S E C U R I T I E S A N D E X C H A N G E C O M M I S S I O N
Washington, D. C. 20549
FORM 10Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period ended June 29, 1997 Commission file number 0-14887
T H E L I P O S O M E C O M P A N Y, I N C.
(Exact name of registrant as specified in its charter)
Delaware 22-2370691
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Research Way, Princeton Forrestal Center, Princeton, N.J. 08540
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 452-7060
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
The number of shares outstanding of each of the issuer's classes of Common
Stock as of the latest practicable date:
Class August 8, 1997
Common Stock, $.01 par value 37,415,721
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE NO.
Part I. FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of
June 29, 1997 and December 29, 1996 3
Consolidated Statements of Operations
for the Six Month and Three Month Periods Ending
June 29, 1997 and June 30, 1996.......................... 4
Consolidated Statements of Cash Flows
for the Six Month Period Ending
June 29, 1997 and June 30, 1996.......................... 5
Notes to Consolidated Financial Statements 6-8
ITEM 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-16
Part II. OTHER INFORMATION 17
Signatures 18
************************************************
Note concerning trademarks: Certain names
mentioned in this report are trademarks owned by
The Liposome Company, Inc. or its affiliates or
licensees. ABELCET is a registered trademark of
The Liposome Company, Inc.
Page 2 of 18
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
ASSETS
Current assets: 6/29/97 12/29/96
Cash and cash equivalents $ 24,743 $ 1,841
Short-term investments 14,114 28,269
Accounts receivable, net of allowance for doubtful
accounts ($1,244 for 1997, $1,079 for 1996) 6,998 7,884
Inventories 17,159 9,904
Prepaid expenses 962 835
Other current assets 208 47
Total current assets 64,184 48,780
Long-term investments 5,000 10,140
Plant and equipment, net 26,731 28,292
Restricted cash 11,930 6,930
Other assets, net 385 413
Total assets $ 108,230 $ 94,555
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,929 $ 1,806
Accrued expenses and other current liabilities 10,634 7,682
Current obligations under capital leases 2,403 2,348
Current obligations under note payable 303 303
Total current liabilities 16,269 12,139
Long-term obligation under capital leases 5,154 6,369
Long term obligation under note payable 1,034 1,186
Total liabilities 22,457 19,694
Commitments and contingencies
Stockholders' equity:
Capital stock:
Common Stock, par value $.0l; 60,000 shares
authorized; 37,405 and 36,061 shares issued
and outstanding 374 361
Additional paid in capital 261,408 237,809
Net unrealized investment loss (354) (481)
Foreign currency translation adjustment (238) (430)
Accumulated deficit (175,417) (162,398)
Total stockholders' equity 85,773 74,861
Total liabilities and stockholders' equity $ 108,230 $ 94,555
See accompanying notes
Page 3 of 18
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)
Three Months Ended Six Months Ended
6/29/97 6/30/96 6/29/97 6/30/96
Product sales $ 15,220 $12,467 $ 29,625$ 22,570
Collaborative research and development
and other revenues........... 900 599 1,800 1,892
Interest, investment and other income 534 1,336 1,083 2,349
Total revenues................ 16,654 14,402 32,508 26,811
Cost of goods sold 5,080 4,040 8,530 7,264
Research and development expense.... 7,528 8,229 14,843 15,235
Selling, general and administrative
expense... 12,418 7,207 21,775 13,413
Interest expense................... 178 56 379 120
Total expenses................ 25,204 19,532 45,527 36,032
Net Loss (8,550) (5,130) (13,019) (9,221)
Preferred Stock dividends 0 (571) 0 (1,233)
Net loss applicable to Common Stock $(8,550) $ (5,701)$(13,019) $(10,454)
Net loss per share applicable to
Common Stock.......................$ (0.23) $ (0.17) $ (.36) $ (.33)
Weighted average number of common
shares outstanding................. 36,988 33,493 36,560 31,842
See accompanying notes
Page 4 of 18
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
6/29/97 6/30/96
Cash flows from operating activities:
Net loss $ (13,019) $ (9,221)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation and amortization 2,551 1,850
Provision for bad debts 165 112
Provision for severance 2,550 --
Other 711 300
Changes in assets and liabilities
Accounts receivable 721 (1,184)
Inventories (7,255) (2,163)
Prepaid expenses (127) (522)
Other current assets (161) (4)
Accounts payable 1,123 (768)
Accrued expenses and other current liabilities 402 518
Net cash used by operating activities (12,339) (11,082)
Cash flows from investing activities:
Purchases of short and long-term investments (16,791) (16,142)
Sales of short and long-term investments... 36,213 31,054
Restricted cash (5,000) --
Purchases of property, plant and equipment (962) (6,786)
