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 June 28, 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 August 7, 1998
Common Stock, $.01 par value 38,017,256
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 28, 1998 and December 28, 1997 3
Consolidated Statements of Operations
for the Three and Six Month Periods Ending
June 28, 1998 and June 29, 1997 4
Consolidated Statements of Cash Flows
for the Six Month Periods Ending
June 28, 1998 and June 29, 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: 6/28/98 12/28/97
Cash and cash equivalents $ 25,373 $ 15,236
Short-term investments 7,118 15,359
Accounts receivable, net of allowance for doubtful
accounts ($1,285 for 1998, $1,285 for 1997) 8,375 7,150
Inventories 6,268 10,530
Prepaid expenses 739 1,034
Other current assets 130 216
Total current assets 48,003 49,525
Long-term investments 2,000 3,000
Property, plant and equipment, net 25,019 26,652
Restricted cash 11,930 11,930
Intangibles, net 360 393
Total assets $ 87,312 $ 91,500
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,473 $ 2,616
Accrued expenses and other current liabilities 7,354 6,009
Current obligations under capital leases 2,005 2,031
Current obligations under note payable 303 303
Total current liabilities 12,135 10,959
Long-term obligations under capital leases 5,578 5,996
Long-term obligations under note payable 732 883
Total liabilities 18,445 17,838
Commitments and contingencies
Stockholders' equity:
Capital stock:
Common Stock, par value $.0l; 60,000 shares authorized;
38,008 and 37,663 shares issued and outstanding 380 377
Additional paid-in capital 263,772 262,637
Accumulated other comprehensive loss (517) (508)
Accumulated deficit (194,768) (188,844)
Total stockholders' equity 68,867 73,662
Total liabilities and stockholders' equity $ 87,312 $ 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 Six Months Ended
6/28/98 6/29/97 6/28/98 6/29/97
Product sales $ 19,203 $ 15,220 $ 35,247 $ 29,625
Collaborative research and development
revenues........... 0 900 0 1,800
Interest, investment and other income 1,022 534 2,072 1,083
Total revenues................. 20,225 16,654 37,319 32,508
Cost of goods sold 5,224 5,080 10,023 8,530
Research and development expense..... 7,481 7,528 15,773 14,843
Selling, general and administrative
expense... 8,167 12,418 17,036 21,775
Interest expense...................... 200 178 411 379
Total expenses................. 21,072 25,204 43,243 45,527
Net loss applicable to Common Stock $(847) $(8,550) $(5,924) $(13,019)
Net loss per share applicable to
Common Stock (basic & diluted) $(0.02) $(0.23) $(0.16) $(0.36)
Weighted average number of common
shares outstanding (basic & diluted) 37,992 36,988 37,919 36,560
See accompanying notes
Page 4 of 19
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
6/28/98 6/29/97
Cash flows from operating activities:
Net loss $ (5,924) $ (13,019)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 3,020 2,551
Provision for bad debts 0 165
Provision for severance 0 2,550
Other 1,117 711
Changes in assets and liabilities
Accounts receivable (1,225) 721
Inventories 4,262 (7,255)
Prepaid expenses 295 (127)
Other current assets 86 (161)
Accounts payable (143) 1,123
Accrued expenses and other current liabilities 1,345 402
Net cash provided/(used) by operating activities 2,833 (12,339)
Cash flows from investing activities:
Purchases of short- and long-term investments (2,306) (16,791)
Sales of short- and long-term investments... 11,644 36,213
Restricted cash... 0 (5,000)
Purchases of property, plant and equipment (859) (962)
Net cash provided by investing activities 8,479 13,460
Cash flows from financing activities:
Expenses related to registration of Common Stock 0 (119)
Exercises of stock options 21 2,145
Proceeds from issuance of Common Stock 0 20,875
Principal payments under note payable (151) (152)
Principal payments under capital lease obligations (939) (1,160)
Net cash (used)/provided by financing activities (1,069) 21,589
Effects of exchange rate changes on cash (106) 192
Net increase in cash and cash equivalents 10,137 22,902
Cash and cash equivalents at beginning of the period 15,236 1,841
Cash and cash equivalents at end of the period $ 25,373 $ 24,743
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 June 28, 1998, 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 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 June 28, 1998 and the comparable prior year
period, weighted average shares were 37,992,000 and 36,988,000,
respectively. For the six month periods ended June 28, 1998 and
June 29, 1997, weighted average shares were 37,919,000 and
36,560,000, respectively. The increases for both the three and
six month periods are due primarily to the impact of shares
issued to a private investor and the exercise of stock options.
