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 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period ended September 27, 1998 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 November 4, 1998
Common Stock, $.01 par value 38,224,065
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE NO.
Part I. FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of
September 27, 1998 and December 28, 1997 3
Consolidated Statements of Operations
for the Three and Nine Month Periods Ending
September 27, 1998 and September 28, 1997 4
Consolidated Statements of Cash Flows
for the Nine Month Periods Ending
September 27, 1998 and September 28, 1997 5
Notes to Consolidated Financial Statements 6-7
ITEM 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-17
Part II. OTHER INFORMATION 18
Signatures 19
************************************************
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 19
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
ASSETS
Current assets: 9/27/98 12/28/97
Cash and cash equivalents $ 24,160 $ 15,236
Short-term investments 13,078 18,359
Accounts receivable, net of allowance for doubtful
accounts ($508 for 1998, $1,285 for 1997) 6,406 7,150
Inventories 5,307 10,530
Prepaid expenses 948 1,034
Other current assets 563 216
Total current assets 50,462 52,525
Property, plant and equipment, net 23,792 26,652
Restricted cash 11,930 11,930
Intangibles, net 349 393
Total assets $ 86,533 $ 91,500
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,200 $ 2,616
Accrued expenses and other current liabilities 7,042 6,009
Current obligations under capital leases 2,048 2,031
Current obligations under note payable 303 303
Total current liabilities 11,593 10,959
Long-term obligations under capital leases 5,050 5,996
Long-term obligations under note payable 656 883
Total liabilities 17,299 17,838
Commitments and contingencies
Stockholders' equity:
Capital stock:
Common Stock, par value $.0l; 60,000 shares authorized;
38,071 and 37,663 shares issued and outstanding 381 377
Additional paid-in capital 264,259 262,637
Accumulated other comprehensive loss (330) (508)
Accumulated deficit (195,076) (188,844)
Total stockholders' equity 69,234 73,662
Total liabilities and stockholders' equity $ 86,533 $ 91,500
See accompanying notes
Page 3 of 19
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
9/27/98 9/28/97 9/27/98 9/28/97
Product sales $ 17,638 $ 13,115 $ 52,885 $ 42,740
Collaborative research and development
revenues........... -- 531 -- 2,331
Interest, investment and other income 1,009 2,404 3,081 3,487
Total revenues ................. 18,647 16,050 55,966 48,558
Cost of goods sold 5,220 7,091 15,243 15,621
Research and development expense..... 5,520 6,627 21,293 21,470
Selling, general and administrative
expense... 8,027 8,366 25,063 30,141
Interest expense...................... 188 169 599 548
Total expenses ................. 18,955 22,253 62,198 67,780
Net loss............ ........... $ (308) $(6,203) $(6,232)$(19,222)
Net loss per share (basic & diluted) $ (0.01) $ (0.17) $ (0.16) $ (0.52)
Weighted average number of common
shares outstanding (basic & diluted) 38,050 37,430 37,963 36,850
See accompanying notes
Page 4 of 19
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
9/27/98 9/28/97
Cash flows from operating activities:
Net loss $ (6,232) $ (19,222)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 4,529 3,742
Provision for bad debts 302 254
Other 1,721 1,033
Changes in assets and liabilities
Accounts receivable 442 2,375
Inventories 5,223 (3,828)
Prepaid expenses 86 242
Other current assets (347) (156)
Accounts payable (416) (29)
Accrued expenses and other current liabilities 1,033 (1,412)
Net cash provided/(used) by operating activities 6,341 (17,001)
Cash flows from investing activities:
Purchases of short-term and long-term investments (8,315) (22,347)
Sales of short-term and long-term investments... 13,694 41,637
Restricted cash... -- (5,000)
Purchases of property, plant and equipment (1,288) (1,561)
Net cash provided by investing activities 4,091 12,729
Cash flows from financing activities:
Expenses related to registration of Common Stock -- (158)
Exercises of stock options 63 2,251
Proceeds from issuance of Common Stock -- 20,875
Principal payments under note payable (227) (227)
Principal payments under capital lease obligations (1,424) (1,751)
Net cash (used)/provided by financing activities (1,588) 20,990
Effects of exchange rate changes on cash __ 80 156
Net increase in cash and cash equivalents 8,924 16,874
Cash and cash equivalents at beginning of the period 15,236 1,841
Cash and cash equivalents at end of the period $ 24,160 $ 18,715
See accompanying notes
Page 5 of 19
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The information presented at September 27, 1998, and for the three and nine
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 28, 1997
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 28, 1997, 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
September 27, 1998 and the comparable prior year period, weighted average
shares were 38,050,000 and 37,430,000, respectively. The increase for the
three month period is due primarily to the impact of the issuance of
restricted stock, 401K contributions and the exercise of stock options. For
the nine month period ended September 27, 1998 and September 28, 1997,
weighted average shares were 37,963,000 and 36,850,000, respectively. The
increase for the nine month period is due primarily to the impact of shares
issued to a private investor, the exercise of stock options and the issuance
of restricted stock. On April 23, 1997 the Company issued 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
24.47% of the Company's outstanding Common Stock.