Net cash provided by investing activities 13,460 8,126
Cash flows from financing activities:
Net payments from registration of Common Stock (119) 29
Net payments from conversion of Preferred Stock -- (379)
Proceeds from the exercise of stock options 2,145 3,752
Proceeds from private placement of Common Stock 20,875 --
Principal payments under note payable (152) (151)
Principal payments under capital lease obligations (1,160) (751)
Preferred Stock dividend payments -- (1,999)
Net cash provided by financing activities 21,589 501
Effects of exchange rate changes on cash 192 12
Net increase/(decrease) in cash and cash equivalents 22,902 (2,443)
Cash and cash equivalents at beginning of the period 1,841 3,937
Cash and cash equivalents at end of the period $ 24,743 $ 1,494
See accompanying notes
Page 5 of 18
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.Basis of Presentation
The information presented at June 29, 1997, and for the three and six
month periods then ended is unaudited, but includes all adjustments
(consisting only of normal recurring accruals) that management at The
Liposome Company, Inc. (the "Company") believes to be necessary for the
fair presentation of results for the periods presented. The December
29, 1996 balance sheet was derived from audited financial statements.
These financial statements should be read in conjunction with the
Company's audited financial statements for the year ended
December 29, 1996, which were included as part of the Company's Annual
Report on Form 10-K. Certain reclassifications have been made to the
prior year financial statement amounts to conform with the presentation
in the current year financial statements.
2.Common Stock Outstanding and Per Share Information
Per share data is based on the weighted average number of shares of
Common Stock outstanding during each of the periods. For the three
months ended June 29, 1997 and the comparable prior year period,
weighted average shares increased to 36,988,000 from 33,493,000. The
increase is due primarily to certain conversions of Preferred Stock and
the exercise of stock options. Also, on April 23, 1997 the Company
issued an additional 1,000,000 shares at $20.875 per share to a private
investor for cash of $20,875,000. At the date of this report this
investor has reported total holdings of approximately 24.99% of the
Company's outstanding Common Stock. Unexercised stock options (Common
Stock equivalents) and, in the 1996 reported periods, the conversion of
outstanding Preferred Stock to Common Stock are not included in the
calculation of loss per share since their inclusion would be anti-
dilutive.
The net loss per common share includes a charge for dividends paid on
the outstanding shares of Preferred Stock of $0 and $.02 for the three
months ended June 29, 1997 and June 30, 1996 respectively. For the six
month period, the per share charges for Preferred Stock dividends paid
were $0 in 1997 and $.04 in 1996.
In March 1996, the Company completed the call for the redemption of 50%
of the Preferred Stock, with the remainder being called in October 1996.
Virtually all of the outstanding Preferred Stock was converted into
Common Stock, thereby eliminating the Company's annual Preferred Stock
dividend requirements.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings
Per Share", which specifies computation and disclosure requirements for
earnings per share and is effective for financial statements issued
after December 15, 1997. If SFAS No. 128 had been adopted at June 29,
1997 there would have been no change in the earnings per share amounts
reflected in the accompanying financial statements.
Page 6 of 18
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
3.Inventories
Inventories are carried at the lower of actual cost or market and cost
is accounted for on the first-in first-out (FIFO) basis. The components
of inventories are as follows:
June 29, December 29,
1997 1996
Finished goods $ 2,591,000 $3,063,000
Work in process 11,101,000 5,011,000
Raw materials 2,961,000 1,447,000
Supplies 506,000 383,000
$17,159,000 $9,904,000
4.Supplemental Disclosure of Cash Flow Information
Six Months Ended:
6/29/97 6/30/96
Cash paid during the year for interest $423,000 $120,000
5.Unusual Charges
The Company reported approximately $3,900,000 of unusual charges for the
second quarter 1997. The primary component was organizational
restructuring charges of approximately $2,550,000 with the balance being
attributable to the provision for royalties on past sales under the
University of Texas litigation settlement, as described below, and the
write-off of certain capitalized costs due to the unfavorable results of
a pivotal Phase III clinical study of VENTUSTM, a product being
developed by the Company.
On July 18, 1997, the Company implemented the restructuring of
the organization, including the elimination of approximately 137
positions. The Company expects to save approximately $8,000,000
annually as a result of this restructuring.
