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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-18728
INTERNEURON PHARMACEUTICALS, INC.
(exact name of registrant as specified in its charter)
Delaware 04-3047911
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
One Ledgemont Center, 99 Hayden Avenue 02421
Lexington, Massachusetts (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (781) 861-8444
(Former name, former address and former fiscal year, if changed since last
report): Not Applicable
Indicate by check 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 periods 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
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Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date.
Class Outstanding at August 3, 1999:
Common Stock $.001 par value 41,930,447 shares
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Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
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Results of Operations:
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Statements in this Form 10-Q that are not statements or descriptions of
historical facts are "forward-looking" statements under Section 21E of the
Securities Exchange Act of 1934, as amended, and the Private Securities
Litigation Reform Act of 1995 and are subject to numerous risks and
uncertainties. These forward-looking statements and other forward-looking
statements made by the Company or its representatives include, without
limitation, statements regarding the Redux-related litigation, including the
proposed settlement of the Redux-related product liability litigation; the
Company's ability to successfully develop, obtain regulatory approval for and
commercialize any products, to enter into corporate collaborations or obtain
required additional funds, and are based on a number of assumptions. The words
"believe," "expect," "anticipate," "intend," "estimate" or other expressions
which are predictions of or indicate future events and trends and which do not
relate to historical matters identify forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements as
they involve risks and uncertainties, and actual results could differ materially
from those currently anticipated due to a number of factors, including those set
forth under "Risk Factors" and elsewhere in, or incorporated by reference into,
the Company's Form 10-K for its fiscal year ended September 30, 1998. These
factors include, but are not limited to, risks relating to the Redux-related
litigation, including the risk that the proposed settlement of the product
liability litigation will not be finally approved; uncertainties relating to
clinical trials, regulatory approval and commercialization of citicoline; need
for additional funds and corporate partners; uncertainties relating to clinical
trials, regulatory approval and commercialization of other products; substantial
losses from operations and expected future losses; minimal revenues; product
liability; dependence on third parties for manufacturing and marketing;
competition; government
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regulation; contractual arrangements; patents and proprietary rights; dependence
on key personnel; uncertainty regarding pharmaceutical pricing and reimbursement
and other risks. The forward-looking statements represent the Company's judgment
and expectations as of the date of this Report. The Company assumes no
obligation to update any such forward-looking statements.
The following discussion should be read in conjunction with the Company's
unaudited consolidated financial statements and notes thereto appearing
elsewhere in this report and audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1998. Unless the context indicates otherwise, all references
to the Company include Interneuron and its subsidiaries.
General
Redux
Proposed Settlement of Product Liability Litigation:
Subsequent to the September 15, 1997 market withdrawal of Redux, Interneuron
has been named, together with other pharmaceutical companies, as a defendant in
approximately 1,187 legal actions, many of which purport to be class actions, in
federal and state courts involving the use of Redux and other weight loss drugs.
On December 10, 1997, the federal Judicial Panel on Multidistrict Litigation
issued an Order allowing for the transfer or potential transfer of the federal
actions to the Eastern District of Pennsylvania for coordinated pretrial
proceedings.
On September 25, 1998, the U.S. District Court for the Eastern District of
Pennsylvania (the "District Court") preliminarily approved an Agreement of
Compromise and Settlement (the "Settlement Agreement") between the Company and
the Plaintiffs' Management Committee ("PMC") relating to the proposed settlement
of all product liability litigation and claims against the Company relating to
Redux. As part of the Settlement Agreement, the Company and the PMC entered into
a royalty agreement (the "Royalty Agreement") relating to a portion of the
payments proposed to be made to the settlement fund.
On November 3, 1998, the District Court issued a stay halting all Redux
product liability litigation against the Company, pending and future, in state
courts, following the issuance of a similar stay halting Redux product liability
litigation against the Company in federal courts on September 3, 1998. These
stays will remain effective until further order of the District Court.
Summary of Proposed Settlement: The limited fund class action established by
the Settlement Agreement includes all persons in the United States who used
Redux, and certain other persons such as their family members, who would be
bound by the terms of the settlement. Membership in the class is mandatory for
all persons included within the class definition. Under the terms of the
proposed settlement, class members asserting claims against Interneuron will be
required to seek compensation only from the settlement fund, and their lawsuits
against Interneuron will be dismissed. By agreeing to the proposed settlement,
Interneuron does not admit liability to any plaintiffs or claimants.
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The Settlement Agreement requires Interneuron to deposit a total of
approximately $15,000,000 in three installments into a settlement fund.
The first installment of $2,000,000 was deposited into the settlement fund in
September 1998. A second installment of $3,000,000 is to be made if the
Settlement Agreement is approved by the District Court. These installments, less
certain expenses, will be returned to Interneuron if the settlement does not
become final. A third installment of $10,000,000, plus interest, is to be made
if the settlement becomes final.