Options and warrants to purchase 5,802,229 shares of Common Stock at a range
of $1.03 to $24.38 per share were outstanding during 1998 but were not
included in the computation of diluted earnings per share because the effect
would be anti-dilutive to the net loss. The options and warrants expire on
various dates from September 30, 1998 to September 21, 2008.
3. Comprehensive Income
The Company has adopted the Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". Comprehensive Income represents the change in net
assets of a business enterprise as a result of nonowner transactions. The
following table details "Comprehensive Income" as defined in SFAS No. 130 for
the three and nine month periods ended September 27, 1998 and September 28,
1997.
Three Months Ended:
9/27/98 9/28/97
Net loss $ (308) $(6,203)
Other comprehensive income/(expenses):
Net unrealized investment gain 1 214
Foreign currency translation adjustment 186 (36)
Comprehensive net loss $ (121) $ (6,025)
Page 6 of 19
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended:
9/27/98 9/28/97
Net loss $ (6,232) $(19,222)
Other comprehensive income/(expenses):
Net unrealized investment gain 98 341
Foreign currency translation adjustment 80 156
Comprehensive net loss $ (6,054) $ (18,725)
4. Recently Issued Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 requires that a business
enterprise report certain information about operating segments, products and
services, geographic areas of operation, and major customers in complete sets
of financial statements and in condensed financial statements for interim
periods. The Company is required to adopt this standard in the 1998 year-end
and is currently evaluating the impact of the standard.
5. 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:
September 27, December 28,
1998 1997
Finished goods $ 2,696,000 $ 1,849,000
Work in process 887,000 4,715,000
Raw materials 1,482,000 3,378,000
Supplies 242,000 588,000
$ 5,307,000 $10,530,000
6. Supplemental Disclosure of Cash Flow Information
Nine Months Ended:
9/27/98 9/28/97
Cash paid during the year for interest $654,000 $548,000
Page 7 of 19
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The Liposome Company, Inc. (the "Company") is a biopharmaceutical company
engaged in the discovery, development, manufacturing and marketing of
proprietary lipid- and liposome-based pharmaceuticals, primarily for the
treatment of cancer and other related 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 20 foreign markets and is the subject of marketing application
filings in several other countries. In the United States, ABELCET? has been
approved for the treatment of invasive fungal infections in patients who are
refractory to or intolerant of conventional amphotericin B therapy.
International approvals have been received for primary and/or refractory
treatment of these infections. Currently all product sales are
derived from ABELCET?.
In the U.S., Canada, Switzerland and the United Kingdom, the Company markets
ABELCET? with its own sales force. For other countries, the Company's general
strategy is to market ABELCET? through marketing partners. Specific marketing
partnerships are determined on a country-by-country basis. In addition, sales
are realized on a "named patient" basis in certain countries where marketing
approvals have not yet been received.
The Company is developing EVACETTM (formerly TLC D-99), liposomal doxorubicin,
as a treatment for metastatic breast cancer and potentially other cancers. The
Company has conducted two Phase III clinical studies comparing EVACETTM to
conventional doxorubicin as a single agent and in combination with
cyclophosphamide, another commonly used chemotherapeutic agent. Results of an
interim analysis at the halfway point of the single agent study indicate that
EVACETTM is significantly less cardiotoxic than conventional doxorubicin with
essentially equal tumor response rates. The Company expects to file a New Drug
Application ("NDA") for EVACETTM with the U.S. Food and Drug Administration
("FDA") at the end of 1998.