In July 1997, the Company and the University of Texas and M.D. Anderson
Cancer Center came to an agreement on terms to resolve pending patent
litigation regarding a patent granted to the University of Texas that
allegedly was infringed by ABELCET. The Company has received an
exclusive license under the patent and has agreed to pay royalties to
the University of Texas for past and future sales of ABELCET. The
Company believes that some of these royalties may be offset against
royalties payable to a third party under another agreement. The royalty
on prior period sales due the University of Texas pursuant to the
agreement has been reflected in the Consolidated Statement of Operations
for the three and six month periods ended June 29, 1997. Additionally,
the Company has agreed to issue the University of Texas a ten year
warrant to purchase 1,000,000 shares of the Company's Common Stock at an
exercise price of $15 per share. The value of the warrant is being
amortized as royalty expense based on actual and projected sales from
1995 to 2004, with the retroactive portion being reflected in the
quarter ended June 29, 1997.
Page 7 of 18
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
6.Subsequent Events
On July 15, 1997, the Company announced that it had reacquired all
development, manufacturing and marketing rights to TLC D-99 (liposomal
doxorubicin) from Pfizer Inc. ("Pfizer"). The Company will assume
control, after a transition period, of all clinical studies including
the ongoing Phase III clinical studies testing TLC D-99 as a treatment
for metastatic breast cancer. Pfizer will receive royalties worldwide
(except Japan) on commercial sales of TLC D-99. Pfizer will provide a
credit line of up to $10 million to continue the development of TLC D-
99, and to the extent that any funding is actually used by the Company,
the outstanding principal and interest would be repayable commencing at
the earlier of U.S. Food and Drug Administration clearance to market TLC
D-99 or in 5 years.
On August 11, 1997, the Company entered into a settlement agreement with
NeXstar Pharmaceuticals, Inc. ("NeXstar") and Fujisawa USA, Inc.,
terminating all litigation relating to the Company's liposome drying
technology patents, discussed under "Business: Patents and Proprietary
Technology" in the Company's Annual Report on Form 10-K for the year
ended December 29, 1996. Pursuant to this agreement, the Company will
receive a payment of $1,750,000 in the quarter ending September 28,
1997, and will receive quarterly payments based on AmBisome sales by
NeXstar and its marketing partners beginning in 1998. All parties
agreed to dismiss their claims in the actions pending in Delaware, the
United Kingdom, Germany and the Netherlands, and NeXstar will withdraw
its oppositions to certain of the Company's European and Japanese
patents. NeXstar and the Company also granted to each other options to
acquire licenses under other patented technology.
Page 8 of 18
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The Company is a biopharmaceutical company engaged in the discovery,
development, manufacturing and marketing of proprietary lipid- and liposome-
based pharmaceuticals for the treatment of inadequately treated, life-
threatening illnesses. ABELCET (Amphotericin B Lipid Complex Injection), the
Company's first commercialized product, has been approved for marketing for
certain indications in the United States and 16 foreign countries and is the
subject of marketing application filings in several other countries. In
October 1996, the U.S. Food and Drug Administration ("FDA") cleared for
marketing an expanded indication for ABELCET for the treatment of invasive
fungal infections in patients who are refractory to or intolerant of
conventional amphotericin B therapy. Currently all product sales are derived
from ABELCET. In the U.S., as well as the U.K., the Company markets ABELCET
with its own sales force. In Spain and Portugal, the Company has a
marketing/distribution relationship with a local pharmaceutical company. The
Company will determine whether to market ABELCET directly or with a partner
on a country-by-country basis as it receives future marketing approvals. In
addition, sales are realized on a named patient basis in certain countries
where marketing approval has not yet been received.
On July 15, 1997, the Company announced that it had reacquired all
development, manufacturing and marketing rights to TLC D-99 (liposomal
doxorubicin) from Pfizer Inc. ("Pfizer"). The Company will assume control,
after a transition period, of all clinical studies including the ongoing
Phase III clinical studies testing TLC D-99 as a treatment for metastatic
breast cancer. Pfizer will receive royalties worldwide (except Japan) on
commercial sales of TLC D-99. Pfizer will provide a credit line of up to $10
million to continue the development of TLC D-99, and to the extent that any
funding is actually used by the Company, the outstanding principal and
interest would be repayable commencing at the earlier of U.S. Food and Drug
Administration clearance to market TLC D-99 or in five years. Pfizer was
previously funding the development and clinical trials of TLC D-99. The
Company received a payment upon signing the agreement with Pfizer and was
reimbursed quarterly in advance of expenditures, based on an agreed-upon
annual budget, for virtually all of its costs incurred in connection with
product development and clinical testing.
