425
Accrued liabilities 4,400 980
-----------------------------------------------------------------------------------------------------------------
Total current liabilities 7,537 2,900
-----------------------------------------------------------------------------------------------------------------
Long term debt, less current portion 2,483 2,284
Stockholders' equity:
Common stock 26 2
Convertible preferred stock 0 105
Additional paid in capital 110,511 16,467
Notes receivable (74) (106)
Accumulated deficit during the development stage (34,824) (12,813)
Deferred stock compensation (3,028) (838)
Accumulated other comprehensive income (loss) 241 (2)
-----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 72,852 2,815
-----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 82,872 $ 7,999
=================================================================================================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
ESPERION THERAPEUTICS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Inception to
September 30, September 30, September 30,
------------------------------ -----------------------------
in thousands except share and per share data 2000 1999 2000 1999 2000
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating expenses:
Research and development $ 6,701 $ 2,227 $ 16,867 $ 5,919 $ 27,275
General and administrative 611 782 2,337 1,660 5,318
Goodwill amortization 63 0 63 0 63
Purchased in process R&D 4,000 0 4,000 0 4,000
-----------------------------------------------------------------------------------------------------------------------------------
Total operating expense 11,375 3,009 23,267 7,579 36,656
-----------------------------------------------------------------------------------------------------------------------------------
Operating loss (11,375) (3,009) (23,267) (7,579) (36,656)
Other income, net 571 86 1,256 320 1,832
-----------------------------------------------------------------------------------------------------------------------------------
Loss before income taxes (10,804) (2,923) (22,011) (7,259) (34,824)
Provision for income taxes 0 0 0 0 0
-----------------------------------------------------------------------------------------------------------------------------------
Net loss (10,804) (2,923) (22,011) (7,259) (34,824)
Beneficial conversion feature on preferred stock 0 0 (22,870) 0 (22,870)
-----------------------------------------------------------------------------------------------------------------------------------
Net loss attributable to common stockholders ($10,804) ($2,923) ($44,881) ($7,259) ($57,694)
-----------------------------------------------------------------------------------------------------------------------------------
Basic and diluted net loss per common share ($0.74) ($1.51) ($7.14) ($4.06)
------------------------------------------------------------------------------------------------------------------
Weighted average common shares 14,670,614 1,934,372 6,285,788 1,787,089
------------------------------------------------------------------------------------------------------------------
Pro forma basic and diluted net loss per share ($0.50) ($0.31) ($2.38) ($0.77)
------------------------------------------------------------------------------------------------------------------
Pro forma weighted average common shares 21,699,485 9,520,616 18,821,878 9,373,333
------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
ESPERION THERAPEUTICS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Inception to
September 30, September 30,
-----------------------------
in thousands 2000 1999 2000
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($22,011) ($7,259) ($34,824)
Adjustments to reconcile net loss to net cash
used in operating activities:
Purchased in process research and development 4,000 0 4,000
Depreciation and amortization 1,342 442 2,092
Stock based compensation expense 413 0 688
Decrease in notes receivable 32 12 51
Changes in assets and liabilities:
Prepaid expenses and other (642) 64 (780)
Other assets (110) (20) (109)
Accounts payable 1,280 562 2,675
Accrued liabilities 3,484 918 4,217
-------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (12,212) (5,281) (21,990)
-------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of furniture and equipment (785) (1,072) (3,212)
Deposit on furniture and equipment (450) 0 (450)
Acquisition of Talaria Therapeutics, Inc. (233) 0 (233)
-------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,468) (1,072) (3,895)
-------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from issuance of convertible preferred stock 26,871 0 42,200
Net proceeds from initial public offering 56,253 0 56,253
Proceeds from the issuance of common stock 84 0 86
Proceeds from long term debt 781 1,486 3,808
Repayments of long term debt (342) (124) (590)
-------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 83,647 1,362 101,757
-------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (233) 2 (234)
-------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 69,734 (4,989) 75,638
Cash and cash equivalents at beginning of period 5,904 12,541 0
-------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 75,638 $ 7,552 $ 75,638
-------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 256 $ 33
Income taxes $ 0 $ 0
----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
ESPERION THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include the accounts of Esperion Therapeutics, Inc. ("Esperion" or the
"Company") and its subsidiaries, and have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and with Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. The Company believes that all adjustments, consisting of normal
recurring adjustments considered necessary for a fair presentation, have been
included. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Registration
Statement on Form S-1. (File No. 333-31032)
Operating results for the three-and nine-month periods ended September 30,
2000 and 1999 are not necessarily indicative of the results that may be expected
for the full year.