The Company completed preclinical toxicology studies of TLC ELL-12 (liposomal
ether lipid), a new anticancer drug that may have applications for the treatment
of many different cancers. On October 27, 1998 the Company announced that the
FDA has cleared the Investigational New Drug application ("IND") for this
product. This novel drug acts against tumor cells by a mechanism not shared by
any currently available anticancer drug. A Phase I clinical trial has been
designed to enroll adult patients with advanced solid tumors, including
non-small cell lung, prostate and melanoma. The Company expects to commence
this trial by the end of 1998.
The Company has a continuing discovery research program concentrating on
oncology treatment and has a number of products in research. These products
include: the bromotaxols (hydrophobic derivatives of paclitaxel), some of which
have shown anticancer activity in several experimental models; ceramides and
sphingosines (molecules widely implicated in cell differentiation and apoptosis)
certain of which the Company has identified as displaying anticancer activity;
and fusogenic liposomes (liposomes specifically designed to fuse to cell
membranes), which the Company hopes to use for the efficient delivery of genes
to their intended targets.
Page 8 of 19
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview (Continued)
On June 25, 1997, the Company announced results of a Phase III study of VENTUSTM
as a 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 does
not intend to perform any further significant development of VENTUSTM for this
indication but, instead, intends to make VENTUSTM available for licensing to
another company.
Following the results of the VENTUSTM study, the Company announced its intention
to focus its resources on the development of an oncology franchise. As part of
implementing this strategy, the Company restructured its operations to focus
the organization on the development and marketing of oncology and related
pharmaceuticals. The restructuring eliminated 137 positions, which resulted in
unusual charges of $2,550,000 in the second quarter of 1997. The annualized
benefit of the restructuring is approximately $8,000,000.
Additionally, in order to gain operational access to a second, potentially
significant oncology-related drug, the Company reacquired, on July 14, 1997,
all development, manufacturing and marketing rights to EVACETTM from Pfizer Inc
("Pfizer"), which had previously been co-developing EVACETTM with the Company.
The Company assumed control and the cost of all clinical studies, including the
ongoing Phase III clinical studies that were previously being conducted by
Pfizer. Pfizer will receive royalties on worldwide (except Japan) commercial
sales of EVACETTM.
In July and August 1997, the Company entered into agreements to settle patent
litigation with the University of Texas and M.D. Anderson Cancer Center ("UT")
and with NeXstar Pharmaceuticals, Inc. and Fujisawa U.S.A., Inc. ("NeXstar").
Under the UT settlement the Company received an exclusive license under UT's
patent, paid past royalties on sales of ABELCET?, agreed to pay royalties on
future sales, and issued to UT a ten-year warrant to purchase 1,000,000 shares
of the Company's Common Stock at $15.00 per share. Under the NeXstar settlement,
the Company received a payment of $1,750,000 in the third quarter of 1997 and
began receiving quarterly minimum payments (classified as interest, investment
and other income) based on AmBisome sales commencing in the first quarter of
1998.
On April 22, 1998 the Company announced it had entered into a three year
contract manufacturing agreement with Astra USA, Inc. ("Astra"). The Company
will process and package Astra's M.V.I.?-12 Unit Vial, an injectable multi-
vitamin product used by severely ill hospitalized patients in need of
nutritional supplements. The product will be processed and packaged at the
Company's Indianapolis facility, taking advantage of its modern, large-scale
capabilities. Under the terms of the agreement, Astra will supply bulk
quantities of the vitamin product and the Company will sterilize, fill, package
and perform quality control on M.V.I.?-12 Unit Vial. The Company expects to
record revenues related to Astra commencing in the fourth quarter of 1998.
Page 9 of 19
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Revenues
- Three Months Ended September 27, 1998:
Total revenues for the quarter ended September 27, 1998 were $18,647,000 an
increase of $2,597,000 or 16.2% compared to $16,050,000 for the quarter ended
September 28, 1997. The primary components of 1998 revenues for the Company are
product sales of ABELCET? and interest, investment and other income. In
addition, collaborative research and development revenue was also included
during the 1997 period, primarily due to the EVACETTM co-development
agreement with Pfizer.
Net product sales of ABELCETr for the third quarter ended September 27, 1998
were $17,638,000 compared to $13,115,000 for the third quarter of 1997. The
sales increase of $4,523,000 or 34.5%, is due primarily to higher U.S. sales
volume and additional marketing clearance in major European countries and
Canada. Unit shipments of ABELCETr worldwide increased by 39.0% over the
comparable prior year period. The disparity between increases in unit volume
terms and dollar terms is due to several factors as discussed below.