The Company is conducting preclinical toxicology studies of TLC ELL-12
(liposomal ether lipid), a new cancer therapeutic that may have applications
for the treatment of many different cancers. The Company also has a
continuing discovery research program concentrating in oncology treatment.
VENTUSTM is a proprietary injectable liposomal prostaglandin E-1 developed to
treat acute inflammatory and vaso-occlusive diseases. On June 25, 1997 the
Company announced results of a Phase III study of VENTUSTM in the treatment
for Acute Respiratory Distress Syndrome (ARDS), an inflammatory condition
affecting the lungs. The Company's analysis of the two arms of the study
showed no significant difference between patients receiving VENTUSTM or
placebo either in reducing the time on mechanical ventilation or in 28 day
mortality. No safety concerns for the drug were identified. The Company is
evaluating the study to determine what, if any, further actions it should
take in the development of the drug.
Page 9 of 18
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview (Continued)
In July 1997, the Company and the University of Texas and M.D. Anderson
Cancer Center came to an agreement on terms to resolve pending patent
litigation regarding a patent granted to the University of Texas that
allegedly was infringed by ABELCET. The Company has received an exclusive
license under the patent and has agreed to pay royalties to the University of
Texas for past and future sales of ABELCET. The Company believes that some of
these royalties may be offset against royalties payable to a third party
under another agreement. The royalty on prior period sales due the
University of Texas pursuant to the agreement has been reflected in the
Consolidated Statement of Operations for the three and six month periods
ended June 29, 1997. Additionally, the Company has agreed to issue the
University of Texas a ten year warrant to purchase 1,000,000 shares of the
Company's Common Stock at an exercise price of $15 per share. The value of
the warrant is being amortized as royalty expense based on actual and
projected sales from 1995 to 2004, with the retroactive portion being
reflected in the three and six month periods ended June 29, 1997.
On August 11, 1997, the Company entered into a settlement agreement with
NeXstar Pharmaceuticals, Inc. ("NeXstar") and Fujisawa USA, Inc., terminating
all litigation relating to the Company's liposome drying technology patents
discussed under "Business: Patents and Proprietary Technology" in the
Company's Annual Report on Form 10-K for the year ended December 29, 1996.
Pursuant to this agreement, the Company will receive a payment of $1,750,000
in the quarter ending September 28, 1997, and will receive quarterly payments
based on AmBisome sales by NeXstar and its marketing partners beginning in
1998. All parties agreed to dismiss their claims in the actions pending in
Delaware, the United Kingdom, Germany and the Netherlands, and NeXstar will
withdraw its oppositions to certain of the Company's European and Japanese
patents. NeXstar and the Company also granted to each other options to
acquire licenses under other patented technology.
Results of Operations
Revenues
- Three Months Ended June 29, 1997:
Total revenues of the Company for the quarter ended June 29, 1997 were
$16,654,000 compared to $14,402,000 for the same period during 1996. This
change in total revenue represents an increase of $2,252,000 or 15.6%. This
net increase is due primarily to the increase in sales of ABELCET. The other
components of revenue are collaborative research and development agreements
and interest and investment income.
Net product sales of ABELCET for the second quarter ended June 29, 1997 were
$15,220,000 compared to $12,467,000 for the second quarter 1996. Sales in
the U.S. were $13,210,000, an increase of 30.6% from the prior year
comparable period. The U.S. growth is related to greater conversion by
physicians from use of conventional amphotericin B to ABELCET. During the
second quarter, the Company implemented a targeted pricing schedule for large
volume purchasers in the U.S. This program was designed as an inducement to
hospitals to convert more amphotericin B usage to ABELCET, where appropriate.
The price reduction is effected by rebates and chargebacks paid to
wholesalers based on their sales at contract prices to targeted hospitals.
U.S. sales are also subject to rebates pursuant to government mandated price
protection programs. The Company provides a reserve for the impact on sales
for these rebates and chargebacks. The provision for the second quarter
ended June 29, 1997 was approximately $2,500,000. The Company will
periodically evaluate the estimates used in establishing the reserve and make
any necessary adjustments.