In addition, the Settlement Agreement provides for Interneuron to cause all
remaining and available insurance proceeds related to Redux to be deposited into
the settlement fund. Interneuron also agreed to make royalty payments to the
settlement fund in the total amount of $55,000,000, over a seven year period
commencing when the settlement becomes final. Royalties will be paid at the
rate of 7% of gross sales of Interneuron products sold by Interneuron, 15% of
cash dividends received by Interneuron from its subsidiaries related to product
sales, and 15% of license revenues (including license fees, royalties or
milestone payments) received by Interneuron from a sublicensee related to
product sales. All Interneuron products will be subject to this royalty during
the applicable term. If, at the end of that seven year period, the amount of
royalty payments made by Interneuron is less than $55,000,000, the settlement
fund will receive shares of Interneuron stock in an amount equal to the unpaid
balance divided by $7.49 per share, subject to adjustment under certain
circumstances such as stock dividends or distributions.
Conditions to Final Settlement: The settlement will not become final until
approved by the District Court and the time for appeal of the District Court's
judgment approving the Settlement Agreement has elapsed without any appeals
being filed or all appeals from the District Court's judgment approving the
Settlement Agreement have been exhausted and no further appeal may be taken.
In this case, in order to approve the settlement, the District Court must make a
determination that the proposed settlement is fair and reasonable and meets each
of the prerequisites for a class action generally, and for a "limited fund"
class action in particular, all as required by the Federal Rules of Civil
Procedure. Pursuant to these rules, notice of the proposed settlement was
provided to potential class members in November 1998. Between February 25, 1999
and March 5, 1999, the District Court conducted a Fairness Hearing to determine
whether the case is properly certifiable as a limited fund class action and, if
so, whether the terms of the Settlement Agreement are fair and reasonable.
At the hearing, the District Court heard testimony from various witnesses,
received documentary evidence, and heard oral arguments from the proponents and
opponents of the settlement. The Court has not yet rendered a decision.
The Company may withdraw from the Settlement Agreement, or the Settlement
Agreement may otherwise terminate, under any of the following conditions:
(i) final approval of the Settlement Agreement is not entered by the District
Court; (ii) class certification and/or approval of the Settlement Agreement is
overturned on appeal for any reason; (iii) pending and future litigation against
the Company or any other party released by the Settlement Agreement ("Released
Parties") is not permanently enjoined on the final approval date; (iv) the class
action and all pending multi-district lawsuits against the Released Parties are
not dismissed with prejudice on the final approval date; (v) an order is not
entered by the District Court permanently barring contribution and indemnity
claims by other defendants in the diet drug litigation; or (vi) Interneuron is
unable to compel tender of its insurance proceeds.
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On November 20, 1998, December 30, 1998 and February 5, 1999, the Company's
three product liability insurers filed actions against Les Laboratoires Servier
("Servier") and the Company in the District Court, pursuant to the federal
interpleader statute. The insurers allege that both Servier and the Company
have asserted claims against commercial excess insurance policies issued by the
insurers to Interneuron with limits of $20,000,000, $5,000,000 in excess of
$20,000,000, and $15,000,000 in excess of $25,000,000, respectively, a portion
of which has been used in the Company's defense of the litigation. The insurers
have deposited the available proceeds up to the limits of their policies into
the registry of the District Court.
On June 23, 1999, the United States Supreme Court issued its opinion in Ortiz
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v. Fibreboard Corporation ("Ortiz"). The ruling in Ortiz may significantly
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influence, or potentially result in the rejection of, the Settlement Agreement.
However, although Ortiz involved an appeal from a mandatory, putative "limited
fund" class action settlement, Ortiz was factually distinguishable in many
respects from the Company's proposed settlement. While overturning the
settlement in Ortiz, the Supreme Court identified certain guidelines that
should be met for an action to be considered for certification as a limited fund
class action. The Company has filed an additional brief with the District Court
arguing that the Company's pending settlement meets the Ortiz guidelines. The
Company cannot, however, predict whether the District Court will approve the
Company's proposed settlement. Even if the settlement is approved by the
District Court, opponents of the settlement may appeal the District Court's
decision, to the United States Court of Appeals for the Third Circuit.
Future Charges to Operations: The Company will record initial charges to
operations for the estimated fair value of the Company's obligations under the
Settlement Agreement, exclusive of insurance proceeds, at such time as the
Company can determine that it is probable that the conditions to final
settlement have been or will be met. This is expected to be subsequent to the
Court's decision regarding approval of the Settlement Agreement. The amount of
the liability to be recognized in connection with these charges is likely to be
significant and to materially adversely affect the Company's net worth. From the
date the Company records the initial charge and related liability for the
settlement and through the term of the Royalty Agreement, the Company may record
additional charges to accrete the liability attributable to the royalty feature
of the Royalty Agreement up to the amount of royalties the Company expects to
pay pursuant to the Royalty Agreement over the time the Company expects to make
such royalty payments. Payments to be made by the Company pursuant to the
Settlement Agreement could have a material adverse effect on the results of
operations and financial condition of the Company.