Domestic sales in the third quarter of 1998 were $14,361,000, an increase of
$2,869,000 or 25.0% from the comparable prior year period. Unit shipments
increased 23.5% compared to the prior year period. During the second quarter of
1997, the Company instituted a tiered pricing program in response to a
competitor, by offering discounts to high volume purchasers. The Company
believes that this program served to stimulate significantly greater demand
for ABELCET?. Also contributing to the change is a price increase instituted
by the Company to its domestic customers effective July 1, 1998. The Company
provides a reserve for the impact on sales for rebates and chargebacks and
periodically evaluates the estimates used in establishing the reserve in
order to make necessary adjustments. The provision for the three months
ended September 27, 1998 was approximately $7,161,000.
International product sales were $3,277,000 in the third quarter of 1998 versus
$1,623,000 in the third quarter of 1997. The majority of the increase is due
to the impact of the launch of ABELCET? in late 1997 in France, Italy and
Canada, combined with ABELCET? sales growth in the UK and Spain. While
international sales revenues increased by 101.9%, unit volume increased by
158.8%. The principal reason for this difference is the mix of sales to end
users (i.e. direct distribution) in certain countries and to marketing
partners in others.
Collaborative research and development revenues for the third quarter of 1998
were $0 compared to $531,000 in the third quarter of 1997. This is due to the
cessation of development funding by Pfizer pursuant to the July 14, 1997
agreement in which the Company reacquired all development, manufacturing and
marketing rights to EVACETTM from Pfizer.
Interest, investment and other income for the three months ended September 27,
1998 and September 28, 1997 were $1,009,000 and $2,404,000, respectively. The
decrease of $1,395,000 or 58.0% is primarily due to the receipt of an initial
royalty payment from NeXstar of $1,750,000 in connection with the settlement of
certain patent litigation in 1997. In the third quarter of 1998, the Company
recognized a minimum quarterly royalty of $437,500 pursuant to the terms of the
litigation settlement.
Page 10 of 19
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (Continued)
- Nine Months Ended September 27, 1998:
Total revenues for the nine months ended September 27, 1998 were $55,966,000,
an increase of $7,408,000 or 15.3% compared to $48,558,000 for the nine months
ended September 28, 1997. The primary components of 1998 revenues for the
Company are product sales of ABELCET? and interest, investment and other income.
In addition, collaborative research and development revenue was also included
during the 1997 period, primarily due to the EVACETTM co-development agreement
with Pfizer.
Net product sales of ABELCET? for the nine months ended September 27, 1998 were
$52,885,000 compared to $42,740,000 for the comparable prior year of 1997. The
sales increase of $10,145,000 or 23.7%, is due primarily to higher U.S. sales
volume and additional marketing clearance in major European countries and
Canada. Unit shipments of ABELCET? worldwide increased by 48.2% over the
comparable prior year period. The disparity between increases in unit volume
terms and dollar terms is due to several factors as discussed below.
Domestic sales in the first nine months of 1998 were $42,555,000, an increase
of 14.7% from the comparable prior year period while unit shipments increased
35.2%. This growth was achieved despite the partial year impact of the U.S.
tiered pricing program instituted in the second quarter of 1997. The tiered
pricing program is effected by chargebacks paid to wholesalers based on their
sales at contract prices to targeted hospitals. The Company believes that this
program served to stimulate significantly greater demand for ABELCET?. 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 and periodically evaluates the estimates used in
establishing the reserve in order to make necessary adjustments.
The provision for the nine months ended September 27, 1998 was approximately
$19,213,000.
International product sales were $10,330,000 for the first nine months of 1998
versus $5,628,000 in the comparable prior year period. The major growth
components of the change were the impact of the launch of ABELCET? in late 1997
in France, Canada and Italy, combined with more normal ordering patterns in
Spain. While international sales revenues increased by 83.5%, unit volume
increased by 134.1%. The principal reason for this difference is the mix of
sales to end users (i.e. direct distribution) in certain countries and to
marketing partners in others.
Page 11 OF 19
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 for 1998 were $0 and $2,331,000
for the 1997 period. The change is due to the cessation of development funding
by Pfizer pursuant to the July 14, 1997 agreement in which the Company
reacquired all development, manufacturing and marketing rights to EVACETTM from
Pfizer.
