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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1998
COMMISSION FILE NUMBER 0-13789
NASTECH PHARMACEUTICAL COMPANY INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 11-2658569
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
45 DAVIDS DRIVE, HAUPPAUGE, NEW YORK 11788
(Address of principal executive offices) (Zip Code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (516) 273-0101
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
<TABLE>
<S> <C>
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock, $.006 par value Nasdaq National Market
</TABLE>
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.
Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
DATE CLASS SHARES OUTSTANDING
<S> <C> <C>
06/30/98 Common stock - $.006 par value 6,378,020
</TABLE>
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NASTECH PHARMACEUTICAL COMPANY INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1 - FINANCIAL STATEMENTS Page
<S> <C>
Balance Sheets as of June 30, 1998 (unaudited) and December 31, 1997.................................................1
Statements of Operations for the six and three months ended June 30, 1998 (unaudited) and 1997
(unaudited)..........................................................................................................2
Statements of Stockholders' Equity for the six months ended June 30, 1998 (unaudited) and the year
ended December 31, 1997..............................................................................................3
Statements of Cash Flows for the six months ended June 30, 1998 (unaudited) and 1997 (unaudited)....................4
Notes to Financial Statements......................................................................................5-6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............................7-9
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K....................................................................................10
SIGNATURES..........................................................................................................11
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NASTECH PHARMACEUTICAL COMPANY INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 24,538 $ 25,294
Accounts receivable .................................................... 74 482
Royalties and fees receivable .......................................... 2,952 455
Inventories ............................................................ 315 370
Prepaid expenses and sundry ............................................ 192 47
------------- -------------
Total current assets 28,071 26,648
------------- -------------
Property and equipment ....................................................... 1,359 1,010
Less: Accumulated depreciation and amortization ........................ 444 302
------------- -------------
Property and equipment, net ..................................... 915 708
------------- -------------
Other assets ................................................................. 15 15
------------- -------------
Total assets $ 29,001 $ 27,371
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................................... $ 1,268 $ 1,497
Royalties payable ...................................................... 375 191
Accrued expenses and sundry liabilities ................................ 507 754
------------- -------------
Total current liabilities 2,150 2,442
------------- -------------
Stockholders' equity:
Common stock, $.006 par value; authorized: 25,000,000 shares; issued and
outstanding: 6,378,020 shares at June 30, 1998 and 6,101,020 shares at
December 31, 1997 .................................................... 38 37
Additional paid-in capital ............................................. 37,426 35,978
Accumulated deficit .................................................... (10,613) (11,086)
------------- -------------
Total stockholders' equity ............................... 26,851 24,929
------------- -------------
Total liabilities and stockholders' equity ............... $ 29,001 $ 27,371
============= =============
</TABLE>
See accompanying notes to financial statements.