(2) - Initial Public Offering of Common Stock
In August 2000, the Company completed an initial public offering of its
stock, which resulted in the issuance of 6,000,000 shares of common stock at
$9.00 per share. In connection with the offering, all of the outstanding
preferred stock was converted to common stock. In September 2000, an additional
900,000 shares were sold by the Company at $9.00 per share to cover the
underwriters' over-allotment. The Company received gross proceeds of $62.1
million, of which $4.3 million was paid as an underwriting discount. Expenses
related to the offering totaled approximately $1.7 million. The proceeds have
been invested in highly liquid, interest bearing, investment grade securities.
(3) - Acquisition
On September 21, 2000, the Company acquired all of the outstanding shares
of stock of Talaria Therapeutics, Inc. in exchange for the issuance of 813,008
shares of restricted Esperion common stock to Talaria stockholders, valued at a
price of $9.00 per share. Additionally, the merger agreement provides for the
following additional consideration to Talaria stockholders: (i) payment by the
Company of up to $6.25 million in cash and/or common stock based on the
achievement of four future development milestones; and (ii) payment by the
Company of royalties in cash and/or common stock based on net annual sales of
large unilamellar vesicles, or LUVs, in North America. The milestones are due
upon the enrollment of the first patient in certain future clinical trials and
upon each of the filing and approval of a new drug application in the United
States. These milestone payments will increase the amount of the purchase price
in the period when the milestone is achieved, and the Company will include these
additional amounts in goodwill. The royalty payments will be included in cost
of sales in the period when the respective sales are recognized. The combined
milestone payments and royalties are subject to a maximum aggregate ceiling of
$20.0 million.
The acquisition was accounted for under the purchase method of accounting.
In connection with this acquisition, the Company recorded a one-time charge to
operations in the third quarter of 2000 of $4.0 million, associated with the
write-off of in-process research and development acquired in the transaction
that had not reached technological feasibility. The allocation of the purchase
price was based on an independent appraisal of the fair values on the closing
date. The remaining excess of the purchase price over the fair value of the net
assets acquired of approximately $3.75 million has been recognized as goodwill
and is being amortized on a straight-line basis over a period of five years. The
operating results of Talaria have been included in the consolidated results of
operations from the date of the merger.
6
<PAGE>
The purchase price allocation based on the net assets of Talaria at the
closing date is as follows:
<TABLE>
<S> <C>
Tangible net assets................................. $ (167,714)
In-process research and development................. 4,000,000
Goodwill and other intangible assets................ 3,750,000
----------
Total purchase price........................... $7,582,286
==========
</TABLE>
The $4.0 million allocation to purchased in-process research and
development is based on the assumption that the development of LUVs has not yet
reached technological feasibility, and that no alternative future uses have been
identified. At the acquisition date, the product candidate had exhibited
satisfactory safety and efficacy results in preliminary testing; however,
significant further investment is required to complete the development of the
acquired technology, including completion of clinical trials, manufacturing
scale-up and successful regulatory approvals. Talaria had spent approximately
$3.2 million on the development of the in-process project since its inception in
1998; the patent holders spent additional amounts on scientific research prior
to 1998. We expect to spend an additional $20.0 million in third party costs
over all phases of the project prior to commercialization. Of these remaining
costs, approximately $15.0 million would relate to a Phase III clinical trial
which is expected to commence after the Phase II clinical trials are completed,
but not sooner than 2002. Our expectations with respect to these additional
costs, adjustments and periods are preliminary and therefore subject to
substantial sequential adjustments.