Interest, investment and other income for the nine months ended September 27,
1998 and September 28, 1997 were $3,081,000 and $3,487,000, respectively. The
decrease of $406,000 or 11.6% is primarily due to the $1,750,000 receipt of an
initial payment from NeXstar relating to the settlement of certain patent
litigation in 1997. During the first nine months of 1998, the Company
recognized a minimum royalty for each quarter.
Due to the Company's reacquisition of rights in EVACETTM from Pfizer, the
Company anticipates there will be no collaborative research and development
revenues in future quarters, as it currently has no other agreements in place.
In future quarters, the Company anticipates recognition of income related to
a manufacturing agreement with Astra. The anticipated revenues from interest
and investment income will be related to the level of cash balances available
for investment and the rate of interest earned.
Expenses
- - Three Months Ended September 27, 1998:
The components of total expenses for the quarter ended September 27, 1998 were
cost of goods sold, research and development, selling, general and
administrative and interest expense. Total expenses for the quarter ended
September 27, 1998 were $18,955,000, a decrease of $3,298,000 from the
comparable prior year period.
Cost of goods sold for the quarter ended September 27, 1998 was $5,220,000 or
$1,871,000 lower than the comparable prior year period. The significant
decrease was due to lower standard cost in 1998 from the more efficient
Indianapolis facility combined with the impact of the Company's decision not to
manufacture ABELCET? during the third quarter of 1997. As a result of this
decision, certain manufacturing overhead and fixed costs for Indianapolis were
reflected in cost of goods sold in the 1997 period. Partially offsetting
the decrease is the impact of the higher sales volume in the 1998 period.
Gross margin in the 1998 period was 70.4% compared to 45.9% in the 1997
period, an improvement of 24.5 percentage points.
Research and development expense was $5,520,000 for the third quarter of 1998,
compared to $6,627,000 for the prior year period. The reduction is due to lower
spending related to the pivotal Phase III clinical trials of EVACET?, which are
nearing completion, for which the Company expects to file a NDA with the FDA
later this year. Partially offsetting this reduction is increased research and
development activity for TLC ELL-12 and the late 1997 reorientation of the
Princeton manufacturing facility to the production of clinical supplies.
Page 12 of 1
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (Continued)
Selling, general and administrative expenses for the quarter ended September 27,
1998 were $8,027,000 compared to $8,366,000 in 1997. The principal reasons for
the decrease of $339,000 was the elimination of litigation costs relating to
the University of Texas and NeXstar lawsuits.
Interest expense was $188,000 in the third quarter of 1998 and $169,000 in the
third quarter of 1997. Interest expense is related to capital leases for the
Princeton and Indianapolis manufacturing equipment and the mortgage on the
Indianapolis building.
- Nine Months Ended September 27, 1998:
The components of total expenses for the nine months ended September 27, 1998
were cost of goods sold, research and development, selling, general and
administrative and interest expenses. Total expenses for the nine months ended
September 27, 1998 were $62,198,000, a decrease of $5,582,000 over the
comparable prior year period.
Cost of goods sold for the nine months ended September 27, 1998 was $15,243,000
or $378,000 lower than the comparable prior year period. The decrease in cost of
goods sold is primarily due to the lower manufacturing costs related to the high
volume efficiencies at the Indianapolis facility, combined with the absence of
manufacturing in the third quarter of 1997 (as previously discussed with respect
to the three months ended September 27, 1998). The reduction in cost of goods
sold was partially offset by the impact of higher sales volume in 1998 of 48.2%
year to year. Gross margin in the 1998 period was 71.2% compared to 63.5% in the
1997 period.
Research and development expense was $21,293,000 for the nine months ended
September 27, 1998, compared to $21,470,000 for the comparable prior year
period. The change is due to the Company's reacquisition of EVACET? from Pfizer
in 1997, increased research and development activity for TLC Ell-12 and the
reorientation of the Princeton manufacturing facility to the production of
clinical supplies in late 1997. Offsetting those increases is the absence of
spending for VENTUSTM in the 1998 period.
Selling, general and administrative expenses for the nine months ended September
27, 1998 were $25,063,000 compared to $30,141,000 in 1997. The principal reasons
for the decrease of $5,078,000 were the absence in 1998 of the restructuring
charge of $2,550,000 recorded in the second quarter of 1997, and the elimination
of litigation costs relating to the University of Texas and NeXstar lawsuits.