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 24.60% of the Company's outstanding Common Stock.
Options and warrants to purchase 5,760,007 shares of Common Stock
at $1.03 - $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 July 6, 1998 to
June 26, 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 six month periods ended June 28, 1998.
Three Months Ended:
6/28/98 6/29/97
Net loss applicable to Common Stock $ (847) $(8,550)
Other comprehensive income/(expenses):
Net unrealized investment gain 29 164
Foreign currency translation adjustment (25) 78
Comprehensive net loss $ (843) $(8,308)
Page 6 of 19
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended:
6/28/98 6/29/97
Net loss applicable to Common Stock $ (5,924) $(13,019)
Other comprehensive income/(expenses):
Net unrealized investment gain 97 127
Foreign currency translation adjustment (106) 192
Comprehensive net loss $ (5,933) $ (12,700)
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:
June 28,1998 December 28, 1997
Finished goods $ 2,469,000 $ 1,849,000
Work in process 1,352,000 4,715,000
Raw materials 1,812,000 3,378,000
Supplies 635,000 588,000
$ 6,268,000 $10,530,000
6.Supplemental Disclosure of Cash Flow Information
Six Months Ended:
6/28/98 6/29/97
Cash paid during the year for interest $411,000 $423,000
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 18 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. EVACETTM is currently in two Phase III
clinical studies comparing it to conventional doxorubicin as a single
agent and in combination with cyclophosphamide, another commonly used
chemotherapeutic agent. Results of an interim analysis at the half-
way point of the studies indicate that EVACETTM is significantly less
cardiotoxic than conventional doxorubicin with essentially equal
efficacy. If clinical results continue to be positive, the Company
expects to file a New Drug Application for EVACETTM with the U.S. Food
and Drug Administration ("FDA") in 1998.
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. If
successful, the Company expects to file an Investigational New Drug
application with the FDA and, if approved, to commence human clinical
studies of TLC ELL-12 in late 1998 or early 1999.
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. 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 1997 and began receiving quarterly
minimum payments (classified as interest, investment and other income)
based on AmBisome sales in the first quarter of 1998.
On April 22, 1998 the Company announced it had entered into a three
year 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.
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 June 28, 1998:
Total revenues for the quarter ended June 28, 1998 were $20,225,000 an
increase of $3,571,000 or 21.4% compared to $16,654,000 for the
quarter ended June 29, 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
co-development agreement with Pfizer.
Net product sales of ABELCETr for the second quarter ended June 28,
1998 were $19,203,000 compared to $15,220,000 for the second quarter
of 1997. The sales increase of $3,983,000 or 26.2%, 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 52.7% 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 second quarter of 1998 were $15,297,000, an
increase of 15.8% from the comparable prior year period. Unit
shipments increased 40.4% compared to the prior year period. During
the second quarter of 1998, the Company announced a price increase to
its domestic customers effective July 1, 1998. Some portion of the
sales increase may have resulted from distributor stocking of ABELCETr
in anticipation of the July 1, 1998 price increase. This may affect
the amount of domestic sales in future quarters. In the second
quarter of 1997, the Company instituted a targeted pricing program in
response to a competitor, by offering discounts to high volume
purchasers. The price reduction is effected by chargebacks paid to
wholesalers based on their sales at contract prices to targeted
hospitals. The Company believes that the reduced prices to large
customers also 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 quarter
ended June 28, 1998 was approximately $6,730,000.
International product sales were $3,906,000 in the second quarter of
1998 versus $2,010,000 in the second quarter of 1997. The majority of
the growth is due to the impact of the launch of ABELCET in late 1997
in France, Italy and Canada, combined with the ABELCET inventory
stocking by Wyeth-Ayerst International ("Wyeth") in Austria and
France. While international sales revenues increased by 94.3%, unit
volume increased by 123.5%. 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 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)
Collaborative research and development revenues for the second quarter
of 1998 were $0 compared to $900,000 in the second quarter of 1997.
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 three months ended June
28, 1998 and June 29, 1997 were $1,022,000 and $534,000, respectively.
The increase of interest, investment and other income of $488,000 or
91.4% is primarily due to the recognition of a minimum quarterly
royalty as part of the settlement of patent litigation with NeXstar.
- Six Months Ended June 28, 1998:
Total revenues for the six months ended June 28, 1998 were
$37,319,000, an increase of $4,811,000 or 14.8% compared to
$32,508,000 for the six months ended June 29, 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 co-development agreement
with Pfizer.