Page 10 of 18
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (Continued)
International sales were $2,010,000 in 1997 versus $2,349,000 in 1996. Sales
were lower primarily due to the timing of shipments to the Company's
marketing partner in Spain and Portugal, where the Company has a
marketing/distribution relationship with a local pharmaceutical Company.
Collaborative research and development revenues were $900,000 for the second
quarter of 1997, $301,000 or 50.3% higher than the comparable prior year
period. These revenues were all recorded for reimbursement from Pfizer for
Company expenses in the co-development of TLC D-99 as a treatment for
metastatic breast cancer. On July 15, 1997, the Company reacquired all
development, manufacturing and marketing rights to TLC D-99 from Pfizer.
Interest and investment income for the three months ended June 29, 1997 and
June 30, 1996 were $534,000 and $1,336,000, respectively. Interest income
decreased primarily due to lower average cash and investment balances and
lower average rates in the Company's investment portfolio in the 1997
quarter.
The Company anticipates continued growth in product sales as greater market
penetration is achieved, higher sales volumes related to its tiered pricing
policy are reached and commercial sales begin in additional countries. The
Company is also aware that a competing product has received a favorable
recommendation from an advisory committee of the FDA for the treatment of
fever of unknown origin. The impact, if any, of ultimate FDA approval of
this product on U.S. sales and growth of ABELCET is not presently
quantifiable. Due to the Company's reacquisition of rights in TLC D-99 from
Pfizer, the Company anticipates significant reductions or elimination of
collaborative research and development revenues in future quarters, as the
Company's collaborative research agreement with Pfizer has been terminated
and it currently has no other agreements in place. Interest income will be
related to the level of cash balances available for investment and the rate
of interest earned.
- Six Months Ended June 29, 1997:
Total revenues for the six months ended June 29, 1997 were $32,508,000, an
increase of $5,697,000 or 21.2% compared to the six months ended June 30,
1996. The primary components of revenues for the Company are product sales,
collaborative research and development revenue and interest, investment and
other income. The major component of the revenue increase was the growth of
U.S. product sales, which commenced in late 1995.
Net product sales of ABELCET for the first six months of 1997 were
$29,625,000, of which $25,620,000 occurred in the U.S. with the remainder
from international activity. The U.S. sales growth of $6,967,000 or 37.4%
over the comparable prior year period, is related to greater conversion by
physicians from use of conventional amphotericin B to ABELCET. 1997 sales
unit volume increased 50.7% from the comparable prior year period. See
discussion of the new pricing initiatives above with respect to the three
months ended June 29, 1997.
Page 11 of 18
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (Continued)
Collaborative research and development revenues of $1,800,000 for the six
months ended June 29, 1997 decreased $92,000 or 4.9% compared to the
comparable prior year period. The change is primarily due to the level of
developmental activity billable to Pfizer for TLC D-99. The Company earned
all of its collaborative research and development revenues from Pfizer during
1997 and 1996.
Interest, investment and other income for the six months ended June 29, 1997
was $1,083,000 compared to $2,349,000 for the same 1996 period. Interest
income decreased primarily due to lower average cash and investment balances
in the Company's investment portfolio in the 1997 period. The average cash
balances available for investment in the first six months of 1997 were
significantly lower than the comparable 1996 period, until late April 1997,
when the Company received $20,875,000 from a private investor for the
issuance of 1,000,000 shares of Common Stock.
Expenses
- Three Months Ended June 29, 1997:
The components of total expenses for the quarter ended June 29, 1997 were
cost of goods sold, research and development, selling, general and
administrative and interest expense. Total expenses for the three months
ended June 29, 1997 were $25,204,000, an increase of $5,672,000 over the same
prior year period. The Company reported approximately $3,900,000 of unusual
charges for the second quarter 1997. The primary components were the
organizational restructuring charges of $2,550,000, the provision for
royalties on past sales under the University of Texas litigation settlement
and the write-off of certain capitalized costs due to the unfavorable results
of a VENTUSTM Phase III study.
Cost of goods sold was $5,080,000 or $1,040,000 higher than the same period
last year. The change is primarily due to the increased unit volume of
ABELCET sold during the 1997 quarter and the provision for royalties on past
sales under the University of Texas litigation settlement. Partially
offsetting this increase were improved production efficiencies in the
manufacturing of ABELCET. The gross margin in 1997 was 66.6% compared to
67.6% in the comparable 1996 period. The principal reason for the slight
decline in gross margin was lower pricing due to the implementation of the
targeted pricing program in the second quarter of 1997, combined with the
royalty provision previously discussed.