Interest expense was $599,000 in the first nine months of 1998 and $548,000 in
the 1997 period. Interest expense is related to capital leases for the
Princeton and Indianapolis manufacturing equipment and the mortgage on the
Indianapolis building.
Page 13 of 19
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (Continued)
Net Loss and Net Loss per Share
The net loss was $308,000 or $0.01 per share (basic and diluted) and $6,203,000
or $0.17 per share (basic and diluted) for the third quarters of 1998 and 1997,
respectively. Weighted average shares used in the per share calculations were
38,050,000 in the 1998 period and 37,430,000 in the 1997 period. The number of
shares of Common Stock used in each period to calculate basic and diluted loss
per share were identical as the Company was in a loss position in all the
periods and the inclusion of contingently issuable shares would have been anti-
dilutive.
The net loss was $6,232,000 or $0.16 per share (basic and diluted) and
$19,222,000 or $0.52 per share (basic and diluted) for the nine month periods of
1998 and 1997, respectively. Weighted average shares used in the per share
calculations were 37,963,000 in the 1998 period and 36,850,000 in the 1997
period.
Liquidity and Capital Resources
The Company had $49,168,000 in cash and marketable securities as of September
27, 1998. Included in this amount were cash and cash equivalents of $24,160,000,
short-term investments of $13,078,000 and restricted cash of $11,930,000. The
Company invests its cash reserves in a diversified portfolio of high-grade
corporate marketable and United States Government-backed securities.
Cash and marketable securities (both short-term and restricted cash) increased
$3,643,000 from December 28, 1997 to September 27, 1998. The primary components
of the favorable impact on cash flow were the lower inventory balance of
$5,223,000, the higher accrued liabilities balance of $1,033,000 and the lower
accounts receivable balance of $744,000. The major uses of funds were the net
loss (net of depreciation and amortization) of $1,703,000 and the capital lease
and note payable payments of $1,651,000.
Inventories at September 27, 1998 decreased $5,223,000 from December 28, 1997.
During 1997, the Company completed its plan to shift manufacturing of ABELCET?
from Princeton to a new, more cost efficient facility in Indianapolis, Indiana.
In order to ensure a smooth transition, the Company increased its inventory of
ABELCET? during the first half of 1997. FDA approval of the Indianapolis
facility was received during the third quarter of 1997, and the Company has
reoriented the Princeton manufacturing facility to the production of clinical
supplies. As planned, the Company has reduced inventories to levels consistent
with demand for ABELCET?.
Accrued expenses and other current liabilities at September 27, 1998 were
$7,042,000 or $1,033,000 higher than December 28, 1997. The major component of
the increase is the higher clinical trial accruals and expenses related to
higher sales volume.
Page 14 of 19
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (Continued)
In July 1993, the Company entered into a capitalized lease financing agreement
for certain manufacturing equipment providing for an initial lease term followed
by options to extend the lease, or to return or purchase the equipment. In
December 1996, the agreement was amended to include an additional $6,101,000 of
manufacturing equipment. In November 1997 and January 1998, the Company
exercised its options to purchase certain manufacturing equipment under the
original 1993 lease for $1,583,000 and $495,000, respectively. These amounts
have been re-financed as a capital lease obligation under the lease
agreement for a three-year period. The lease is collateralized by $4,310,000
in standby letters of credit which are in return collateralized by AAA rated
securities owned by the Company. Pursuant to the December 1996 lease
amendment, the Company is required to maintain a minimum balance of
$25,000,000 in cash and marketable securities, including those securities
collateralizing the letters of credit. In addition, the Company completed a
U.S. working capital revolving credit line agreement in early 1997, with a
maximum capacity of $14,000,000. All borrowings must be secured by approved
accounts receivable and finished goods inventories. The Company has a pledge of
$5,000,000 to support this agreement, which has been classified as restricted
cash. There have been no advances made against this line through the date of
this report.
As part of the agreement to repurchase the development, manufacturing and
marketing rights to EVACETTM, the Company has obtained from Pfizer a credit line
of up to $10,000,000 to continue the development of EVACETTM. To the extent
that any funding is actually used by the Company, the outstanding principal and
interest would be repayable on the earlier of 180 days after FDA clearance to
market EVACETTM or in twenty quarterly installments commencing July 14, 2002.
Pfizer at its option may elect to receive payment in the form of shares of
Common Stock.
