UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
COMMISSION FILE NUMBER 1-10451
NORTH AMERICAN VACCINE, INC.
(Exact name of registrant as specified in its charter)
CANADA 98-0121241
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
12103 INDIAN CREEK COURT, BELTSVILLE, MARYLAND 20705
- ---------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 419-8400
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
COMMON STOCK, NO PAR VALUE, OUTSTANDING AS OF NOVEMBER 5, 1997 -- 31,714,212
SHARES
<PAGE>
TABLE OF CONTENTS
PAGE NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements........................................ 3
Consolidated Balance Sheets................................. 4
Consolidated Statements of Operations....................... 5
Consolidated Statement of Shareholders' Equity.............. 6
Consolidated Statements of Cash Flows....................... 7
Notes to Condensed Consolidated Financial Statements........ 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................................. 21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 22
SIGNATURES ............................................................ 23
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following unaudited, condensed consolidated financial statements of North
American Vaccine, Inc. and Subsidiaries (the "Company") have been prepared in
accordance with the instructions to Form 10-Q and, therefore, omit or condense
certain footnotes and other information normally included in financial
statements prepared in accordance with generally accepted accounting principles.
This report should be read in conjunction with the Company's Annual Report on
Form 10-K filed for the year ended December 31, 1996. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial information for the interim
periods reported have been made. Results of operations for the three and nine
months ended September 30, 1997, will not necessarily be indicative of the
results for the entire fiscal year ending December 31, 1997.
3
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NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 55,917 $ 70,881
Accounts receivable 468 4,166
Inventory 2,423 1,782
Prepaid expenses and other current assets 806 533
---------- ----------
Total current assets 59,614 77,362
Property, plant and equipment, net 34,254 40,629
Investment in affiliate, at market 1,492 1,281
Deferred financing costs, net 2,807 3,184
Other assets 516 506
---------- ----------
TOTAL ASSETS $ 98,683 $ 122,962
========== ==========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
- ----------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 1,990 $ 1,912
Deferred revenue 4,290 3,000
Obligation under capital lease, current portion 1,608 1,496
Other current liabilities 6,714 4,540
---------- ----------
Total current liabilities 14,602 10,948
6.50% Convertible subordinated notes, due May 1, 2003 86,250 86,250
Obligation under capital lease, net of current portion 4,651 5,871
Deferred rent credit, net of current portion 38 114
---------- ----------
Total liabilities 105,541 103,183
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' (DEFICIT) EQUITY:
Preferred stock, no par value; unlimited shares
authorized-
Series A, convertible; issued and outstanding
2,000,000 shares; entitled to Can $2.50 per
share in liquidation 6,538 6,538
Common stock, no par value; unlimited shares
authorized; issued 31,635,780 shares at
September 30, 1997 and 31,406,999 shares at
December 31, 1996 75,264 71,357
Unrealized investment holding gain 864 653
Accumulated deficit (89,524) (58,769)
----------- ----------
Total shareholders' (deficit) equity (6,858) 19,779
----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' (DEFICIT) $ 98,683 $ 122,962
EQUITY =========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Product sales $ 465 $ - $ 1,378 $ 727
Marketing, research and development
agreements 6,485 - 7,710 -
-------- -------- ----------- ----------
Total revenues 6,950 - 9,088 727
-------- -------- ----------- ----------
OPERATING EXPENSES:
Production 5,234 4,058 13,868 10,754
Research and development 4,931 2,560 14,446 8,126
General and administrative 3,239 1,599 8,941 4,826
-------- -------- ----------- ----------
Total operating expenses 13,404 8,217 37,255 23,706
-------- -------- ----------- ----------
OPERATING LOSS (6,454) (8,217) (28,167) (22,979)
OTHER INCOME (EXPENSES):
Gain on sale of investment in
affiliate - - - 4,228
Interest and dividend income 739 1,075 2,489 1,917
Interest expense (1,685) (1,531) (5,077) (2,456)
---------- -------- ----------- ---------
NET LOSS $ (7,400) $ (8,673) $ (30,755) $ (19,290)
========== ======== =========== ==========
NET LOSS PER SHARE $ (0.23) $ (0.28) $ (0.97) $ (0.63)
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 31,627 30,769 31,604 30,600
</TABLE>
The accompanying notes are are integral part of these condensed consolidated
financial statements.