Research and development expense was $7,528,000 for the quarter ended June
29, 1997, 8.5% lower than the comparable prior year period. The decrease was
due to the absence of the 1996 pre-production expenses for the start-up of
the Indianapolis manufacturing facility during 1997. Partially offsetting
this decrease was the write-off in the 1997 period of certain capitalized
costs due to the unfavorable results of the VENTUSTM Phase III clinical
study.
Selling, general and administrative expenses for the three months ended June
29, 1997 were $12,418,000 compared to $7,207,000 in 1996. A major component
of the $5,211,000 increase is the restructuring charges of $2,550,000
following the unfavorable VENTUSTM Phase III study result. The balance of
the increase is due to higher U.S. sales and marketing costs combined with
increased legal expenses incurred in connection with intellectual property
litigation. The U.S. sales and marketing increase is related to the growth
of U.S. sales and marketing efforts, expanded medical education and marketing
programs and a sales force expansion in late 1996.
Page 12 of 18
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (Continued)
Interest expense was $178,000 in the second quarter of 1997 or $122,000
higher than the comparable 1996 period. The major reason for the increase is
interest expense related to a capital lease signed in December 1996.
Inventories increased as the Company produced ABELCET at both the Princeton
and Indianapolis Manufacturing facilities while awaiting final FDA approval
of the lower cost Indianapolis facility. Final FDA approval is expected in
the third quarter of 1997. However, in order to reduce inventory to a more
optimal level the benefits of the Indianapolis facility will not be realized
until the fourth quarter of 1997. As a result, the Company anticipates that
the third quarter gross margin percentage will be below the second quarter
gross margin percentage. The Company expects research and development
expenses to increase as a result of the reacquiring of TLC D-99 and the
related costs of completing TLC D-99 product development. Selling, general
and administrative expenses may increase due to marketing activity related to
the launch of ABELCET in certain international markets.
- Six Months Ended June 29, 1997:
The components of total expenses for the six months ended June 29, 1997 were
cost of goods sold, research and development, selling, general and
administrative, and interest expense. Total expenses for the six months ended
June 29, 1997 were $45,527,000, an increase of $9,495,000 or 26.4% over the
prior year period. In the second quarter, the Company included in total
expenses approximately $3,900,000 of unusual charges. The primary components
were the organizational restructuring charges of $2,550,000, the provision
for royalties on past sales under the University of Texas litigation
settlement and the write-off of certain capitalized costs due to the
unfavorable results of a VENTUSTM Phase III study.
Cost of goods sold for the six months ended June 29, 1997 was $8,530,000
versus $7,264,000 in the 1996 period. The 17.4% increase from 1996 to 1997
of $1,266,000 was a result of the increased unit volume of ABELCET sold
during 1997 and the provision for royalties on past sales under the
University of Texas litigation settlement. Partially offsetting this
increase were improved production efficiencies in the manufacturing of
ABELCET. The gross margin for the first six months of 1997 was 71.2% to
67.8% in the comparable 1996 period. The principal reason for the
improvement was a result of production efficiencies at the Princeton
manufacturing facility, partially offset by impact of lower pricing and the
royalty provision previously discussed.
Research and development expenses were $14,843,000 for the six months ended
June 29, 1997, compared to $15,235,000 for the comparable prior year period.
The major components of this category are research, development, clinical and
regulatory activities. The decreased spending of $392,000 versus the
comparable prior year period is due to the absence of the 1996 pre-production
expenses for the start up of the Indianapolis manufacturing facility during
1997. Partially offsetting this decrease was the write-off in the 1997
period of certain capitalized costs due to the unfavorable results of the
VENTUSTM Phase III clinical study.
Selling, general and administrative expenses for the first six months of 1997
were $21,775,000, a $8,362,000 increase versus the prior year period. The
$8,362,000 increase is due to the restructuring charges of $2,550,000
following the unfavorable VENTUSTM Phase III study result. The balance of
the increase is due to higher U.S. sales and marketing costs combined with
increased legal expenses incurred in connection with intellectual property
litigation. The U.S. sales and marketing increase is related to the growth
of U.S. sales and marketing efforts, expanded medical education and marketing
programs and a sales force expansion in late 1996.
Page 13 of 18
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (Continued)
Interest expense was $379,000 in the first six months of 1997 or $259,000
higher than the comparable 1996 period. The major reason for the increase is
interest expense related to a capital lease signed in December 1996.