If the Settlement Agreement is overturned or not made final, the ongoing
Redux-related litigation would then proceed against the Company. In this
event, the existence of such litigation, including the time and expenses
associated with the litigation, may materially adversely affect the Company's
business, including its ability to obtain additional financing to fund
operations. Although the Company is unable to predict the outcome of any such
litigation, such outcome may materially adversely affect the Company's future
business, results of operations and financial condition.
Securities Litigation:
The Company has also been named as a defendant in several lawsuits filed by
alleged purchasers of the Company's Common Stock, purporting to be class
actions, claiming violation of the federal securities laws. It is not possible
for the Company to determine its costs related to its defense in these or
potential future legal actions, monetary or other damages which may result from
such legal actions, or the effect on the future operations of the Company. See
"Legal Proceedings".
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General:
Although the Company maintains certain product liability and director and
officer liability insurance and intends to defend these and similar actions
vigorously, the Company has been required and may continue to devote
significant management time and resources to these legal actions and, in the
event of successful uninsured or insufficiently insured claims, or in the event
a successful indemnification claim were made against the Company, the Company's
business, financial condition and results of operations could be materially
adversely affected. In addition, the uncertainties and costs associated with
these legal actions have had, and may continue to have, an adverse effect on the
market price of the Company's Common Stock and on the Company's ability to
obtain additional financing to satisfy cash requirements, to retain and attract
qualified personnel, to develop and commercialize products on a timely and
adequate basis, to acquire or obtain rights to additional products, to enter
into corporate partnerships, or to obtain product liability insurance for other
products at costs acceptable to the Company, or at all, any or all of which may
materially adversely affect the Company's business and financial condition.
Citicoline
In June 1998, the Company initiated an approximately 900-person Phase 3
clinical trial which will compare the change in neurological function at 12
weeks following ischemic stroke of citicoline-treated patients with that of
patients who received placebo. Patients are being treated with 2000 milligrams
of citicoline or placebo daily for six weeks with a six week follow-up period.
It is anticipated that this clinical trial will be completed in late 1999.
The 2000 milligram dose level is higher than the dose used in the Company's two
most recent citicoline clinical trials but was used in the Company's first Phase
3 trial in which patients treated with this dose achieved the primary endpoint
of improved neurological function. Depending upon the evaluation of the results
from this trial, the Company will determine whether to re-submit the New Drug
Application ("NDA") for citicoline to the FDA. Even if the Company does re-
submit the NDA, as to which there is no assurance, the Company is unable to
predict whether or when the FDA would grant authorization to market citicoline
in the U.S. Upon resubmission of the NDA, a new FDA review period would
commence.
The Company withdrew its NDA for citicoline in April 1998. The Company had
submitted the NDA to the FDA for citicoline in December 1997. The citicoline
NDA had been accepted for filing and assigned priority and fast-track review
status. A priority review status reflects the FDA's commitment to review the NDA
within six months following submission. A fast-track designation indicates that
the FDA has determined a drug is intended to treat a serious or life-threatening
condition with a current unmet medical need and that the FDA can take actions to
expedite the development and review of the drug. While there can be no
assurance that any resubmission of a citicoline NDA would be assigned a priority
review status, the indication of stroke presently warrants such NDA review
status.
As of June 30, 1999, the remaining expenditures of all currently planned
clinical trials and related studies and NDA preparation for citicoline are
estimated, based upon current trial protocols, to aggregate approximately
$19,000,000. The Company is unable to predict the costs of any related or
additional clinical studies which will depend upon the results of the on-going
trial and upon FDA requirements. As a result of the Company's withdrawal of its
citicoline NDA, the related additional time and expense for product development,
and the Company's limited cash resources, the Company is evaluating its
commercialization strategy for citicoline. The Company requires additional funds
for manufacturing, distribution, marketing and selling efforts, the amount of
which will depend upon whether the Company markets citicoline itself or enters
into a corporate collaboration and the terms of any such collaboration.
The Company has no commitments or arrangements to obtain additional funds or
collaborations relating to citicoline and there can be no assurance such funds
or collaborations can be obtained on terms favorable to the Company or at all.
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The Company licensed in fiscal 1993 from Ferrer Internacional, S.A.
("Ferrer"), a Spanish pharmaceutical company, certain patent and know-how rights
in the United States and Canada relating to the use of citicoline in exchange
for a royalty equal to 6% of the Company's net sales of citicoline. In June
1998, the Company amended its agreement with Ferrer to extend to January 31,
2002 the date upon which Ferrer may terminate the citicoline license agreement
if FDA approval of citicoline is not obtained. The agreement provides for such
date to be extended for up to two years if the Company provides information to
Ferrer which tends to establish that the Company has carried out the steps for
obtaining such approval and if such approval has not been obtained for reasons
beyond the Company's control. In fiscal 1999, the Company was issued three
citicoline-related patents for several claims including reduction of cerebral
infarct size, effective dose regimens, combination therapies with other products
and the treatment of head trauma.
The Company will be dependent upon third party suppliers of citicoline bulk
compound, finished product and packaging for manufacturing in accordance with
the Company's requirements and current U.S. Good Manufacturing Practices
("cGMP") regulations as well as third party arrangements for the distribution of
citicoline. Supplies of citicoline finished product used for clinical purposes
have been and are produced on a contract basis by third party manufacturers.