In making its purchase price allocation, management considered present
value calculations of income, an analysis of project accomplishments and
remaining outstanding items, as well as project risks. The value assigned to
purchased in-process technology was determined by estimating the costs to
develop the acquired technology into commercially viable products, estimating
the resulting net cash flows from the projects, and discounting the net cash
flows to their present value. The revenue projection used to value the in-
process research and development was based on estimates of relevant market
sizes, penetration rates, therapy costs, and the nature and expected timing of
new product introductions by the Company and its competitors. The resulting net
cash flows from such projects are based on management's estimates of milestone
and royalty payments the acquired projects would command, as well as operating
expenses and income taxes related to such projects.
The rates utilized to discount the net cash flows to their present value
were based on estimated cost of capital calculations. Due to the nature of the
forecast and the risks associated with the projected growth and profitability of
the developmental projects, a discount rate of 35% was considered appropriate
for the in-process R&D. These discount rates were commensurate with the
Talaria's stage of development and the uncertainties in the economic estimates
described above. If these projects are not successfully developed, the sales and
profitability of the combined company may be adversely affected in future
periods.
(4) - Comprehensive Loss
Comprehensive loss is the total of net loss and all other non-owner changes
in equity. Total comprehensive loss was $10,555,000 and $2,918,000 for the three
month periods ended September 30, 2000 and 1999, respectively, and $44,638,000
and $7,248,000 for the nine month periods ended September 30, 2000 and 1999,
respectively. The difference between net loss, as reported in the accompanying
condensed consolidated statements of operations, and comprehensive loss is the
foreign currency translation adjustment for the respective periods.
(5) - Basic, Diluted and Pro Forma Loss per Share
Basic and diluted loss per share amounts have been calculated using the
weighted average number of shares of common stock outstanding during the
respective periods. In all periods presented, options for the purchase of common
stock were not included in the calculation of diluted loss per share as doing so
would have been anti-dilutive.
7
<PAGE>
The following table presents the calculation of pro forma basic and diluted
net loss per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- ------------------------------
2000 1999 2000 1999
------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Net loss attributable to common stockholders.............. $(10,804,000) $(2,923,000) $(44,881,000) $(7,259,000)
============================== ==============================
Shares used in computing basic and diluted net loss
per share............................................ 14,670,614 1,934,372 6,285,788 1,787,089
Pro forma adjustment to reflect assumed conversion
of Series A and Series B preferred stock from the
date of issuance .................................... 3,371,664 7,586,244 6,181,384 7,586,244
Pro forma adjustment to reflect assumed conversion
of Series C and Series D preferred stock from the
date of issuance..................................... 3,657,207 -- 6,354,706 --
------------------------------ ------------------------------
Shares used in computing pro forma basic and diluted
net loss per share................................... 21,699,485 9,520,616 18,821,878 9,373,333
============================== ==============================
Pro forma basic and diluted net loss per share............ $ (0.50) $ (0.31) $ (2.38) $ (0.77)
============================== ==============================
</TABLE>
Series C and Series D Preferred Stock
In accordance with EITF 98-5, the Company recorded approximately $22.9
million relating to the beneficial conversion feature of the Series C preferred
stock and Series D preferred stock in the first quarter of 2000 through equal
and offsetting adjustments to additional paid-in capital with no net impact on
stockholders' equity, as the preferred stock was convertible immediately on the
date of issuance. The beneficial conversion feature was considered in the
determination of the Company's loss per common share amounts in the applicable
periods.
(6) - Commitments and Contingencies
Contingent repurchase of stock
The Company may be required to repurchase approximately 47,000 shares of
common stock that were sold to certain employees and others under the Company's
directed share program as part of the initial public offering (see Note 2). The
Company believes that the maximum liability arising from this repurchase would
be approximately $423,000 plus interest. A liability has not been recorded in
the financial statements, as management believes that the potential repurchase
of these shares is not likely.