5
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NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT) EQUITY
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SERIES A UNREALIZED TOTAL
CONVERTIBLE INVEST- SHARE
PREFERRED STOCK COMMON STOCK MENT ACCUMU- HOLDERS'
------------------ -------------------- HOLDING LATED EQUITY
SHARES AMOUNT SHARES AMOUNT GAINS DEFICIT (DEFICIT)
-------- -------- -------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 2,000 $ 6,538 31,407 $ 71,357 $ 653 $(58,769) $ 19,779
Exercises of stock options - - 221 2,421 - - 2,421
Shares issued under
401(k) plan - - 8 173 - - 173
Stock option compensation - - - 1,313 - - 1,313
Increase in market value
of investment - - - - 211 - 211
Net loss - - - - - (30,755) (30,755)
------ ------- ------- -------- ------ -------- --------
Balance, September 30, 1997 2,000 $ 6,538 31,636 $ 75,264 $ 864 $(89,524) $ (6,858)
====== ======= ======= ======== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
6
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NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS
ENDED
SEPTEMBER 30,
1997 1996
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (30,755) $ (19,290)
Adjustments to reconcile net loss
to net cash used in operating activities:
Gain on sale of investment in affiliate - (4,228)
Loss on disposal of equipment - (15)
Depreciation and amortization 8,211 3,697
Amortization of deferred financing costs 377 210
Contribution of common stock to 401(k) plan 173 131
Stock option compensation 1,313 -
(Increase) Decrease in other assets (10) 24
Decrease in deferred rent (67) (60)
Cash flows provided by other working capital 6,317 1,735
--------- ---------
Net cash used in operating activities (14,441) (17,796)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,836) (3,345)
Proceeds from sale of investment in affiliate - 5,199
Proceeds from sale of equipment - 15
--------- ---------
Net cash (used in) provided by investing
activities (1,836) 1,869
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible notes - 86,250
Deferred financing costs of convertible notes - (3,519)
Proceeds from exercises of stock options 2,421 4,634
Principal payments on capital lease obligation (1,108) -
--------- ---------
Net cash provided by financing 1,313 87,365
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (14,964) 71,438
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 70,881 10,443
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 55,917 $ 81,881
========= =========
The accompanying notes are an integral part of these condensed financial
statements.
7
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NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS
ENDED
SEPTEMBER 30,
1997 1996
------------ -------------
CASH FLOWS PROVIDED BY OTHER WORKING CAPITAL ITEMS:
Decrease (increase) in :
Accounts receivable $ 3,698 $ 2,000
Inventory (641) (915)
Prepaid expenses and other current assets (273) (28)
Increase (decrease) in:
Accounts payable 78 (1,816)
Other current liabilities 3,455 2,494
--------- ---------
Net cash provided by other working capital items $ 6,317 $ 1,735
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 3,308 $ 9
========= =========
The accompanying notes are an integral part of these condensed financial
statements.
8
<PAGE>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS
The Company is engaged in the research, development, production, and sale of
vaccines for the prevention of infectious diseases in children and adults. In
1996, regulatory approval of the Company's acellular pertussis vaccine
formulated as a DTaP vaccine for the prevention of diphtheria, tetanus and
pertussis (whooping cough) was granted in Sweden, and regulatory approval of a
combined DTaP-IPV (polio) vaccine was granted in Denmark. In April 1997, the
Medical Products Agency of Sweden granted regulatory approval for the Company's
monovalent acellular pertussis (aP) vaccine to vaccinate children, thereby
expanding the market for the Company's aP vaccine. The Company has not received
approval from the U.S. Food and Drug Administration ("FDA") or any other
regulatory authority to market its DTaP vaccine or any other product in
development.
2. SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF ACCOUNTING AND CURRENCY. The Company is a Canadian corporation
incorporated under the Canadian Business Corporations Act ("CBCA") on August 31,
1989. The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") in the United
States and are denominated in U.S. dollars, because the Company conducts the
majority of its transactions in this currency. The application of Canadian GAAP
would not result in material adjustments to the accompanying financial
statements except for the impact of the adoption of Statement of Financial
Accounting Standards ("SFAS") No. 115. The effect of foreign currency
translation has been immaterial.
(B) PERVASIVENESS OF ESTIMATES. The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from estimates.
(C) REVENUE RECOGNITION. Nonrefundable fees or milestone payments in connection
with research and development or collaborative agreements are recognized when
they are earned in accordance with the applicable performance requirements and
contract terms. Revenue from product sales is recognized when all significant
risks of ownership have been transferred, the amount of the selling price is
fixed and determinable, all significant related acts of performance have been
completed, and no other significant uncertainties exist. In most cases, these
criteria are met when the goods are shipped.
9
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(d) NET LOSS PER SHARE. Net loss per share is computed on the weighted-average
number of common shares outstanding for the respective periods. All common stock
equivalents are excluded as they are antidilutive. Fully diluted loss per share
is not presented as it would not materially differ from primary loss per share.
In 1997, the Financial Accounting Standards Board released SFAS No. 128,
"Earnings Per Share." SFAS No. 128 requires dual presentation of basic and
diluted earnings per share on the face of the income statement for all periods
presented. Basic earnings per share excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Basic earnings per share differs
from primary earnings per share pursuant to Accounting Principles Bulletin No.