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NASTECH PHARMACEUTICAL COMPANY INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
-------------------------- ---------------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Product sales .................................................. $ 437 --- $ 205 ---
License fee, royalty and research income ...................... 4,431 1,946 2,572 1,108
Interest income ............................................... 710 697 345 395
------- ------- ------- -------
Total revenues ......................................... 5,578 2,643 3,122 1,503
------- ------- ------- -------
Costs and expenses:
Cost of product sales ......................................... 503 --- 229 ---
Research and development ...................................... 2,423 1,524 1,360 935
Royalties ..................................................... 663 945 375 541
Sales and marketing ........................................... 462 757 262 587
General and administrative .................................... 1,054 689 659 348
------- ------- ------- -------
Total costs and expenses ............................... 5,105 3,915 2,885 2,411
------- ------- ------- -------
Net income (loss) ................................................... $ 473 $(1,272) $ 237 $ (908)
======= ======= ======= =======
Net income (loss) per common share-Basic ............................ $ .08 $ (.22) $ .04 $ (.15)
======= ======= ======= =======
Net income (loss) per common share-Diluted .......................... $ .07 $ (.22) $ .04 $ (.15)
======= ======= ======= =======
Weighted average common shares outstanding-Basic .................... 6,216 5,860 6,325 6,086
======= ======= ======= =======
Weighted average common shares outstanding-Diluted .................. 6,530 5,860 6,535 6,086
======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
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NASTECH PHARMACEUTICAL COMPANY INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 .......................... 4,706,158 $ 28 $ 18,325 $ (6,540) $ 11,813
Additional shares issued in connection with public
offering at $14 per share, net of issuance costs .. 1,380,000 9 17,460 --- 17,469
Shares issued in connection with exercise of stock
options ........................................... 14,999 --- 18 --- 18
Compensation related to stock options ............... --- --- 175 --- 175
Fractional shares redeemed in connection with reverse
stock split ....................................... (137) --- --- --- ---
Net loss for year ended December 31, 1997 ........... --- --- --- (4,546) (4,546)
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1997 .......................... 6,101,020 37 35,978 (11,086) 24,929
Shares issued in connection with exercise of
underwriters warrants ............................. 270,000 1 1,402 --- 1,403
Shares issued in connection with exercise of stock
options ........................................... 7,000 --- 46 --- 46
Net income six months ended June 30, 1998
(unaudited) ....................................... --- --- --- 473 473
---------- ---------- ---------- ---------- ----------
BALANCE, JUNE 30, 1998 (UNAUDITED) .................. 6,378,020 $ 38 $ 37,426 $ (10,613) $ 26,851
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
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NASTECH PHARMACEUTICAL COMPANY INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ............................ $ 473 $ (1,272)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization .............. 140 89
Changes in assets and liabilities:
Accounts receivable ....................... 408 ---
Royalties and fees receivable ............. (2,497) (302)
Prepaid expenses and sundry ............... (145) (78)
Inventories ............................... 55 (474)
Accounts payable .......................... (229) 233
Royalties payable ......................... 184 304
Accrued expenses and sundry liabilities ... (247) 148
-------- --------
Net cash used in operating activities ............... (1,858) (1,352)
-------- --------
INVESTING ACTIVITIES:
Property, plant and equipment ................ (347) (436)
Short-term investments--acquisitions.......... --- (969)
Short-term investments--redemptions .......... --- 6,005
-------- --------
Net cash (used in) provided by investing activities (347) 4,600
-------- --------
FINANCING ACTIVITIES:
Net proceeds from sale of common stock ....... --- 17,566
Proceeds from exercise of stock options ...... 46 ---
Proceeds from exercise of warrants ........... 1,403 ---
-------- --------
Net cash provided by financing activities .......... 1,449 17,566
-------- --------
Net (decrease) increase in cash and cash equivalents (756) 20,814
-------- --------
Cash and cash equivalents--beginning ............... 25,294 4,494
-------- --------
Cash and cash equivalents--ending .................. $ 24,538 $ 25,308
======== ========
</TABLE>
See accompanying notes to financial statements.
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NASTECH PHARMACEUTICAL COMPANY INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- GENERAL
The accompanying financial information should be read in conjunction
with the audited financial statements, including the notes thereto, as of and
for the year ended December 31, 1997.
The information furnished in this report reflects all adjustments
(consisting of only normal recurring accruals) which are, in the opinion of
management, necessary for a fair statement of the results for the interim
periods.