The Company does not have an agreement with a manufacturer for supply of
commercial quantities of finished product and there can be no assurance such
agreement can be obtained on terms favorable to the Company or at all, which
could adversely affect the Company's ability to commercialize citicoline on a
timely and cost-effective basis. The Company's agreement with Ferrer requires
the Company to purchase from Ferrer citicoline bulk compound for commercial
purposes at fixed prices, subject to certain conditions. In the event that such
conditions permit the Company to purchase bulk compound from a third party , the
Company has entered into an agreement with a manufacturer to supply citicoline
bulk compound for commercial purposes. Any citicoline manufacturing facilities
are subject to FDA inspection both before and after FDA approval to determine
compliance with cGMP requirements. There can be no assurance the Company can or
will establish on a timely basis, or maintain, manufacturing capabilities of
finished product required to obtain regulatory approval or that any facilities
used to produce citicoline bulk compound or finished product will have complied,
or will be able to maintain compliance, with cGMP or that such suppliers will be
able to meet manufacturing requirements on a timely basis or at all.
Pagoclone
The Company is developing pagoclone as a drug to treat panic/anxiety
disorders. Current pharmacological treatments for anxiety and panic disorders
include serotonin agonists such as BuSpar, and benzodiazepines, such as Valium
and Xanax, as well as selective serotonin reuptake inhibitors such as Paxil.
Pre-clinical and early clinical data suggest that pagoclone may offer advantages
over traditional benzodiazepine anti-anxiety agents, including reduced
drowsiness, lower addiction and withdrawal potential and less potential for
alcohol interactions.
In August 1998, the Company announced results of its phase 2/3 trial involving
277 patients showing that treatment with pagoclone statistically significantly
reduced the frequency of panic attacks among patients suffering from panic
disorder. In addition, pagoclone was well-tolerated by these patients, with no
evidence of sedation and no apparent withdrawal syndromes in this study, which
included a tapering-off period. The Company designates a trial as phase 2/3 if
it is a well-controlled trial which the Company may utilize, depending upon
results, as either a pivotal or supporting trial in an NDA submission. Based on
the
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results of this trial, Interneuron believes it has identified an optimal dose of
pagoclone for phase 3 clinical testing. The Company estimates the total costs of
currently anticipated clinical development and NDA preparation relating to
pagoclone for panic disorder, including license fees to Rhone-Poulenc Rorer
Pharmaceuticals, Inc. ("RPR"), to be approximately $43,000,000, which if all of
such activities are undertaken, may be incurred over approximately three years.
The Company licensed from RPR exclusive worldwide rights to pagoclone, in
exchange for licensing, milestone and royalty payments to RPR.
The Company does not have sufficient funds to conduct Phase 3 clinical testing
or commercialization of pagoclone and is seeking a corporate collaboration to
proceed with a Phase 3 clinical study. There can be no assurance the Company
will be successful in obtaining a corporate collaboration or additional
financing sufficient to fund development and commercialization of pagoclone, on
terms favorable to the Company or at all. In this event, the development of
pagoclone would be significantly delayed or curtailed. Even if a collaboration
or other financing is obtained, the Company is unable to predict with certainty
the costs of any additional studies which may be required by the FDA for
approval of pagoclone. There can be no assurance, assuming such trials are
conducted, that any such clinical trials will be successful or result in FDA
approval of the product.
BEXTRA/(R)/
As a result of, and pursuant to, the CPEC Exchange Transactions (see Note F of
Notes to Unaudited Consolidated Financial Statements), through CPEC, its 65%
owned subsidiary, the Company intended to develop BEXTRA (bucindolol) as a drug
to treat congestive heart failure. On July 29, 1999, CPEC received notification
that BEST has been terminated at the recommendation of the BEST Data and Safety
Monitoring Board, based upon the absence of significant survival advantage of
treatment with bucindolol. Although CPEC has not been provided any data from
BEST, according to the BEST Coordinating Center, the decision of the Data and
Safety Montoring Board was based upon the totality of evidence available
regarding beta-blocker treatment of heart failure from BEST and other randomized
controlled trials. The BEST Coordinating Center stated that there was no
significant survival advantage of treatment with bucindolol for the population
as a whole. However, the results are not inconsistent with those of other
studies of other beta blockers for congestive heart failure. It is expected that
BEST investigators will treat patients comparable to those entered into such
other studies as suggested by the results of those studies. The BEST
Coordinating Center also advised BEST investigators to conduct the trial and
follow patients in accordance with the study protocol at this time. CPEC intends
to work with the NIH and VA to understand more fully the trial data. Pending
receipt and analysis of BEST data, U.S. bucindolol development is on hold. See
"Subsidiaries".