(7) - Reverse Stock Split
The Company effected a 0.7225-for-1 reverse stock split of all outstanding
common stock and stock options as of March 24, 2000. All references to the
number of shares and per share amounts have been retroactively restated to
reflect this reverse stock split.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion provides an analysis of the Company's financial
condition and results of operations, and should be read in conjunction with the
Company's consolidated financial statements and the notes included in Item 1 of
this Form 10-Q.
Forward-Looking Information is Subject to Risk and Uncertainty
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations as well as information contained elsewhere in this
report contains "forward-looking statements" within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended. These forward-looking
statements include, but are not limited to, statements concerning certain costs
and operating expense levels, the level of other income, the Company's liquidity
and capital needs, various business environment and trend information,
completion of clinical trials, the Company's product candidates, research and
development, manufacturing, sales, and marketing and commercialization of
potential products. When used in this report, we intend the words "may,"
"believe," "anticipate," "planned," "expect," "require," "intend," "assume" and
similar words to identify "forward-looking statements." Our forward-looking
statements involve uncertainties and other factors that may cause our actual
results, performance or achievements to be far different from that suggested by
our forward-looking statements. These factors include, but are not limited to,
risks associated with the development of our product candidates, including
regulatory approval; dependence on clinical research organizations, license
arrangements and other strategic relationships; dependence on patents and
proprietary rights; procurement, maintenance, enforcement and defense of the
Company's patents and proprietary rights; risks related to manufacturing; risks
associated with the timing and acceptance of new products by the Company or its
competitors; competitive conditions in the industry; business cycles affecting
the markets in which the Company's products are sold; extraordinary events, such
as litigation; risks inherent in seeking and consummating acquisitions,
including the diversion of management attention to the assimilation of the
operations and personnel of the acquired business; fluctuations in foreign
exchange rates; and economic conditions generally or in various geographic
areas. All of the foregoing factors are difficult to forecast. The future
operating results of the Company may fluctuate materially as a result of these
and other risk factors detailed from time to time in the Company's Securities
and Exchange Commission reports and detailed in the Company's Registration
Statement on Form S-1, as amended (Registration No. 333-31032), declared
effective with the Securities and Exchange Commission on August 9, 2000.
Accordingly, the Company believes that period-to-period comparisons of its
results of operations are not necessarily meaningful and should not be relied
upon as an indication of future performance. It is likely that, in some future
quarters, the Company's operating results will be below the expectations of
stock market analysts and investors. In such an event, the price of the
Company's common stock would likely be materially adversely affected. You should
not place undue reliance on our forward-looking statements. We do not intend to
update any of these factors or to publicly announce the results of any revisions
to any of these forward-looking statements.
Overview
Background
We have devoted substantially all of our resources since we began our
operations in May 1998 to the research and development of pharmaceutical product
candidates for cardiovascular and metabolic diseases. We are a development stage
pharmaceutical company and have not generated any revenues from product sales.
We have not been profitable and have incurred a cumulative net loss of
approximately $57.7 million from inception through September 30, 2000. These
losses have resulted principally from costs incurred in research and development
activities, and general and administrative expenses. We expect to incur
significant additional operating losses for at least the next several years and
until such time as we generate sufficient revenue to offset expenses. Research
and development costs relating to product candidates will continue to increase.
Manufacturing, sales and marketing costs will increase as we prepare for the
commercialization of our products.