Net Loss, Net Loss Applicable to Common Stock and Net Loss per Share of
Common Stock
The net loss for the 1997 second quarter of $8,550,000 increased by
$3,420,000 from the same prior year period. The net loss applicable to
Common Stock was $8,550,000 or $0.23 per share and $5,701,000 or $0.17 per
share for the second quarters 1997 and 1996, respectively. The primary
reasons for the increase in the net loss were the restructuring charges, the
provision for royalties under the University of Texas litigation settlement
and the write-off of certain capitalized costs due to the unfavorable results
of the Phase III study of VENTUSTM. These higher costs were partially offset
by the elimination of Preferred Stock dividends as a result of conversions of
Preferred Stock into Common Stock during 1996.
The net loss for the six months ended June 29, 1997 of $13,019,000 increased
by $3,798,000 from the same prior year period. The net loss applicable to
Common Stock of $13,019,000 for the period ended June 29, 1997 increased by
$2,565,000 versus the same prior year period. The net loss applicable to
Common Stock was $13,019,000 or $.36 per share and $10,454,000 or $.33 per
share for the first six months of 1997 and 1996, respectively. The major
reasons for the increase in the net loss were the restructuring charge, the
provision for royalties under the University of Texas litigation settlement
and the write-off of certain capitalized costs due to the unfavorable results
of the Phase III study of VENTUSTM. These higher costs were partially offset
by the elimination of Preferred Stock dividends as a result of conversions of
Preferred Stock into Common Stock during 1996.
Liquidity and Capital Resources
The Company had $55,787,000 in cash and marketable securities as of June 29,
1997. Included in these reserves were cash and cash equivalents of
$24,743,000, short-term investments of $14,114,000, long term investments in
marketable securities of $5,000,000 and restricted cash of $11,930,000. Both
short term and long term investments are available for sale. The Company
invests its cash reserves in a diversified portfolio of high-grade corporate
marketable and United States Government-backed securities.
Inventories at June 29, 1997 increased $7,255,000 from December 29, 1996, as
the Company produced ABELCET at both the Princeton and Indianapolis
Manufacturing facilities while awaiting final FDA approval of the lower cost
Indianapolis facility. Final FDA approval is expected in third quarter 1997.
The Company expects to reduce inventories to more optimal levels and as such,
may incur a deterioration in gross margins as the efficiencies of the new
Indianapolis manufacturing facility may not be realized until the fourth
quarter 1997.
Cash and marketable securities (both short and long-term) increased
$8,607,000 from December 29, 1996 to June 29, 1997, due to the issuance of
1,000,000 shares of Common Stock to a private investor resulting in the
receipt of $20,875,000, and the receipt of $2,145,000 from the exercise of
stock options. Partially offsetting the cash inflows are the use of funds for
operations, the net loss applicable to Common Stock (net of depreciation and
provision for severance) of $7,918,000, higher ABELCET inventory (planned
increases in inventory to facilitate the transfer of certain manufacturing
operations from Princeton to Indianapolis) of $7,255,000.
Page 14 of 18
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (Continued)
The Company entered into an agreement in December 1996 which provided for
equipment lease financing under a sale-leaseback arrangement. The equipment
is located primarily at the Indianapolis manufacturing facility. As of
December 29, 1996, the Company received $6,101,000 under this financing
agreement. The sale-leaseback financing is secured by a pledge of $5,000,000
aggregate principal amount of AAA rated securities, which are classified as
restricted cash on the Balance Sheet. The Company is required to maintain a
minimum balance of $25,000,000 in cash and marketable securities, including
those securities pledged in connection with the lease financing. In addition,
the Company completed a working capital revolving credit line agreement in
early 1997, which allows for a borrowing capacity of approximately
$14,000,000 secured by approved account receivables and inventories. There
have been no advances made against this line through the date of this report.
On April 23, 1997 the Company issued 1,000,000 shares of Common Stock at
$20.875 per share to a private investor for cash of $20,875,000. At the date
of this report, this investor has reported total holdings of approximately
24.99% of the Company's outstanding shares of Common Stock.
The Company expects to finance its operations and capital spending
requirements from, among other things, the proceeds received from product
sales, interest earned on investments and the proceeds from maturity or sale
of certain investments. Cash may also be provided to the Company by leasing
arrangements for capital expenditures, financing of receivables and inventory
under its line of credit, the licensing of its products and technology and
the sale of equity or debt securities. The Company believes that its product
revenues and revenues from other sources, coupled with its available cash and
marketable securities reserves, will be sufficient to meet its expected
operating and capital cash flow requirements for the intermediate term.