15 ("APB 15"), which may include dilution related to common stock equivalents.
Diluted earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted earnings per share is computed similarly
to fully diluted earnings per share pursuant to APB 15. SFAS No. 128 is
effective for reporting periods ending after December 15, 1997, and when
adopted, it will require restatement of prior periods earnings per share for
those reported periods preceding December 15, 1997.
Since the effect of outstanding options, convertible notes, and preferred stock
is antidilutive, they have been excluded from the Company's computation of net
loss per share. Accordingly, management does not believe that SFAS No. 128 will
have an impact upon historical net loss per share as reported.
3. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
Components of inventory cost include materials, labor, and manufacturing
overhead. Production costs attributable to a product are expensed until
regulatory approval is obtained for such product. Inventories consist of the
following:
September 30, December 31,
1997 1996
---- ----
(in thousands)
Raw materials $ 2,282 $1,518
Work-in-process - 162
Finished goods 141 102
------- ------
Total $ 2,423 $1,782
======= ======
10
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4. OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following components:
September 30, December 31,
1997 1996
---- ----
(in thousands)
Payroll and fringe benefits $ 1,868 $ 1,114
Accrued interest payable 2,391 999
Reserve for contract loss 720 720
Accrued taxes 608 608
Accrued costs of clinical trials 276 421
Accrued construction costs 180 192
Accrued consulting and professional fees 216 144
Deferred rent credit 104 95
Other accrued liabilities 351 247
-------- -------
Total other current liabilities $ 6,714 $ 4,540
======== =======
5. SHAREHOLDERS' EQUITY
In March 1997, the Company extended the expiration date for an option to
purchase 150,000 shares of common stock at an exercise price of $11.13. The
Company recognized as compensation expense in the quarter ended March 31, 1997,
the excess of the fair market value of the Company's common stock as of the date
of the option extension over the exercise price of $11.13 per share.
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING PARAGRAPHS IN THIS FORM 10-Q CONTAIN CERTAIN FORWARD
LOOKING STATEMENTS, WHICH ARE WITHIN THE MEANING OF AND MADE PURSUANT TO THE
SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
THESE FORWARD LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, THOSE REGARDING
THE PROSPECTS FOR REGULATORY APPROVAL, THE PROSPECTS FOR MARKETING AND
DISTRIBUTION OF VACCINE PRODUCTS, THE PROSPECTS FOR AND FACTORS AFFECTING FUTURE
REVENUES AND PROFITABILITY, FUTURE COMPLIANCE WITH FINANCIAL COVENANTS UNDER A
DEBT OBLIGATION, LIKELIHOOD OF ADDITIONAL FUNDING UNDER LICENSE, MARKETING,
DISTRIBUTION AND/OR DEVELOPMENT AGREEMENTS, CASH REQUIREMENTS FOR FUTURE
OPERATIONS, AND PROJECTED CAPITAL EXPENDITURES. READERS ARE CAUTIONED THAT
FORWARD LOOKING STATEMENTS INVOLVE RISKS, UNCERTAINTIES, AND FACTORS THAT MAY
AFFECT THE COMPANY'S BUSINESS AND PROSPECTS, INCLUDING WITHOUT LIMITATION THOSE
DESCRIBED BELOW AS WELL AS THE RISKS ASSOCIATED WITH: OBTAINING REGULATORY
APPROVAL OF PRODUCTS BY REGULATORY AGENCIES INCLUDING THE FDA; THE PRODUCTION OF
VACCINES; THE NATURE OF COMPETITION; NEED FOR EFFECTIVE MARKETING; DEPENDENCE ON
SUPPLIERS, INCLUDING STATENS SERUMINSTITUT; AND UNCERTAINTIES RELATING TO
CLINICAL TRIALS, ALL AS DISCUSSED IN THE COMPANY'S FILINGS WITH THE U.S.
SECURITIES AND EXCHANGE COMMISSION ("SEC"), INCLUDING THE 1996 ANNUAL REPORT ON
FORM 10-K, TO WHICH THE READER'S ATTENTION IS DIRECTED.
BACKGROUND
The Company is engaged in the research, development, production,
and sale of vaccines for the prevention of infectious diseases in children and
adults.
In February 1996, the Swedish Ministry of Health granted
regulatory approval to market the Company's acellular pertussis vaccine
formulated as a combined DTaP vaccine for the prevention of diphtheria, tetanus,
and pertussis (whooping cough). This marketing authorization was the first
regulatory approval for any of the Company's products. In April 1997, the
Swedish Ministry of Health granted regulatory approval for the Company's
monovalent acellular pertussis (aP) vaccine to vaccinate children, thereby
expanding the market for the Company's aP vaccine. In addition, the Danish
National Board of Health granted regulatory approval in September 1996 of a
combined DTaP-IPV (polio) vaccine for all primary and booster doses for infants
and children in Denmark. This combination vaccine, which combines the DTaP
vaccine with an enhanced, inactivated polio vaccine ("IPV"), was developed
jointly by Statens Seruminstitut ("SSI") and the Company.