NOTE 2 -- NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is calculated using the
weighted average number of common shares outstanding during the period. Diluted
income (loss) per share is calculated by including all dilutive potential common
shares such as stock options and warrants. A reconciliation between the
numerators and denominators of the basic and diluted net income per common share
is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- --------------------
1998 1997 1998 1997
------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) (numerator for basic and
diluted net income (loss) per common share) $ 473 $(1 ,272) $ 237 $ (908)
======== ======== ======== ========
Weighted average common shares
(denominator for basic net income (loss) per
common share) .............................. 6,216 5,860 6,325 6,086
Effect of dilutive securities:
Employee stock options ...................... 314 --- 210 ---
-------- -------- -------- --------
Weighted average common and potential
common shares outstanding (denominator for
diluted income (loss) per common share) ..... 6,530 5,860 6,535 6,086
======== ======== ======== ========
Net income (loss) per common share-Basic ....... $ .08 $ (.22) $ .04 $ (.15)
======== ======== ======== ========
Net income (loss) per common share-Diluted ..... $ .07 $ (.22) $ .04 $ (.15)
======== ======== ======== ========
</TABLE>
Employee stock options totaling 240,200 for the quarter ended June 30, 1998 and
employee stock options and underwriter stock warrants totaling 862,501 for the
quarter ended June 30, 1997 were not included in the net income (loss) per
common share calculation because their effect would have been anti-dilutive.
NOTE 3 -- INCOME TAXES
At June 30, 1998, the Company has available net operating loss
carryforwards for federal and state income tax reporting purposes of
approximately $6.9 million and has available research and development credit
carryforwards for federal income tax reporting purposes of approximately
$400,000, which are available to offset future taxable income, if any. These
carryforwards expire beginning in 1999. A valuation allowance has been applied
to offset the respective deferred tax assets in recognition of the uncertainty
that such tax benefits will be realized. The Company's ability to use such net
operating loss and research and development credit carryforwards is limited by
change of control provisions under Section 382 of the Internal Revenue Code.
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NOTE 4 -- NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income" and
Statement of Financial Accounting Standards No. 131 ("SFAS 131") "Disclosures
about Segments of an Enterprise and Related Information". SFAS 130 requires
that all items recognized under accounting standards as components of
comprehensive income be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. Other
comprehensive income may include foreign currency translation adjustments,
minimum pension liability adjustments and unrealized gains and losses on
marketable securities classified as available-for-sale. The adoption of SFAS
130 had no impact on the Company's financial statements. SFAS 131 established
standards to report information about operating segments and related
discussions about products and services, geographic areas and major customers
and requires that such information be included in the Company's 1998 annual
report. The adoption of SFAS 131 is not expected to affect the Company's
reporting of its results of operations and financial position.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Except for historical information contained herein, the statements in
this Item are forward-looking statements that are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward- looking statements involve known and unknown risks and uncertainties
that reflect the Company's intentions, expectations or beliefs concerning future
events, including, but not limited to, expectations with respect to FDA approval
of new products, technology and product development milestones, the ability of
the Company to manufacture and meet market demand for its products, the market
acceptance of products under control of the Company's licensees, the ability of
the Company to negotiate favorable collaborative agreements, the commencement of
sales of new products, and the sufficiency of the Company's cash flow for future
liquidity and capital resource needs. These factors, among others, could cause
results to differ materially from those in the forward-looking statements. In
addition, significant fluctuations in quarterly and fiscal operating results may
occur as a result of varying milestone payments and the timing of costs and
expenses related to the Company's research and development programs.
The Company is engaged in the research, development, manufacturing
and commercialization of nasally administered forms of prescription and
over-the-counter pharmaceuticals that are currently delivered in oral,
injectable or other dosage forms. The nasal delivery of certain pharmaceuticals
may enable more rapid systemic absorption, lower required dosages, quicker onset
of desired effect, and painless, convenient patient self-administration,
resulting in improved patient compliance and pharmacoeconomics. The Company
focuses its research primarily on drugs with demonstrated safety and efficacy,
which, through current delivery forms, have certain bioavailability, therapeutic
or patient compliance limitations that may be improved with a preferred delivery
system.