Results of Operations
Revenues, consisting primarily of contract and license fee revenue, decreased
$498,000, or 71%, to $199,000 in the three month period ended June 30, 1999 from
$697,000 in the three month period ended March 31, 1998 and decreased $925,000,
or 46%, to $1,099,000 in the nine month period ended June 30, 1999 from
$2,024,000 in the nine month period ended June 30, 1998. The decreases in
contract and license fee revenue were primarily the result of the absence in the
fiscal 1999 periods of revenue generated by Incara from Astra Merck, Inc.
("Astra Merck") due to the termination of the Development and Marketing
Collaboration and License Agreement between Astra Merck, Incara and CPEC, Inc.
(the "Astra Merck Collaboration") in September 1998 and decreased revenue from
Merck & Co., Inc. related to product development at Incara Research
Laboratories ("IRL"), formerly conducted by Transcell. In the nine month period
ended June 30, 1999, the decreases were partially offset by a milestone payment
received by the Company from Eli Lilly and Company ("Lilly") relating to the
development of Lilly's drug, Prozac(R) for the treatment of premenstrual
syndrome.
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Research and development expense decreased $62,000, or 1%, to $8,891,000 in
the three month period ended June 30, 1999 from $8,953,000 in the three month
period ended June 30, 1998 and increased $2,631,000, or 9%, to $31,590,000 in
the nine month period ended June 30, 1999 from $28,959,000 in the nine month
period ended June 30, 1998. Research and development expense at Interneuron
decreased in the fiscal 1999 three and nine month periods due to the absence of
expense in fiscal 1999 for a fiscal 1998 Redux-related echocardiogram study and
the phase 2/3 pagoclone study and reduced noncash compensation expense related
to the Company's 1997 Equity Incentive Plan, partially offset by increased
expenses related to the 900-person phase 3 citicoline clinical trial which
commenced in June 1998. Incara's expenses decreased in the fiscal 1999 three
month period due to the incurrence in the fiscal 1998 three month period of non-
recurring expense related to Incara's May 1998 acquisition of IRL partially
offset by increased expense in the fiscal 1999 three month period due to
continuing U.S. bucindolol development costs previously assumed by Astra Merck
and Incara's contractual share of European bucindolol development costs incurred
by BASF Pharma/Knoll AG ("Knoll"), Incara's collaborative partner. Incara's
expenses increased in the fiscal 1999 nine month period due to continuing U.S.
bucindolol development costs previously assumed by Astra Merck and Incara's
contractual share of European bucindolol development costs incurred by Knoll and
increased expenses associated with the carbohydrate chemistry program of IRL,
partially offset by the absence in the fiscal 1999 nine month period of non-
recurring expense related to Incara's May 1998 acquisition of IRL. In March
1999, Incara reduced its headcount at IRL by approximately 50% as part of an
overall assessment of Incara's research and development expenses in view of its
limited cash resources and increased expenses after termination of the Astra
Merck Collaboration.
Selling, general and administrative expense decreased $1,685,000, or 36%, to
$3,024,000 in the three month period ended June 30, 1999 from $4,709,000 in the
three month period ended June 30, 1998 and decreased $9,923,000, or 51%, to
$9,633,000 in the nine month period ended June 30, 1999 from $19,556,000 in the
nine month period ended June 30, 1998. These decreases resulted primarily from
reduced noncash compensation expense related to the Company's 1997 Equity
Incentive Plan, the absence of citicoline pre-marketing expenses that were
incurred in fiscal 1998, the absence of costs of the Company's sales force
resulting from its May 1998 dismissal, and Incara's elimination of duplicative
Transcell-related administrative expenses subsequent to the Transcell Merger.
The fiscal 1999 periods include costs for the Company's launch of its AnatoMark
head reference system. The Company does not expect to generate profits from
AnatoMark in the near future.
Investment income, net, decreased $681,000, or 56%, to $528,000 in the three
month period ended June 30, 1999 from $1,209,000 in the three month period ended
June 30, 1998 and decreased $2,611,000, or 58%, to $1,861,000 in the nine month
period ended June 30, 1999 from $4,472,000 in the nine month period ended
June 30, 1998 primarily due to lower balances of cash and marketable securities
resulting from funds used in Company operations.
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There was no provision for equity in net loss of unconsolidated subsidiary,
Progenitor, in the three and nine month periods ended June 30, 1999, compared
to provisions of $1,002,000 and $2,873,000 in the three and nine month periods
ended June 30, 1998, respectively, as the Company wrote down to zero its
investment in Progenitor as of September 30, 1998 as a result of Progenitor's
December 1998 decision to cease operations. See Note D of Notes to Unaudited
Consolidated Financial Statements.
Minority interest decreased by $89,000, or 5%, to $1,588,000 in the three
month period ended June 30, 1999 from $1,677,000 in the three month period ended
March 31, 1998 and increased $3,143,000, or 98%, to $6,344,000 in the nine month
period ended June 30, 1999 from $3,201,000 in the nine month period ended
June 30, 1998. The increase in the nine month period is due to an increased net
loss at Incara and because there is a larger percentage of minority stockholders
at Incara than there was at Transcell to whom to allocate the loss generated by
IRL.