Under supply agreements, the Company manufactures the acellular
pertussis component, and SSI manufactures the diphtheria, tetanus and IPV
components for the DTaP and DTaP-IPV vaccines. SSI is responsible for the
marketing and distribution of the DTaP and DTaP- IPV products in the
Scandinavian, Baltic and other countries comprising its territory ("SSI's
Territory"). Accordingly, the Company has been selling its acellular pertussis
toxoid to SSI for formulation into DTaP and DTaP-IPV for sale in Sweden and
12
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Denmark, respectively. In addition, during the fourth quarter of 1996, the
Company executed a supply and distribution agreement with Chiron Behring
("Chiron Behring") covering the Company's DTaP and DTaP-IPV vaccines in Germany
and Austria ("Chiron Behring's Territory").
In 1995, 1996 and 1997, the Company has recognized development
revenues pursuant to agreements with Pasteur-Merieux Serums et Vaccins, a
wholly-owned subsidiary of Rhone-Poulenc, which operates in North America
through its subsidiary Connaught Laboratories ("Pasteur Merieux Connaught"),
under which the Company and Pasteur Merieux Connaught will jointly develop the
Company's meningococcus B vaccine. Additional funding may be provided to the
Company by Pasteur Merieux Connaught under the terms of the license and clinical
development agreements. See "Outlook," below.
In the fourth quarter of 1996, the Company and Abbott Laboratories
("Abbott") signed an agreement under which Abbott would market CERTIVA(TM), the
Company's DTaP vaccine, when approved by the FDA. The marketing agreement also
will allow Abbott to market the Company's DTaP-HIB (Haemophilus influenza type
b), DTaP-IPV and DTaP-IPV-HIB combination vaccines, which are under development.
Abbott will market CERTIVA(TM) and the combination vaccines to private
physicians and managed care markets in the United States for immunization of
infants and children. The Company will market CERTIVA(TM) and the combination
vaccines to government purchasers, including state governments and the Centers
for Disease Control and Prevention ("CDC").
The Company and Abbott will collaborate in the clinical
development of the combination vaccines and Abbott is providing the Company with
clinical development funding. In addition, the Company will receive payments
upon achievement of prescribed milestones. The first milestone relates to FDA
approval of CERTIVA(TM) provided certain other conditions are satisfied. In
September 1995, the Company filed a product license application with the FDA for
approval to market CERTIVA(TM) and FDA approval for the vaccine is pending.
Following FDA approval, the Company will receive revenues from Abbott as it
purchases CERTIVA(TM) and the combination vaccine products for resale to the
private pediatric market. See "Outlook," below.
In November 1996, the Company acquired a 35,000 square foot
manufacturing facility in Beltsville, Maryland. That acquisition included the
purchase and lease of equipment and leasehold improvements and the assumption of
real estate leases. The total acquisition cost for the equipment and leasehold
improvements was approximately $24.9 million, which included a cash payment of
$17.2 million. The balance of $7.7 million is represented by an equipment lease
obligation accounted for as a capital lease, which expires in 2000. Under the
equipment lease agreement there are financial covenants that obligate the
Company to maintain certain minimum cash and investment balances, a minimum
tangible net worth (defined to include amounts under the outstanding convertible
subordinated notes) and certain other financial ratios. The Company would be
required to post an irrevocable letter of credit for predetermined amounts at
such time as the Company is not in compliance with any of these financial
covenants. The Company believes that it can maintain compliance with these
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financial covenants through the first half of 1998, although there are no
assurances in this regard. This is a forward looking statement and the factors
that affect the Company's ability to maintain compliance with these financial
covenants include, among other things, the Company's ability to control costs,
manage its cash resources and the magnitude and timing of product sales and
payments from license, marketing, distribution and development agreements. In
addition, the Company has assumed the real estate leases underlying the
facility, which are scheduled to expire in February 2001, but may be extended
through 2011.
The Company had 259 and 196 full-time employees as of September
30, 1997 and 1996, respectively.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
In 1997, the Company recognized $465,000 in revenue from product
sales to SSI and $6.5 million under collaborative agreements. Revenue from
collaboration agreements consists of $6 million milestone payment from Pasteur
Merieux Connaught under the license and development agreements covering the
Company's meningococcal B vaccine, with the balance representing revenue
attributable to development funding under the Company's agreement with Abbott.
Production expenses were $5.2 million in 1997 compared to $4.1
million in 1996. The increase in these expenses in 1997 is due to increases in
labor, materials, and facilities operating costs as the Company prepares for
regulatory approval of CERTIVA(TM) in the United States. The increase in labor
cost is attributable primarily to an increase in the number of employees.