The Company receives licensing revenues on two commercial products -
Stadol(R)NSTM and Nascobal(TM). Stadol NS, a narcotic analgesic for the
treatment of moderate to severe pain and the acute pain of migraine, is
currently marketed by Bristol-Myers Squibb Co. (BMS) under an agreement that
generates quarterly royalties to the Company. Stadol NS has been classified by
the FDA as a Schedule IV substance under the Controlled Substances Act which,
among other factors, may negatively affect future sales by BMS and royalties to
the Company. The Company anticipates that this negative effect may continue in
the foreseeable future. In July 1997, the Company entered into an exclusive
licensing agreement for Nascobal(TM) in the U.S. with Schwarz Pharma and
commercially launched the product in October 1997. Under the agreement, the
Company will receive minimum royalty payments in 1998 of $2 million and retains
global manufacturing rights. The Company relies on a contract service provider
for the fill and packaging of this product in accordance with current Good
Manufacturing Practice.
Historically, the Company's product development strategy has
generally been to seek strategic alliances in order to minimize the risk, time
and cost typically associated with the early stages of developing nasal
pharmaceuticals. As part of a revised business strategy, the Company will
typically postpone the establishment of strategic alliances until later stages
of development in order to negotiate more favorable collaborative agreements and
retain manufacturing rights.
The Company intends to commit significant financial resources in the
future to internally fund certain research and development projects with the
goal of achieving greater economic benefit from product sales. In addition, the
Company's future profitability is primarily affected by, among others, the
success of product sales by its licensees, its investment and achievement of
milestones in research and development programs, regulatory uncertainties with
respect to its filings with the FDA, and the success of its financing
activities. As a result of the uncertainties associated with these factors and
the increased investment in research and development, the Company may not be
profitable in calendar 1998.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1998 Compared to Six Months Ended
June 30, 1997
Revenues increased by $2.9 million, or 111%, to $5.6 million
primarily as a result of manufactured product sales and royalty income from the
sales of Nascobal of $1,437,000 and the achievement of milestones of $2.1
million on the intranasal motion sickness product, scopolamine under its
collaborative research agreement with Schwarz Pharma. Royalty income received
from BMS on sales of Stadol NS decreased $585,000, or 30%, to $1,344,000.
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Total costs and expenses increased by $1.2 million, or 30%, to $5.1
million in 1998. The details of the increase follow:
Research and development expense increased by $899,000, or 59%, to
$2.4 million primarily as a result of the Company's clinical program for the
intranasal motion sickness compound, scopolamine. The Company intends to pursue
internally funded projects and anticipates that expenditures for research and
development will continue to increase in 1998.
In connection with the manufacture of Nascobal(TM), the Company
entered into a filling and packaging agreement with a third party. The Company
has incurred certain costs associated with its plan to expand its manufacturing
capabilities and reduce its reliance on third parties. The total cost of
product sales, including certain costs associated with this plan of operations,
was $503,000 in 1998.
Royalties expense decreased by $282,000, or 30%, to $663,000 as a
result of the decline in sales of Stadol NS by BMS and the related royalty
payable to the University of Kentucky Research Foundation (UKRF) under a
separate agreement between the Company and UKRF. Royalites expense increases or
decreases approximately in proportion to royalty income associated with Stadol
NS.
Sales and marketing expenses decreased by $295,000, or 39%, to
$462,000 as the Company eliminated its marketing costs in 1998 associated with
the product, Nascobal(TM), as a result of the licensing agreement entered into
with Schwarz Pharma. General and administrative costs increased by $365,000, or
53%, to $1.1 million primarily as a result of expenses of $200,000 associated
with mergers and acquisition activity. As a percentage of total revenues,
general and administrative expenses decreased to 19% in 1998 as compared to 26%
in 1997.
Three Months Ended June 30, 1998 Compared to Three Months Ended
June 30, 1997
Revenues increased by $1.6 million, or 108%, to $3.1 million
primarily as a result of manufactured product sales and royalty income from the
sales of Nascobal of $750,000 and the achievement of milestones of $1,350,000 on
the intranasal motion sickness product, scopolamine. Royalty income received
from BMS on sales of Stadol NS decreased $350,000, or 32%, to $750,000.