Net product sales of ABELCET for the six months ended June 28, 1998
were $35,247,000 compared to $29,625,000 for the comparable prior year
period of 1997. The sales increase of $5,622,000 or 19.0%, 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 53.2% 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 six months of 1998 were $28,194,000, an
increase of 10.0% from the comparable prior year period. Unit
shipments increased 41.9% compared to the prior year period. This
growth was achieved despite the half year impact of the U.S. targeted
pricing program instituted in the second quarter of 1997 and to some
extent could have been affected by the announced price increase (as
previously discussed with respect to the three months ended June 28,
1998). The targeted pricing program is effected by 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 and
periodically evaluates the estimates used in establishing the reserve
in order to make necessary adjustments. The provision for the six
months ended June 28, 1998 was approximately $12,050,000.
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)
International product sales were $7,053,000 for the first six months
of 1998 versus $4,005,000 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, inventory stocking
by Wyeth in Austria and France, and more normal ordering patterns in
Spain. While international sales revenues increased by 76.1%, unit
volume increased by 122.8%. 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 1998 were $0 and
$1,800,000 in the first half of 1997. 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 six months ended June
28, 1998 and June 29, 1997 were $2,072,000 and $1,083,000,
respectively. The increase of interest, investment and other income of
$989,000 or 91.3% is primarily due to the recognition of two quarters
of a minimum quarterly royalty as part of the settlement of patent
litigation with NeXstar.
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
USA, Inc. Interest, investment and other income will be related to
the level of cash balances available for investment and the rate of
interest earned and the royalty from NeXstar.
Expenses
- - - Three Months Ended June 28, 1998:
The components of total expenses for the quarter ended June 28, 1998
were cost of goods sold, research and development, selling, general
and administrative and interest expenses. Total expenses for the
quarter ended June 28, 1998 were $21,072,000, a decrease of $4,132,000
from the comparable prior year period.
Cost of goods sold for the quarter ended June 28, 1998 was $5,224,000
or $144,000 higher than the comparable prior year period. The
increase in cost of goods sold is primarily due to unit volume growth
of 52.7% during the 1998 period, partially offset by manufacturing
efficiencies. Gross margin in the 1998 period was 72.8% compared to
66.6% in the 1997 period, an improvement of 6.2 percentage points.
The major reasons for the change were the improvement in manufacturing
costs due to the shift of manufacturing from the Company's Princeton
facility to its larger scale facility in Indianapolis and the absence
of unusual charges related to the settlement of patent litigation with
the University of Texas. Partially offsetting the favorable reduction
in unit costs is the lower average price for ABELCET in 1998 as a
result of the impact of the targeted pricing program in the U.S. and
the use of marketing partners in Europe.
Page 12 of 19
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (Continued)
Research and development expense was $7,481,000 for the second quarter
of 1998, compared to $7,528,000 for the comparable prior year period.
The favorability is due to offsetting factors; the absence of
spending associated with VENTUSTM, offset by increased clinical
activity for EVACETTM, increased research and development activity for
TLC ELL-12 and the reorientation of the Princeton manufacturing
facility to the production of clinical supplies.
Selling, general and administrative expenses for the quarter ended
June 28, 1998 were $8,167,000 compared to $12,418,000 in 1997. The
principal reasons for the decrease of $4,251,000 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 $200,000 in the second quarter of 1998 and
$178,000 in the second quarter of 1997. Interest expense is related
to capital leases for the Princeton and Indianapolis manufacturing
equipment and the mortgage on the Indianapolis building.
- Six Months Ended June 28, 1998:
The components of total expenses for the quarter ended June 28, 1998
were cost of goods sold, research and development, selling, general
and administrative and interest expenses. Total expenses for the six
months ended June 28, 1998 were $43,243,000, a decrease of $2,284,000
over the comparable prior year period.
Cost of goods sold for the six months ended June 28, 1998 was
$10,023,000 or $1,493,000 higher than the comparable prior year
period. The increase in cost of goods sold is primarily due to the
53.2% unit volume growth combined with the lower average price of
ABELCETr during the 1998 period. This increase is partially offset by
high volume efficiencies available at the Indianapolis facility,
combined with the absence of unusual charges incurred in 1997 for
litigation settlements. Gross margin in the 1998 period was 71.6%
compared to 71.2% in the 1997 period.
Research and development expense was $15,773,000 for the six months
ended June 28, 1998, compared to $14,843,000 for the comparable prior
year period, an increase of $930,000. The reasons for the increase
were the Company's reacquisition of EVACETTM 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. Partially offsetting the increase is
the absence in 1998 of spending associated with VENTUSTM.