Production costs attributable to a product are expensed until regulatory
approval is obtained for such product.
Research and development expenses increased to $4.9 million in
1997 from $2.6 million in 1996. The increase is attributable primarily to higher
depreciation and operating costs of the Company's newly acquired facility and,
to a lesser extent, labor as a result of an increase in the number of employees.
These increases were offset in part by lower clinical testing and related
expenses.
General and administrative expenses were $3.2 million in 1997 as
compared to $1.6 million in 1996. The increase is primarily due to a technology
license fee payment and to a lesser extent professional service costs and higher
labor as a result of an increase in the number of employees.
Interest and dividend income decreased to $739,000 in 1997 from
$1.1 million in 1996. This reduction is due primarily to a change in the average
cash balance.
Interest expense increased to $1.7 million in 1997 from $1.5
million in 1996. The increase is due primarily to an equipment lease accounted
for as a capital lease.
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The factors cited above resulted in a net loss of $7.4 million or
$0.23 per share in 1997 as compared to a net loss of $8.7 million or $0.28 per
share in 1996. The weighted-average number of common shares outstanding was 31.6
million for 1997 compared to 30.8 million for 1996. The increase in the number
of weighted-average shares outstanding for 1997 as compared to 1996 is
attributable primarily to the exercise of stock options and the sale of 350,000
shares of the Company's Common Stock to Abbott in the fourth quarter of 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
In 1997, the Company recognized $1.4 million in revenue from
product sales to SSI and $7.7 million under collaborative agreements. Revenue
from collaboration agreements consists of $6 million milestone payment from
Pasteur Merieux Connaught under the license and development agreements covering
the Company's meningococcal B vaccine, with the balance representing revenue
attributable to development funding under the Company's agreement with Abbott.
Revenue in 1996 is from product sales to SSI.
Production expenses were $13.9 million in 1997 compared to $10.8
million in 1996. The increase in these expenses in 1997 is due to increases in
materials, labor, and facilities operating costs as the Company prepares for
regulatory approval of CERTIVA(TM) in the United States. The increase in labor
cost is attributable primarily to an increase in the number of employees.
Production costs attributable to a product are expensed until regulatory
approval is obtained for such product.
Research and development expenses increased to $14.4 million in
1997 from $8.1 million in 1996. The increase is attributable primarily to higher
depreciation and operating costs of the Company's newly acquired facility and,
to a lesser extent, labor and supplies, as a result of an increase in the number
of employees. These increases were offset in part by lower clinical testing and
related expenses.
General and administrative expenses were $8.9 million in 1997 as
compared to $4.8 million in 1996. Approximately half of this increase is due to
the combined effect of the recognition of non-cash compensation expense in the
amount of approximately $1.3 million, related to the extension of the term of
one expiring stock option and to a one-time technology license fee payment. The
remaining increase is attributable to higher labor costs as a result of an
increase in the number of employees and professional service costs.
In the first quarter of 1996, the Company sold 193,084 shares of
its investment in common stock of IVAX Corporation ("IVAX"), which generated
proceeds of approximately $5.2 million, and a realized gain of $4.2 million.
Interest and dividend income increased to $2.5 million in 1997
from $1.9 in 1996. This increase is due primarily to higher average cash
15
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balances as a result of the placement of $86.25 million convertible subordinated
notes in May 1996. See "Liquidity and Capital Resources," below.
Interest expense increased to $5.1 million in 1997 from $2.5
million in 1996 due to the Company's interest obligations under the convertible
subordinated notes and an equipment lease accounted for as a capital lease.
The factors cited above resulted in a net loss of $30.8 million or
$0.97 per share in 1997 as compared to a net loss of $19.3 million or $0.63 per
share in 1996. Without the effect of the non-cash expense related to the
extension of an expiring stock option, the net loss in 1997 would have been
$29.4 million or $0.93 per share. Without the $4.2 million gain on the sale of
investment securities, the net loss per share for 1996 would have been $0.77.
The weighted-average number of common shares outstanding was 31.6 million for
1997 compared to 30.6 million for 1996. The increase in the number of
weighted-average shares outstanding for 1997 as compared to 1996 is attributable
primarily to the exercise of stock options and the sale of 350,000 shares of the
Company's Common Stock to Abbott in the fourth quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
In May 1996, the Company completed an offering of 6.50%
convertible subordinated notes in the principal amount of $86.25 million due May
1, 2003. The net proceeds from this offering were approximately $82.7 million.
Interest on the notes is payable semiannually on May 1 and November 1 each year.