Total costs and expenses increased by $474,000, or 20%, to $2.9
million in 1998. The details of the increase follow:
Research and development expense increased by $425,000, or 45%, to
$1.4 million primarily as a result of the Company's clinical program for the
intranasal motion sickness compound, scopolamine.
The Company has incurred certain costs associated with its plan to
expand its manufacturing capabilities and reduce its reliance on third parties.
The total cost of product sales, including certain costs associated with this
plan of operations, was $229,000.
Royalties expense decreased by $166,000, or 31%, to $375,000 as a
result of the decline in sales of Stadol NS by BMS and the related royalty
payable to the UKRF.
Sales and marketing expenses decreased by $325,000, or 55%, to
$262,000 as the Company eliminated its marketing costs in 1998 associated with
the product, Nascobal, as a result of the licensing agreement entered into with
Schwarz Pharma. General and administrative costs increased by $311,000, or 89%,
to $659,000 primarily as a result of expenses of $200,000 associated with
mergers and acquisition activity. As a percentage of total revenues, general and
administrative expenses decreased to 21% in 1998 as compared to 23% in 1997.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company's liquidity included cash and cash
equivalents of $24.5 million compared to $25.3 million at December 31, 1997.
Accounts and royalties receivable at June 30, 1998, consist principally of
receivables pursuant to the BMS and Schwarz Pharma agreements.
At June 30, 1998, the Company had working capital of $25.9 million.
Management anticipates that its current cash position will provide adequate
funds for the Company's anticipated needs, including working capital, through
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<PAGE> 11
1999. Based upon the anticipated future financing requirements of the Company,
management expects that the Company may, from time to time, engage in additional
financings of a character and in amounts to be determined.
YEAR 2000 COMPLIANCE
The Company is currently analyzing the potential impact of the Year 2000 on the
processing of date sensitive information by the Company's computerized
information systems. The Year 2000 problem is the result of computer programs
being written using two digits (rather than four) to define an applicable year.
The Company's general ledger system is currently Year 2000 compliant. The
Company is studying the impact of the Year 2000 problem on other aspects of its
business and as of June 30, 1998 this impact on the future financial position,
operating results, and cash flows of the Company is not determinable.
NEW ACCOUNTING PRONOUCEMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 132 ("SFAS 132"), "Employers' Disclosures about
Pensions and Other Postretirement Benefits". SFAS No. 132 revises disclosures
about pension or other postretirement benefit plans. Management of the Company
does not believe that the implementation of SFAS No. 132 will have a significant
impact on previously reported information regarding its employee retirement
plans.
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PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
NONE
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<PAGE> 13
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, duly authorized, in Hauppauge, State of New York, on August 13,
1998.
NASTECH PHARMACEUTICAL COMPANY INC.
By: /s/ Vincent D. Romeo, Ph.D.
-----------------------------------------
Vincent D. Romeo, Ph.D.
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Andrew Zinzi
-----------------------------------------
Andrew Zinzi
Chief Financial Officer
(Principal Financial and Accounting Officer)
-11-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 24,538
<SECURITIES> 0
<RECEIVABLES> 3,026
<ALLOWANCES> 0
<INVENTORY> 315
<CURRENT-ASSETS> 28,071
<PP&E> 1,359
<DEPRECIATION> 444
<TOTAL-ASSETS> 29,001
<CURRENT-LIABILITIES> 2,150
<BONDS> 0
0
0
<COMMON> 38
<OTHER-SE> 26,813
<TOTAL-LIABILITY-AND-EQUITY> 29,001
<SALES> 437
<TOTAL-REVENUES> 5,578
<CGS> 503
<TOTAL-COSTS> 503
<OTHER-EXPENSES> 4,602
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 473
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 473
<EPS-PRIMARY> .08
<EPS-DILUTED> .07
</TABLE>