Page 15 of 18
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Risk Factors
This Quarterly Report on Form 10-Q contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934, and The Liposome
Company, Inc. (the "Company") intends that such forward-looking statements be
subject to the safe harbors created thereby. Examples of these forward-
looking statements include, but are not limited to, (i) the progress of
clinical trials, (ii) future marketing approvals, (iii) the expansion of
sales efforts, (iv) possible new licensing agreements, (v) the anticipated
outcome or financial impact of litigation, (vi) future product revenues,
(vii) the future uses of capital, and financial needs of the Company and
(viii) cost savings from restructuring. While these statements are made by
the Company based on management's current beliefs and judgment, they are
subject to risks and uncertainties that could cause actual results to vary.
In evaluating such statements, stockholders and investors should specifically
consider a number of factors and assumptions, including those discussed in
the text and the financial statements and their accompanying footnotes in
this Report.
Among these factors and assumptions that could affect the forward-looking
statements in this Report are the following: (a) the Company is experiencing
a rapid period of growth, and it is uncertain as to whether the rate of
growth can be maintained; (b) the commercialization of ABELCET, is in an
early stage and the ultimate rate of sales of ABELCET is uncertain; (c) the
Company's other products have not yet received regulatory approvals for sale,
and it is difficult to predict when approvals will be received and, if
approved, whether the products can be successfully commercialized; (d)
competitors of the Company have developed and are developing products that
are competitive with the Company's products, and the Company will be
dependent on the success of its products in competing with these other
products; (e) the rate of sales of the Company's products could be affected
by regulatory actions, decisions by government health administration
authorities or private health coverage insurers as to the level of
reimbursement for the Company's products, and risks associated with
international sales, such as currency exchange rates, currency controls,
tariffs, duties, taxes, export license requirements and foreign regulations;
(f) the levels of protection afforded by the Company's patents and other
proprietary rights is uncertain and may be challenged; and (g) the Company
has incurred losses in each year since its inception and there can be no
assurance of profitability in any future period.
Page 16 of 18
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. The Company is involved in lawsuits, claims, investigations and
proceedings, including patent, commercial, and environmental
matters, which arise in the ordinary course of business. There are
no such matters pending that the Company expects to be material in
relation to its business, financial condition, cash flows, or
results of operations. The Company has recently settled its
litigation with the University of Texas and NeXstar
Pharmaceuticals, Inc. See Notes to Consolidated Financial
Statements under "Unusual Charges" with respect to the University
of Texas settlement and "Subsequent Events" with respect to the
NeXstar Pharmaceuticals, Inc. settlement.
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) An annual meeting of stockholders of the Company was held on May 15,
1997.
(c) All members of the Board of Directors were re-elected at the annual
meeting. The following votes were cast for and withheld from each
nominee:
For Withheld
Charles A. Baker 31,101,120 193,423
James G. Andress 31,101,620 192,923
Morton Collins 31,101,320 193,223
Stuart F. Feiner 31,101,120 193,423
Robert F. Hendrickson 31,101,620 193,923
Bengt Samuelsson 31,101,620 193,923
Joseph T. Stewart 31,101,120 193,423
Gerald Weissmann 31,101,120 193,423
Horst Witzel 31,101,620 193,923
The appointment of Coopers & Lybrand L.L.P. as the Company's
independent accountants for the fiscal year ending December 28,
1997 was ratified by a vote of 31,164,916 affirmative votes and
35,667 negative votes, with 93,960 shares abstaining.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
On June 25, 1997, the Company filed a report on Form 8-K regarding the
results of a Phase III clinical trial of VENTUSTM, liposomal
prostaglandin E-1, as a treatment for acute respiratory distress
syndrome.
Page 17 of 18
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
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.
DATE: August 13, 1997
THE LIPOSOME COMPANY, INC.
By:
Charles A. Baker
Chairman of the Board and
Chief Executive Officer
By:
Brian J. Geiger
Vice President and
Chief Financial Officer
Page 18 of 18
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
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.
DATE: August 13, 1997
THE LIPOSOME COMPANY, INC.
By: /s/ Charles A. Baker
Charles A. Baker
Chairman of the Board and
Chief Executive Officer
By: /s/ Brian J. Geiger
Brian J. Geiger
Vice President and
Chief Financial Officer
Page 18 of 18
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<PERIOD-END> JUN-29-1997
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