The notes are convertible into shares of the Company's Common Stock, at the
initial conversion price of approximately $24.86 per share. The notes also are
subordinated to present and future senior indebtedness of the Company and will
not restrict the incurrence of future senior or other indebtedness by the
Company. The notes are redeemable, in whole or in part, at the option of the
Company on or after May 1, 1999 at certain pre-established redemption prices,
plus accrued interest. Upon a change in control, the Company is required to
offer to purchase all or part of the notes then outstanding at a purchase price
equal to 100% of the principal amount thereof, plus interest. The repurchase
price is payable in cash or, at the option of the Company, in shares of the
Company's Common Stock. The Company has filed a registration statement with the
U.S. Securities and Exchange Commission, which has been declared effective,
registering resales of the notes and the underlying shares of Common Stock.
The Company's cash requirement for operations was $9.8 million in
the third quarter of 1997 as compared to $11.3 million in the second quarter of
1997. The Company's cash requirement for operations is the net cash used in
operating activities for the period being reported less amounts received under
marketing, research and development agreements and further adjusted by the
timing of proceeds from the sale of investments in affiliates. The decrease in
cash requirements from the second quarter is attributable primarily to a
semi-annual interest payment of $2.8 million on the convertible subordinated
notes made during the second quarter of 1997. At September 30, 1997, the Company
had cash and cash equivalents of approximately $55.9 million and investment
16
<PAGE>
securities in an affiliate with a market value of $1.5 million. The investment
consisted of 125,000 shares of IVAX common stock. The fair market value as of
November 6, 1997 was approximately $1.0 million. This investment is volatile and
therefore subject to significant fluctuations in value.
The Company anticipates that cash requirements for operations in
the fourth quarter of 1997 will be between approximately $12 and $13 million as
the Company: produces its acellular pertussis vaccine for commercial sale in
Europe; produces CERTIVA(TM) in anticipation of or following regulatory approval
in the United States and other territories; produces investigational combination
vaccines and conjugate vaccines; and conducts clinical trials. Thereafter, it is
presently anticipated that quarterly cash requirements for operations will
depend principally upon the level of vaccine production, costs to market
CERTIVA(TM) upon approval, the level of expenditures for the Company's ongoing
research and development program, and the timing of interest payments due on the
convertible subordinated notes described above. The foregoing are forward
looking statements. There are no assurances that the Company will meet the
projections for cash requirements for operations, that any further regulatory
approvals will be received as projected, that the milestones under existing
marketing and research and development agreements will be achieved, or that, if
such milestones are obtained, they will contribute materially to the quarterly
cash requirements. Failure or significant delays in receiving additional
regulatory approvals and meeting milestones would have a significant adverse
effect on the Company's future financial position.
Total capital expenditures for the first nine months of 1997 were
$1.8 million. Total projected capital expenditures for the last quarter of 1997
are expected to be less than $1.0 million. The Company is in the planning stages
of expanding its manufacturing capacity for its vaccine products for both
clinical trials and for commercial sale. Total projected capital expenditures
for 1998 for facilities' modifications, equipment, systems and other capital
additions could range between $4 million to $8 million, depending upon the
ultimate extent of the expansions, which has not yet been determined. The amount
of and timing for capital expenditures could fluctuate based upon a number of
factors including: the magnitude of the changes in the facilities required to
meet demand for the Company's acellular pertussis products; the equipment and
leasehold improvements required in order to expand the Company's production
capacity for investigational products; the anticipated timing for further
regulatory approvals of existing products; the anticipated timing for regulatory
approval of future products; and unanticipated costs to replace or repair
existing equipment and systems in order to keep the manufacturing and
development facilities operational or in compliance with regulatory
requirements.
The capital expenditures described above are exclusive of any
future real estate acquisition or build-out plans. The Company continues to
evaluate its need to build-out, lease or acquire additional research,
development, and other facilities to accommodate the Company's expanding vaccine
development program. The Company's sublease for its research and development
facilities is scheduled to expire in 1998, and the Company is presently
evaluating several options for those operations including renewing its sublease
at existing rates. The Company has no present agreements, commitments or
17
<PAGE>
understandings in respect of any additional facilities and any related capital
expenditures will vary substantially depending upon a number of factors
including, among other things, the size of such facilities, the equipment and
systems requirements for the facilities, location, zoning and other government
restrictions and the magnitude of available financing.
Cash requirements for operations and capital expenditures for the
last quarter of 1997 and the first quarter of 1998 will be financed through a
combination of: cash and cash equivalents; revenues from product sales; fees and
payments from existing and/or new license, marketing, distribution and/or
development agreements; the exercise of stock options; the sale of debt and/or
equity securities; mortgage financing; and equipment leases. The Company
believes that it has adequate cash resources to meet its 1997 and 1998 funding
requirements although there are no assurances in this regard. While failure or
significant delays in receiving additional regulatory approvals and satisfying
milestones would have a significant adverse effect on the Company's future
operating results and future financial position, the Company believes that in
such event it could manage and reduce cash requirements for operations, although
there are no assurances in this regard. This paragraph contains forward looking
statements and the factors affecting the ability of the Company to meet its
funding requirements and manage its cash resources include, among other things,
the magnitude and timing of product sales; the magnitude and timing of any fees
and payments from license, marketing, distribution and/or development
agreements; and the magnitude of fixed costs.