9
<PAGE>
Recent Development
On September 21, 2000, the Company acquired all of the outstanding shares
of stock of Talaria Therapeutics, Inc. ("Talaria") for 813,008 shares of
restricted Esperion common stock. Additionally, the merger agreement provides
for the following additional consideration to Talaria stockholders: (i) payment
by the Company of up to $6.25 million in cash and/or common stock based on the
achievement of four future development milestones, of which $750,000 may become
due within the next twelve months; and (ii) payment by the Company of royalties
in cash and/or common stock based on net annual sales of large unilamellar
vesicles, or LUVs, in North America. The milestones are due upon the enrollment
of the first patient in certain future clinical trials and upon each of the
filing and approval of a new drug application in the United States. These
milestone payments will increase the amount of the purchase price in the period
when the milestone is achieved, and the Company will include these additional
amounts in goodwill. The royalty payments will be included in cost of sales in
the period when the respective sales are recognized. The combined milestone
payments and royalties are subject to a maximum aggregate ceiling of $20.0
million.
At the acquisition date, Talaria was conducting development and testing
activities related to LUVs. The product candidate is designed to enhance
mobilization of cholesterol from tissues to the liver for elimination. The end
result of this cholesterol mobilization is intended to be an opening of
narrowed arteries and improved hemodynamic function. The Company believes that
LUVs could provide advantages over current available therapies.
The acquisition was accounted for under the purchase method of accounting.
The purchase price for amounts due at closing was allocated to both tangible and
intangible assets. In connection with this allocation, the Company recorded a
one-time charge to operations in the third quarter of 2000 of $4.0 million,
associated with the write-off of in-process research and development acquired in
the transaction that had not reached technological feasibility. The allocation
of the purchase price was based on an independent appraisal of the fair values
on the closing date using risk-adjusted cash flows related to the incomplete
research and development project. The remaining excess of the purchase price
over the fair value of the net assets acquired of approximately $3.75 million
has been recognized as goodwill and is being amortized on a straight-line basis
over a period of five years.
The $4.0 million allocation to purchased in-process research and
development is based on the assumption that the development of LUVs has not yet
reached technological feasibility, and that no alternative future uses have been
identified. At the acquisition date, the product candidate had exhibited
satisfactory safety and efficacy results in preliminary testing; however,
significant further investment is required to complete the development of the
acquired technology, including completion of clinical trials, manufacturing
scale-up and successful regulatory approvals. Talaria had spent approximately
$3.2 million on the development of the in-process project since its inception in
1998; the patent holders spent additional amounts on scientific research prior
to 1998. We expect to spend an additional $20.0 million in third party costs
over all phases of the project prior to commercialization. Of these remaining
costs, approximately $15.0 million would relate to a Phase III clinical trial
which is expected to commence after the Phase II clinical trials are completed,
but not sooner than 2002. Our expectations with respect to these additional
costs, adjustments and periods are preliminary and therefore subject to
substantial sequential adjustments.
In making its purchase price allocation, management considered present
value calculations of income, an analysis of project accomplishments and
remaining outstanding items, as well as project risks. The value assigned to
purchased in-process technology was determined by estimating the costs to
develop the acquired technology into commercially viable products, estimating
the resulting net cash flows from the projects, and discounting the net cash
flows to their present value. The revenue projection used to value the in-
process research and development was based on estimates of relevant market
sizes, penetration rates, therapy costs, and the nature and expected timing of
new product introductions by the Company and its competitors. The resulting net
cash flows from such projects are based on management's estimates of milestone
and royalty payments the acquired projects would command, as well as operating
expenses and income taxes related to such projects.
The rates utilized to discount the net cash flows to their present value
were based on estimated cost of capital calculations. Due to the nature of the
forecast and the risks associated with the projected growth and profitability of
10
<PAGE>
the developmental projects, a discount rate of 35% was considered appropriate
for the in-process R&D. These discount rates were commensurate with Talaria's
stage of development and the uncertainties in the economic estimates described
above. If this project is not successfully developed, the sales and
profitability of the combined company may be adversely affected in future
periods.