The Company has a mortgage-backed note to partially fund the purchase of the
Indianapolis manufacturing facility. The principal balance outstanding at
September 27, 1998 is $959,000.
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 24.47% 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, a line of credit from a former licensing partner, 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 19
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Year 2000 Compliance
The Year 2000 computer issue ("Y2K") refers to a condition in computer software
where a two digit field rather than a four digit field is used to distinguish a
calendar year. For example, 1998 would be stored as "98", rather than "1998".
The basic problem is that when the year changes from 1999 (99) to the year 2000
(00), some computer programs will be unable to distinguish the correct date.
Such a situation could significantly interfere with the conduct of the Company's
business, disrupt its operations and materially impact its financial condition.
In order to address this situation, the Company has conducted a Year 2000
assessment of its core business information systems including a wide variety of
other information systems and related business processes (hereinafter,
collectively referred to as the "Systems") used in its operations. The goal of
the assessment was to identify and determine the Y2K readiness of the Company's
Systems. The task of assessing the Systems from a Y2K readiness perspective has
been substantially accomplished. Accordingly, the Company has developed a
comprehensive remediation plan and scheduled the necessary hardware,
software, and sub-component upgrades to remediate non-Y2K compliant systems.
The Systems investigated were categorized into three areas. The first
category involves the traditional management information systems that
include computers, telecommunication devices, application software,
operating system software, and related peripherals. The second category
involves manufacturing and facility systems including machines and devices used
to manufacture, store, and test the Company's product. It also includes the
systems that control and monitor the Company's facilities such as HVAC, fire
suppression, and elevators. The third category involves research systems
including computer-controlled devices, calibration equipment, and similar
instruments. The Company uses no older legacy or proprietary systems in its
operations as a result of recent technology initiatives. Consequently, the
Company believes that all existing non-Y2K compliant systems will be
remediated by the third quarter of 1999.
In addition to the assessment of the Systems, key suppliers and customers have
been identified. A survey form was developed and has been sent to each of these
business entities in order to determine if their systems are Y2K compliant.
This is significant since delays in the shipment and receipt of critical
supplies can impact the Company's production. Problems would also exist if
customers become unable to pay for the Company's product (e.g., their accounts
payable system fails) or if they cannot electronically order, store, or track
product in compliance with FDA requirements. The Company is proactively
addressing the Y2K issue with these vendors and suppliers in order to
minimize risk from these external factors.
Based on the assessment of its Systems, the Company believes that the costs of
addressing the Y2K issue will be less than $300,000. However, if key third
parties such as suppliers and customers are not Y2K ready, Y2K problems could
have a material adverse impact on the Company's business and its financial
condition.
Page 16 of 19
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 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 and preclinical studies regarding EVACETT,
TLC ELL-12 and other oncology products, (ii) the timing of filing a New Drug
Application for EVACETT, (iii) future regulatory approvals for EVACETT, (iv)
the expansion of sales efforts regarding ABELCETr, (v) possible new licensing
agreements, (vi) future product revenues, (vii) the future uses of capital,
and financial needs of the Company, (viii) cost savings from restructuring,
(ix) manufacturing efficiencies and other benefits to be realized from use of
the Indianapolis facility; (x) the recording of revenues relating to the
Astra contract in the fourth quarter of 1998; and (xi) resolution of Year
2000 computer issues. 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 commercialization of
ABELCET? is still in its early stage and the ultimate rate of sales of ABELCET?
is uncertain; (b) 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; (c) 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; (d) 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;
(e) key customers, vendors and suppliers of the Company will be Y2K
compliant; (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 17 of 19
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
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.
ITEM 6. Exhibits and Reports on Form 8K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter for which this report on Form 10-Q is filed, no reports on
Form 8-K have been filed.
Page 18 of 19
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: November 9, 1998
THE LIPOSOME COMPANY, INC.
By:
Charles A. Baker
Chairman of the Board and
Chief Executive Officer
By:
Lawrence R. Hoffman
Vice President and
Chief Financial Officer
Page 19 of 19
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: November 9, 1998
THE LIPOSOME COMPANY, INC.
By: /s/ Charles A. Baker
Charles A. Baker
Chairman of the Board and
Chief Executive Officer
By: /s/ Lawrence R. Hoffman
Lawrence R. Hoffman
Vice President and
Chief Financial Officer
Page 19 of 19
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