Due to the Company's September 1998 decision to discontinue the operations of
InterNutria and reflect InterNutria as a discontinued operation in the Company's
statements of operations, no net loss was reflected in the three and nine month
periods ended June 30, 1999 relating to InterNutria compared to net losses of
$3,674,000 and $15,065,000 in the three and nine month periods ended June 30,
1998, respectively. InterNutria losses resulted primarily from the expenses of
the national launch of PMS Escape exceeding the revenue from sales of PMS
Escape. See Note D of Notes to Unaudited Consolidated Financial Statements.
For the reasons described above, net loss decreased $5,155,000 or 35%, to
$9,600,000 in the three month period ended June 30, 1999 from $14,755,000 in the
three month period ended June 30, 1998 and decreased $25,337,000, or 44%, to
$31,919,000 in the nine month period ended June 30, 1999 from $57,256,000 in the
nine month period ended June 30, 1998.
Liquidity and Capital Resources
Cash, Cash Equivalents and Marketable Securities
At June 30, 1999, the Company had consolidated cash, cash equivalents and
marketable securities aggregating $36,279,000 (of which approximately
$8,093,000 was held by Incara and is not available to Interneuron) compared to
$72,032,000 at September 30, 1998. This decrease is primarily due to
approximately $35,098,000 used to fund operations in the nine month period ended
June 30, 1999 (of which approximately $15,000,000 related to Incara ). Because
the Company will no longer consolidate Incara but will instead consolidate
only CPEC, cash, cash equivalents and marketable securities will decrease on a
consolidated basis.
The Company believes it has sufficient cash for currently planned expenditures
through December 1999, based on certain assumptions relating to operations and
other factors, and through October 1999 if the Settlement Agreement becomes
final before that time, which would cause the third installment payment to be
deposited into the settlement fund. The Company believes finalization of the
Settlement Agreement would facilitate its fund raising efforts. The Company
requires additional funds and intends to seek additional funds or corporate
collaborations to pursue development and commercialization of its products and
meet its commitments. The Company requires additional funds for the development
and commercialization of citicoline, pagoclone, and its other products under
development, as well as any new products acquired in the future. The Company has
no commitments or arrangements to obtain such funds. If such funds or corporate
collaborations are not available, the Company will be required to delay product
development and regulatory efforts. As a result of the uncertainties and costs
associated with the Redux-related litigation, including the risk that the
proposed settlement of the Redux product liability litigation does not become
final, market
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conditions and other factors generally affecting the Company's ability to raise
capital, there can be no assurance that the Company will be able to obtain
additional financing to satisfy future cash requirements or that any financing
will be available on terms favorable or acceptable to the Company.
Product Development
The Company expects to continue expending substantial amounts for the
development of citicoline as described above and for its other products. Because
the Company does not have sufficient capital resources to fund significant
further development of any products other than citicoline, it is seeking a
corporate collaboration to provide for future pagoclone development and
marketing costs, including Phase 3 clinical studies. In addition, in the event
CPEC determines to proceed with BEXTRA development, the Company would require
additional funds to fund its obligations to CPEC. Although the Company is
engaged in discussions with respect to certain corporate collaborations relating
to pagoclone, there can be no assurance any agreements will be obtained.
During 1997, the Company obtained an exclusive option to license a product
for the treatment and prevention of liver diseases. The option grants
Interneuron the right to license, on specified terms, North American and Asian
marketing rights to an issued U.S. patent and U.S. and international patents
applications, following Interneuron's review of future clinical data. This
orally-administered compound is being studied in a large U.S. government-
sponsored Phase 3 clinical trial. Eight hundred patients have been enrolled in
the study, which is expected to be completed in mid-2000, provided the study's
Data Safety Monitoring Board deems sufficient data has been obtained in the
follow-up period.
The Company is continuing to conduct preliminary evaluations of PACAP, a
compound licensed from Tulane University in April 1998 that, among other
indications, may have potential as a treatment for stroke, and of LidodexNS, a
product for the acute intra-nasal treatment of migraine headaches being
developed pursuant to a collaborative agreement with Algos Pharmaceutical
Corporation.
There can be no assurance that results of any on-going current or future
preclinical or clinical trials will be successful, that additional trials will
not be required, that any drug under development will receive FDA approval in a
timely manner or at all, or that such drug could be successfully manufactured in
accordance with cGMP or marketed in a timely manner or at all, or that the
Company will have sufficient funds to commercialize any of its products, any of
which events could materially adversely affect the Company.
Analysis of Cash Flows
----------------------
Cash used by operating activities during the nine months ended June 30, 1999
of $35,098,000 consisted primarily of a net loss of $31,919,000.
Cash provided by investing activities of $29,841,000 during the nine months
ended June 30, 1999 consisted of net proceeds from maturities and sales of
marketable securities of $30,125,000 less purchases of property and equipment of
$284,000.
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Other
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Year 2000 Issue:
General
The Year 2000 issue is the result of the failure of hardware or software
components to properly handle dates which occur on or after January 1, 2000
including leap years, the failure to properly handle all manipulations of time
related information and the failure to store century information in a non-
ambiguous format (i.e., storing years with 2 digits rather than 4 digits).