Results of Operations
Operating Expenses
<TABLE>
<CAPTION>
Three Months Ended September Nine Months Ended September 30,
----------------------------------------- ----------------------------------------
dollars in thousands 2000 1999 % Change 2000 1999 % Change
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Research and development $6,701 $2,227 200.9% $16,867 $5,919 185.0%
% of total 58.9% 74.0% 72.5% 78.1%
General and administrative $ 611 $ 782 -21.9% $ 2,337 $1,660 40.8%
% of total 5.4% 26.0% 10.0% 21.9%
Goodwill amortization $ 63 $ 0 *** $ 63 $ 0 ***
% of total 0.5% 0.0% 0.3% 0.0%
Purchased in-process R&D $4,000 $ 0 *** $ 4,000 $ 0 ***
% of total 35.2% 0.0% 17.2% 0.0%
</TABLE>
Three Months Ended September 30, 2000 and 1999
Research and Development Expenses. Research and development expenses
increased to approximately $6.7 million for the three months ended September 30,
2000 compared to approximately $2.2 million for the three months ended September
30, 1999. This increase is primarily due to the costs associated with developing
our product candidates, including new product candidates discovered or in-
licensed over the past year, as well as higher personnel costs. In addition, the
increase was a result of the costs incurred to manufacture clinical material in
preparation for upcoming human clinical trials.
General and Administrative Expenses. General and administrative expenses
decreased to approximately $611,000 for the three months ended September 30,
2000 compared to approximately $782,000 for the three months ended September 30,
1999. In 1999, the Company incurred professional fees related to the in-
licensing of new compounds for future development.
Other Income (Expense). Interest income increased to approximately $782,000
for the three months ended September 30, 2000 compared to approximately $118,000
for the three months ended September 30, 1999. The increase is attributable to
higher levels of cash and cash equivalents available for investment in 2000 as a
result of the Company's preferred stock financings and the initial public
offering. Interest expense for the three months ended September 30, 2000 and
1999 was approximately $157,000 and $32,000, respectively, and represents
interest incurred on an equipment financing facility and a special project loan
in 2000. During the three months ended September 30, 2000, we recorded
approximately $54,000 of foreign currency transaction losses on transactions
denominated in various currencies of European countries.
Net Loss. The net loss was approximately $10.8 million for the three months
ended September 30, 2000 compared to approximately $2.9 million for the three
months ended September 30, 1999. The increase reflects increases in research and
development in addition to the one-time $4.0 million purchased in-process R&D
write-off, offset in part by the increase in interest income.
11
<PAGE>
Nine Months Ended September 30, 2000 and 1999
Research and Development Expenses. Research and development expenses
increased to approximately $16.9 million for the nine months ended September 30,
2000 compared to approximately $5.9 million for the nine months ended September
30, 1999. This increase is primarily due to the costs associated with developing
our product candidates, including new product candidates discovered or in-
licensed over the past year, as well as higher personnel costs. In addition, the
increase was a result of the costs incurred to manufacture clinical material in
preparation for upcoming human clinical trials.
General and Administrative Expenses. General and administrative expenses
increased to approximately $2.3 million for the nine months ended September 30,
2000 compared to approximately $1.7 million for the nine months ended September
30, 1999. This increase is primarily due to increased general and administrative
personnel and facility costs as well as a $413,000 non-cash compensation charge
related to the issuance of series C preferred stock in exchange for services
rendered by an employee and a director.
Other Income (Expense). Interest income increased to approximately $1.4
million for the nine months ended September 30, 2000 compared to approximately
$118,000 for the nine months ended September 30, 1999. The increase is
attributable to higher levels of cash and cash equivalents available for
investment in 2000. Interest expense for the same periods was approximately
$333,000 and $32,000 and represents interest incurred on an equipment financing
facility and a special project loan in 2000. During the nine months ended
September 30, 2000, we recorded approximately $143,000 of foreign currency
transaction gains on transactions denominated in various currencies of European
countries.
Net Loss. The net loss was approximately $22.0 million for the nine months
ended September 30, 2000 compared to approximately $7.3 million for the nine
months ended September 30, 1999. The increase reflects increases in research and
development and general and administrative expenses in addition to the one-time
$4.0 million purchased in-process R&D write-off, offset in part by the increase
in interest income.