OUTLOOK
The Company recognized an operating loss of $30.8 million in the
first nine months of 1997 based on revenues of $1.4 million from product sales,
$6.0 million from collaborative milestone and license payments, and $1.7 million
under a development agreement. The Company anticipates that the next several
quarters operating results may fluctuate significantly based upon a number of
factors including, among other things: the magnitude of product sales for
distribution in Europe; the timing of FDA marketing clearance; the timing for
the commercial introduction of CERTIVA(TM); the ability of the Company and its
distributors to compete against competitive products, several of which have been
approved, and to effectively market and sell products in their respective
territories; the sales prices established for products by the Company and its
distributors; the efficiency of the Company's production operations; the timing
of the payments under license, marketing, distribution and/or development
agreements with third parties; the ability of the Company to manufacture and
deliver products in accordance with customer orders; the timing and costs
associated with clinical trials and post-licensure testing of the Company's
products; the timing and amount of funding that may be received under any
additional license, marketing, distribution and/or development agreements with
third parties; and the timing of and amount of proceeds from the sale of
additional investment securities. The foregoing are forward looking statements
and the factors affecting its outcome are described herein as well as in the
first paragraph of this Management's Discussion and Analysis of Financial
Condition and Results of Operations, and in the Company's other filings with the
SEC, including the 1996 annual report on Form 10-K, to which the reader's
attention is directed.
18
<PAGE>
There are no assurances that the Company will meet the operating
results projected, that any further regulatory approvals will be received, that
any milestones will be achieved, or if achieved, that milestone payments will
contribute materially to the quarterly operating results of the Company.
PRODUCT SALES. The Company anticipates additional revenues from
product sales during the fourth quarter of 1997 to SSI for its sale of the DTaP
and the DTaP-IPV vaccines in SSI's Territory and from the sale of its acellular
pertussis vaccine for distribution in Sweden for immunization of older children
and adolescents. Any additional product approvals granted to SSI could lead to
increased revenues from the sale of the Company's acellular pertussis vaccine.
Additional revenues may be forthcoming from sale of the DTaP and/or DTaP-IPV
vaccines to Chiron Behring in anticipation of or following regulatory approval
for one or both of these products in Chiron Behring's Territory. There are no
assurances that further product approvals will be obtained in these territories
during 1997 or at all, or that once obtained SSI or Chiron Behring will be
effective in the marketing and distributing the products. The Company does not
control the marketing and distribution efforts of SSI or Chiron Behring in their
respective territories and, therefore, the Company's revenues for product sales
in those territories are dependent upon the effectiveness of these parties'
sales, marketing and distribution efforts.
As described above, during 1996, the Company and Abbott signed an
agreement under which Abbott would market CERTIVA(TM) and certain combination
vaccines to private physicians and managed care markets in the United States for
immunization of infants and children. The Company will market these products to
government purchasers, including state governments and the CDC. FDA approval of
the Company's product license application for CERTIVA(TM) is pending.
The Company, therefore, anticipates revenues from the sale of
CERTIVA(TM) in the United States to Abbott for resale to private physicians and
the managed care market beginning in 1997 or early 1998, and to state
governments and the CDC beginning in early 1998. If the product is launched
successfully in the United States by the Company and Abbott, revenues from
operations and the prospects for profitability would increase. The foregoing are
forward looking statements and there are no assurances that the Company will
achieve profitability based solely on revenues from its acellular pertussis
vaccine or any future vaccines under development. There can be no assurance that
the FDA's approval will be obtained or that, once obtained, the Company and/or
Abbott will be effective in marketing and distributing the product. The
principal factors affecting the approval of CERTIVA(TM) and its timing are
believed to be the sufficiency of the clinical trials' design, the quality of
the clinical data submitted to the FDA, and the adequacy of the systems,
procedures, operations and facilities relating to the product, among other
things. The factors affecting successful commercial launch of CERTIVA(TM) in the
United States include, among others: successfully participating in established
purchasing programs of Federal and state governments; establishing an identity
and reputation for the Company and its products; creating an awareness among
19
<PAGE>
pediatricians of the safety and efficacy of the vaccine; distinguishing the
Company's product from that of its competitors; establishing the Company as an
effective and reliable supplier of vaccines; production of sufficient quantities
of vaccine and establishing effective distribution channels.
The foregoing paragraphs contain only a partial description of the
factors affecting the Company's business prospects and risk factors affecting
future operations. Reference is made to the Company's filings with the SEC,
including the 1996 annual report on Form 10-K, for a more complete description
of the risks and uncertainties affecting the Company and its business.