These failures could result in system failure or miscalculations causing
disruptions in processing transactions or creating incorrect data used in the
operations of the business.
As a result of the CPEC Exchange Transactions, Incara is no longer a
consolidated subsidiary of Interneuron. Accordingly , Incara's Year 2000 Issue
is no longer relevant to the Company for financial reporting purposes. However,
in the event, upon receipt of BEST data, CPEC determines to proceed with U.S.
bucindolol development, due to Incara's continuing role as a provider of BEXTRA
development services to CPEC LLC and maintainer of significant databases
relating to BEXTRA, Incara's Year 2000 readiness is pertinent to the Company. To
this extent, Interneuron and Incara are collaborating to ascertain Incara's Year
2000 compliance as deemed necessary. All references below to Incara's systems
and Year 2000 Issue are relative only to Incara's non-financial systems. The
Company does not believe it has a risk of loss of significant revenues due to
the Year 2000 issue because no pharmaceutical products will have attained FDA
approval prior to the year 2000 and because the Company currently anticipates
marketing and sales fulfillment to be conducted by a licensee. A factor in the
selection of potential licensees will be their ability to demonstrate Year 2000
compliance.
Systems Assessment
Interneuron's, CPEC LLC's and Incara's internal systems are similar and
comprised primarily of purchased or leased software. None of the companies
develops or maintains any significant proprietary software or hardware systems.
Interneuron and Incara utilize numerous operationally-related non-IT systems.
These include telephone systems, pagers, and security alarm systems.
Also, Interneuron, CPEC LLC and Incara subcontract a substantial portion of
their research and development activities to external vendors, including
contract research organizations, and rely on the systems of these vendors for
data and information that may be date sensitive. To the extent that the systems
of these subcontractors produce incorrect information or cause incorrect
interpretation of the information that they produce, Interneuron, CPEC LLC and
Incara are at risk for making invalid conclusions about the nature, efficacy, or
safety of their products or technologies which could lead to abandoning
potentially lucrative products or technologies or invalidly continuing
development and pursuing FDA approval of others.
Interneuron, CPEC LLC and Incara are ascertaining Year 2000 compliance of
their primary internal software systems, operationally-related systems,
equipment with embedded microprocessors, and subcontractors through vendor
inquiry and obtaining written assertions of Year 2000 compliance from each.
Interneuron has obtained letters from its primary internal software vendors and
certain subcontractors that purport their current belief of Year 2000 compliance
and generally indicate continued efforts to assess Year 2000 issues. During
1999, the Company will continue and complete its review of
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all significant above-noted vendors and seek to obtain letters of Year 2000
compliance. If such letters cannot be obtained on a timely basis, Interneuron,
CPEC LLC and Incara will assess the potential risks in each instance and
determine the appropriate actions. Such action may include the replacement of
software, equipment, or the subcontractor. Interneuron, CPEC LLC and Incara will
continue during 1999 to monitor vendors and subcontractors who have provided
letters of Year 2000 compliance for any notices or information that contradict
earlier assertions of Year 2000 compliance.
Costs and Contingencies
To date, Interneuron, CPEC LLC and Incara have expended only internal costs to
assess the Year 2000 issue. Letters of Year 2000 compliance from internal
software providers tend to indicate Interneuron and CPEC LLC will not be exposed
to any material amounts for replacements of such systems, however there can be
no assurance of this. Also, it is not yet possible to ascertain if any
expenditure will be required to replace systems, subcontractors or the work
performed by such subcontractor. While vendor assurances and internal testing
are useful in assessing Year 2000 issues, neither can provide absolute assurance
that no Year 2000 problems will or can occur. During 1999, Interneuron, CPEC LLC
and Incara will continue to refine their plans in an attempt to assure the Year
2000 issue will not materially adversely affect their business operations or
financial condition.
Other:
In November 1998, pursuant to an agreement with Les Laboratoires Servier to
resolve a withholding tax issue on Redux-related payments to Servier, the
Company paid to the U.S. Internal Revenue Service approximately $1,700,000 for
withholding tax and interest. Servier agreed to reimburse the Company for a
portion of the withholding taxes upon Servier's receipt of a related tax refund
from the French tax authorities. The Company is unable to predict with
certainty whether or when this reimbursement will be obtained.
Subsidiaries
Interneuron had funded the operations of InterNutria through September 30,
1998, at which time the Company adopted a plan to discontinue the operations of
InterNutria. Loss from the discontinued operations of InterNutria represented
approximately 25% and 26% of the Company's consolidated net loss in the three
and nine month periods ended June 30, 1998, respectively. Interneuron had also
funded Transcell until May 8, 1998, the effectiveness of the Transcell Merger.
Since the Transcell Merger, the operations previously conducted by Transcell
have been conducted as a division of Incara known as IRL. Accordingly, through
June 30, 1999, such operations have continued to be reflected in the Company's
consolidated financial statements.