Selling, general and administrative expenses for the six months ended
June 28, 1998 were $17,036,000 compared to $21,775,000 in 1997. The
principal reasons for the decrease of $4,739,000 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.
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)
Interest expense was $411,000 in the first six months of 1998 and
$379,000 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.
The Company expects the gross margin for ABELCET to continue to
improve, as the Company realizes economies of scale associated with
increased manufacturing volume at its Indianapolis plant. The Company
expects research and development expenses to increase as a result of
the reacquisition of EVACETTM and the related costs of completing
EVACETTM product development. As ABELCET is launched in additional
international markets, the Company's selling, general and
administrative expenses in support of its marketing partners'
activities, may increase.
Net Loss Applicable to Common Stock and Net Loss per Share of Common
Stock
The net loss applicable to Common Stock was $847,000 or $0.02 per
share (basic and diluted) and $8,550,000 or $0.23 per share (basic and
diluted) for the second quarters of 1998 and 1997, respectively.
Weighted average shares used in the per share calculations were
37,992,000 in the 1998 period and 36,988,000 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 applicable to Common Stock was $5,924,000 or $0.16 per
share (basic and diluted) and $13,019,000 or $0.36 per share (basic
and diluted) for the first half of 1998 and 1997, respectively.
Weighted average shares used in the per share calculations were
37,919,000 in the 1998 period and 36,560,000 in the 1997 period.
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
Liquidity and Capital Resources
The Company had $46,421,000 in cash and marketable securities as of
June 28, 1998. Included in this amount were cash and cash equivalents
of $25,373,000, short-term investments of $7,118,000, long-term
investments in marketable securities of $2,000,000 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- and long-term and
restricted cash) increased $896,000 from December 28, 1997 to June 28,
1998. The primary components of the favorable impact on cash flow
were the lower inventory balance of $4,262,000, and the higher accrued
liabilities balance of $1,345,000. The major uses of funds were the
net loss applicable to Common Stock (net of depreciation and
amortization) of $2,904,000, the increase in accounts receivable of
$1,225,000 due to higher sales, and capital lease payments of
$939,000.
Inventories at June 28, 1998 decreased $4,262,000 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 unit demand for ABELCET.
Accrued expenses and other current liabilities at June 28, 1998 were
$7,354,000 or $1,345,000 higher than December 28, 1997. The major
component of the increase is the higher clinical trial accruals
related to EVACETTM.
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.
Page 15 of 19
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (Continued)
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 June 28, 1998 is $1,035,000.
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 24.60% 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.
Year 2000 Impact
The Company is working to resolve the potential impact of the year
2000 on the ability of the Company's computerized information systems
to accurately process information that may be date-sensitive. Any of
the Company's programs that recognize a date using "00" as the year
1900 rather than the year 2000 could result in errors or system
failures. The Company utilizes a number of computer programs across
its entire operation. The Company has not completed its assessment,
but currently believes that costs of addressing this issue will not
have a material adverse impact on the Company's financial position.
However, if the Company and third parties upon which it relies are
unable to address this issue in a timely manner, it could result in a
material financial risk to the Company. In order to assure that this
does not occur, the Company plans to devote all resources required to
resolve any significant year 2000 issues in a timely manner.
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 EVACETTM, TLC ELL-12
and other oncology products, (ii) the timing of filing of new drug
application for EVACETTM, (iii) future regulatory approvals for
EVACETTM, (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 and (ix) manufacturing efficiencies
and other benefits to be realized from use of the Indianapolis
facility. 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) the
levels of protection afforded by the Company's patents and other
proprietary rights is uncertain and may be challenged; and (f) 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 4. Submission of Matters to a Vote of Security Holders
(a) An annual meeting of stockholders of the Company was held on
May 14, 1998.
(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 32,248,452 509,389
James G. Andress 32,259,566 498,275
Morton Collins 32,261,266 496,575
Stuart F. Feiner 32,261,266 496,575
Robert F. 32,261,266 496,575
Hendrickson
Bengt Samuelsson 32,261,316 496,525
Joseph T. Stewart 32,261,316 496,525
Gerald Weissman 32,261,266 496,575
Horst Witzel 32,261,166 496,675
The appointment of PricewaterhouseCoopers L.L.P. (formerly
Coopers & Lybrand L.L.P.) as the Company's independent
accountants for the fiscal year ending January 3, 1999 was
ratified by a vote of 32,519,194 affirmative votes and
100,432 negative votes, with 138,215 shares abstaining.
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: August 10, 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: August 10, 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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