Net Loss Attributable to Common Stockholders. The net loss attributable to
common stockholders for the nine months ended September 30, 2000 includes a one-
time $22.9 million charge related to the beneficial conversion feature on the
series C and series D convertible preferred stock. The total of the non-cash
beneficial conversion feature was reflected through equal and offsetting
adjustments to additional paid-in-capital with no net impact on stockholders'
equity. The beneficial conversion feature was considered in the determination of
our loss per common share amounts.
Liquidity and Capital Resources
In August 2000, the Company completed an initial public offering of its
stock, which resulted in the issuance of 6,000,000 shares of common stock at
$9.00 per share. In September 2000, an additional 900,000 shares were sold by
the Company at $9.00 per share to cover the underwriters' over-allotment. Total
proceeds to the Company from the offering were approximately $56.3 million,
after deducting the underwriting discount and offering expenses. As of September
30, 2000, the Company had cash and cash equivalents of approximately $75.6
million, an increase of approximately $69.7 million from December 31, 1999,
resulting primarily from the initial public offering and the preferred stock
financings, offset by approximately $12.2 million in cash used to fund
operations. Our investment policy emphasizes liquidity and preservation of
principal over other portfolio considerations. We select investments that
maximize interest income to the extent possible by investing cash in securities
with different maturities to match projected cash needs and limit risk by
diversifying our investments. We believe that our current cash position, along
with available borrowings under our credit facilities will be sufficient to fund
our operations and capital expenditures until at least the end of 2002.
During the nine months ended September 30, 2000 and 1999, net cash used in
operating activities was approximately $12.2 million and $5.3 million,
respectively. This cash was used to fund our net losses for the periods,
adjusted for non-cash expenses and changes in operating assets and liabilities.
Net cash used in investing activities for the nine months ended September
30, 2000 and 1999 was $1.5 million and $1.1 million, respectively, primarily the
result of the acquisition of laboratory equipment, furniture and fixtures and
office equipment. In addition, the Company used approximately $233,000 in cash
for professional fees related to the acquisition of Talaria.
12
<PAGE>
Net cash proceeds from financing activities were $83.6 million and $1.4
million for the nine months ended September 30, 2000 and 1999, respectively. The
net cash proceeds from financing activities for the nine months ended September
30, 2000 resulted primarily from $56.3 million raised in the initial public
offering, $26.9 million raised in preferred stock financings, $781,000 of
additional borrowings on a special project loan, and $84,000 raised from the
issuance of common stock to employees as part of the Company's equity
compensation plans. The proceeds were partially offset by $342,000 of cash used
to repay borrowings under an equipment loan. The net cash proceeds from
financing activities during the nine months ended September 30, 1999 were from
borrowings on an equipment loan.
We anticipate that our capital expenditures for the next twelve months will
be approximately $2.5 million. These expenditures relate to, among other things,
an agreement we have entered into with a scientific instrument manufacturer to
purchase a specialized piece of equipment for $1.0 million. We expect delivery
in the fourth quarter of 2000.
As of September 30, 2000, we had approximately $867,000 outstanding under a
credit facility with a U.S. bank. This credit facility was used to finance
purchases of equipment. Borrowings under the facility bear interest at the
bank's prime rate plus 1.0%. We also have a credit facility with a Swedish
entity totaling 19.5 million Swedish kronor (approximately $2.1 million of which
was outstanding as of September 30, 2000) that may only be used to finance the
development of our AIM product candidate. If a related product is not developed
or does not succeed in the market, our obligation to repay the loan may be
forgiven. Borrowings under the loan facility bear interest at 17.0% of which
9.5% is payable quarterly. The remaining 7.5% of interest together with
principal are payable in five equal annual installments starting December 2004.
We have signed a commitment letter with a U.S. lender for a credit facility
that may be used to finance past and future purchases of equipment. If final
loan documents are signed relating to this facility, the aggregate borrowings
available under the facility would be $2.5 million. This facility is subject to
completion of the final loan documents and approval from the lender.