Incara and CPEC:
On July 15, 1999, the Company entered into the CPEC Exchange Transactions
pursuant to which the Company acquired from its previously majority-owned
subsidiary, Incara, a 65% interest in CPEC LLC. In exchange, Incara redeemed
4,229,381 of the 4,511,084 shares of Incara common stock previously owned by the
Company (the "Redeemed Shares") and the Company cancelled a promissory note
issued by Incara to the Company in a related transaction. See Note F of Notes to
Unaudited Consolidated Financial Statements.
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As a result of the CPEC Exchange Transactions, subsequent to July 15, 1999 the
Company will no longer consolidate Incara but will instead consolidate only
CPEC. Consolidated net losses from Incara, net of allocation to minority
interest and including IRL in fiscal 1999 and 1998 and Transcell in fiscal 1998,
was approximately $2,600,000, or 26%, of consolidated net loss in the three
month period ended June 30, 1999 and approximately $10,100,000, or 32%, of
consolidated net loss in the nine month period ended June 30, 1999. Given the
indeterminate status of bucindolol development, it is not possible to predict
the impact of CPEC LLC on the results of operations of the Company, but it is
expected that losses from CPEC in the near future will be less than the
historical losses from Incara.
Subsequent to the announcement of the communication from the Data Safety
Monitoring Board's notification to CPEC of its decision regarding BEST, the
market value of Incara's common stock signficantly declined. To the extent such
decline is deemed permanent, the Company may incur additional charges in future
periods relating to its investment in Incara.
Progenitor:
In December 1998, Progenitor announced its intention to implement an immediate
cessation of operations due to insufficient funds to meet its obligations.
Progenitor's market valuation had been substantially reduced and the Company
could not viably sell any of its holdings of Progenitor securities. As a result,
the Company's investment in Progenitor was reduced to zero as of September 30,
1998. Progenitor has sold and is seeking to sell certain of its assets which may
yield cash distributions to the Company of up to an aggregate of approximately
$600,000, depending upon resolution of outstanding Progenitor liabilities, over
the next several years. In addition, in exchange for the Company's interest in
the developmental endothelial locus-1 gene, Progenitor assigned to the Company
the right to receive certain future payments from Amgen under Progenitor's
license to Amgen of the leptin receptor patents for human pharmaceutical uses.
The Company cannot predict the amount of future payments, if any, which may be
received from Amgen.
General
The Company's business strategy includes evaluation of various technologies,
product or company acquisitions, licensing and/or financing opportunities and
Interneuron engages from time to time in discussions relating to such
opportunities. Interneuron requires additional cash to fund future operations
and commitments and intends to seek additional financings and corporate
collaborations. Any Interneuron initiatives may involve the issuance of
securities of Interneuron, which would dilute existing stockholders, and/or
financial commitments for licensing fees and/or to fund product development, or
debt financing, any of which may adversely affect the Company's consolidated
financial condition or results of operations. The Company's in-licensing
agreements generally require the Company to undertake general or specific
development efforts or risk the loss of the license and/or incur penalties.
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PART II OTHER INFORMATION
Item 5. Other Information
-----------------
On July 29, 1999, the Company received and accepted the resignation of
Richard J. Wurtman, M.D. as a director of the Company, effective as of that
date. Dr. Wurtman's consulting agreement with the Company will terminate
November 1, 1999.
On July 29, 1999, CPEC received notification that the BEST (Beta-blocker
Evaluation of Survival Trial) trial of BEXTRA has been terminated at the
recommendation of the BEST Data and Safety Monitoring Board, based upon the
absence of significant survival advantage of treatment with bucindolol.
Although CPEC has not been provided any data from BEST, according to the BEST
Coordinating Center, the decision of the Data and Safety Monitoring Board was
based upon the totality of evidence available regarding beta-blocker
treatment of heart failure from BEST and other randomized controlled trials.
There was no significant survival advantage of treatment with bucindolol for
the population as a whole. However, the results are not inconsistent with
those of other studies of other beta blockers for congestive heart failure.
It is expected that BEST investigators will treat patients comparable to
those entered into such other studies as suggested by the results of those
studies. The BEST Coordinating Center also advised BEST investigators to
conduct the trial and follow patients in accordance with the study protocol
at this time. CPEC intends to work closely with the NIH and VA to understand
more fully the trial data. Pending receipt and analysis of BEST data, U.S.
bucindolol development is on hold.
On August 4, 1999, Incara received notice from Knoll that it was terminating
the Knoll Agreement with immediate effect. Accordingly, the BEAT trial is
also expected to terminate shortly.
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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.
INTERNEURON PHARMACEUTICALS, INC.
Date: August 4, 1999 By: /s/ Glenn L. Cooper
-------------------------------------------
Glenn L. Cooper, M.D., President
and Chief Executive Officer
(Principal Executive Officer)
Date: August 4, 1999 By: /s/ Michael W. Rogers
-------------------------------------------
Michael W. Rogers, Executive Vice
President, Chief Financial Officer, and
Treasurer (Principal Financial Officer)
Date: August 4, 1999 By: /s/ Dale Ritter
-------------------------------------------
Dale Ritter, Senior Vice President, Finance
(Principal Accounting Officer)
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