MARKETING, RESEARCH & DEVELOPMENT AGREEMENTS. In December 1995,
the Company signed a clinical development agreement and license agreement with
Pasteur Merieux Connaught under which the parties agreed to jointly develop its
new conjugate vaccine against meningococcus B infection for both adults and
pediatric indications. In 1996, the Company recognized revenue from Pasteur
Merieux Connaught under these agreements, and in the third quarter of 1997, the
Company received a $6 million milestone payment under this collaboration. Future
fees and funding would be made upon achievement of development, clinical and
regulatory milestones. Total remaining fees and payments to the Company upon
achievement of all clinical and regulatory milestones amount to $39 million. The
time it may take to achieve future milestones cannot be predicted accurately,
and there are no assurances that any additional milestones will be met. In
addition, Pasteur Merieux Connaught may terminate these agreements in its sole
discretion at any time.
Under the marketing and distribution agreement with Abbott, the
Company will receive clinical development payments and milestone payments upon
achievement of prescribed clinical and regulatory events. The first milestone
relates to FDA approval of CERTIVA(TM) provided certain other conditions are
satisfied. Total remaining payments by Abbott to the Company under the
agreement, inclusive of payments expected during 1997, amount to $26 million. In
addition, the Company will receive revenues from Abbott as it purchases
CERTIVA(TM) and the combination vaccine products for resale to the private
pediatric market. There are no assurances that the milestones will be met, that
the quantities of Abbott's purchases of CERTIVA(TM) will be significant or as to
the timing of such purchases, or that Abbott will not exercise its right to
terminate this arrangement at any time with advance notice.
For the last quarter of 1997, the Company anticipates that total
receipts of license fees, clinical development funding and milestone payments
under its existing marketing, research and development agreements could be up to
approximately $3 million with no assurance that any further amounts will be
received during 1997. This is a forward looking statement and the factors that
affect the timing of the license fee and milestone payments are in large measure
outside of the control of the Company. In the first nine months of 1997, the
Company recognized $7.7 million of revenue under marketing, research and
development agreements, which includes the $6 million received under the
agreements with Pasteur Merieux Connaught. The revenue recognized by the Company
from clinical development payments received from Abbott are and will be equal to
the Company's expenditures in the clinical development program for CERTIVA(TM)
and the combination vaccines up to a specified amount. Accordingly, such
20
<PAGE>
revenues are likely to fluctuate from quarter to quarter and would have no
effect on net operating results. The factors that affect the timing of these
expenditures, and therefore, the revenues to be recognized therefrom, are
subject to uncertainties related to the planning, commencement and completion of
clinical trials and the regulatory approval process. There are no assurances
that the clinical development funding from Abbott will be sufficient to fund all
of the Company's expenditures in the clinical development program for
CERTIVA(TM) and the combination vaccines.
The Company is considering the advisability of executing further
distribution agreements for certain markets throughout the world. The Company
also intends to collaborate in the development of selected vaccine products and
may enter into additional collaborative development agreements similar in nature
to that which was signed with Pasteur Merieux Connaught, as described above. In
addition, the Company is in various stages of discussions with third parties
regarding various business arrangements including licensing, joint venture,
acquisition, and other business agreements, some of which possibly may be
concluded in the near term. There are no assurances that the Company will
successfully negotiate and sign any such agreements or that, if executed, the
financial terms for any such agreement will be significant.
TAX AND OTHER MATTERS
At December 31, 1996, the Company and its subsidiaries had income
tax loss carryforwards of approximately $11.8 million to offset future Canadian
source income and approximately $56.0 million to offset future United States
taxable income subject to the alternative minimum tax rules in the United
States.
If more than a certain percentage of the Company's assets or
income becomes passive, the Company will be classified for U.S. tax purposes as
a passive foreign investment company ("PFIC"), and a U.S. taxpayer may be
subject to an additional Federal income tax on receiving certain dividends from
the Company or selling the Company's Common Stock. The Company has not been
classified as a PFIC to date, and during 1997, the Company intends to, and
believes that it can, generate sufficient other income to avoid being classified
as a PFIC. This is a forward looking statement and the factors affecting this
classification include, among other things, the timing and amount of revenue
from product sales; the timing and amount of license fees, milestone payments
and development funding under license, marketing, distribution and development
agreements; the classification of payments received by the Company as active or
passive; and the classification of the Company's assets as active or passive.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Not applicable.
21
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
22
<PAGE>
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.
NORTH AMERICAN VACCINE, INC.
(Registrant)
By: /s/ SHARON MATES
--------------------------
Sharon Mates, Ph.D.
President
By: /s/ LAWRENCE J. HINELINE
---------------------------
Lawrence J. Hineline
Vice President - Finance
Date: November 7, 1997
23
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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