We lease our corporate and research and development facilities under
operating leases expiring at various times through June 2002. We may extend
these leases for additional periods. Minimum annual payments under these leases
are approximately $491,000 as of September 30, 2000.
We expect that our operating expenses and capital expenditures will
increase in future periods. We also intend to hire additional research and
development, clinical testing and administrative staff. Our capital expenditure
requirements will depend on numerous factors, including the progress of our
research and development programs, the time required to file and process
regulatory approval applications, the development of commercial manufacturing
capability, the ability to obtain additional licensing arrangements, and the
demand for our product candidates, if and when approved by the FDA or other
regulatory authorities.
Income Taxes
As of September 30, 2000, we had operating loss carryforwards of
approximately $22.3 million. These net operating loss carryforwards expire
beginning in 2018. Additionally, utilization of net operating loss carryforwards
may be limited under Section 382 of the Internal Revenue Code. These and other
deferred income tax assets are fully reserved by a valuation allowance as
management has determined that it is more likely than not that the deferred tax
assets will not be realized.
Employees
As of September 30, 2000, we had 50 employees. Of these employees, 39 were
engaged in research, preclinical and clinical development, regulatory affairs,
intellectual property activities, and/or manufacturing activities and 11 were
engaged in finance and general administrative activities.
13
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income we can earn on our
investment portfolio and on the increase or decrease in the amount of interest
expense we must pay with respect to our various outstanding debt instruments.
Under our current policies, we do not use interest rate derivative instruments
to manage our exposure to interest rate changes. We ensure the safety and
preservation of our invested principal funds by limiting default risks, market
risk and reinvestment risk. We mitigate default risk by investing in investment
grade securities. A hypothetical 100 basis point adverse move in interest rates
along the entire interest rate yield curve would not materially affect the fair
value of our interest sensitive financial instruments at September 30, 2000.
Declines in interest rates over time will, however, reduce our interest income
while increases in interest rates over time will increase our interest expense.
14
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On March 22, 2000, Talaria Therapeutics, Inc., or Talaria, and Dr. Kevin J.
Williams filed a lawsuit against us and Inex Pharmaceuticals Corp., or Inex, the
University of British Columbia, or UBC, and the two inventors named on patent
applications we sub-license from Inex. One of these inventors is now employed by
us. One of the allegations in the lawsuit, which was filed in the United States
District Court for the Eastern District of Virginia, is the improper
incorporation into a UBC patent application of certain confidential information
of Dr. Williams. This UBC patent application is exclusively licensed to Inex and
sublicensed to us. In addition to seeking damages, the plaintiffs asked that Dr.
Williams be named as the inventor and Talaria as the owner of the UBC patent
application.
On September 21, 2000, we acquired Talaria by way of merger in settlement
of claims against the Company and its employee. Additionally we entered into a
binding letter of intent with Inex and UBC that provides for an amendment to the
License Agreement with Inex granting more control to us over the patent
prosecution related to LUVs, mutual releases of claims in connection with the
litigation and the Inex License Agreement, and dismissal of Inex, UBC and the
other individual defendant from the lawsuit. The parties are currently
completing negotiations of the definitive documents required by the letter of
intent. A demand for arbitration that was filed on September 23, 2000 with the
American Arbitration Association seeking resolution of matters under the Inex
License Agreement has been withdrawn/dismissed as required by the letter of
intent.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Exhibit
------------------------------------------------------------------------------
(27.1) Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a Form 8-K on October 6, 2000 related to the acquisition
of Talaria Therapeutics, Inc.
15
<PAGE>
SIGNATURES
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.
Dated: November 13, 2000 ESPERION THERAPEUTICS, INC.
(Registrant)
By: /s/ Roger S. Newton
------------------------------------------
Roger S. Newton
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Timothy M. Mayleben
------------------------------------------
Timothy M. Mayleben
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
16
<PAGE>
INDEX TO EXHIBITS
Number Exhibit
-----------------------------------------------------------------------------
(27.1) Financial Data Schedule.
17
