UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1996
Commission File Number 0-22314
PENEDERM INCORPORATED
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0146116
(State of other jurisdiction of I.R.S. Employer
incorporation or organization) Identification Number
320 LAKESIDE DRIVE, FOSTER CITY, CALIFORNIA 94404
(Address of principal executive offices) (Zip Code)
(415) 358-0100
(Registrant's telephone number, including area code)
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 month (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 number of shares outstanding of each of the issuer's classes of
common stock, at the latest practicable date:
Class Outstanding as of: SEPTEMBER 30, 1996
Common Stock 7,289,628
<PAGE>
Part I: Financial Information
PENEDERM INCORPORATED
Condensed Consolidated Balance Sheets
September 30, 1996 and December 31, 1995 (in thousands)
September 30, December 31,
1996 1995
----------- ----------
ASSETS (unaudited)
Current Assets:
Cash and cash equivalents $ 1,147 $ 8,695
Short-term marketable securities 4,753 4,796
Accounts receivable 336 862
Inventory 1,049 301
Prepaid expenses and other
current assets 447 467
----------- ----------
Total current assets 7,732 15,121
Marketable Securities 1,857 1,520
Property & equipment, at cost,
less accumulated depreciation
and amortization 282 282
Intangible and other assets 1,078 1,045
------------ -----------
Total assets $ 10,949 $ 17,968
=========== ===========
LIABILITIES
Current liabilities:
Accounts payable $ 145 $ 791
Accrued and other liabilities 594 1,166
------------ -----------
Total current liabilities 739 1,957
Long-term obligations 48 77
------------ -----------
Total liabilities 787 2,034
SHAREHOLDERS' EQUITY
Common stock, no par value 46,829 46,684
Accumulated deficit (36,667) (30,750)
------------ -----------
Total shareholders' equity 10,162 15,934
------------ -----------
Total liabilities and
shareholders' equity $ 10,949 $ 17,968
=========== ===========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
PENEDERM INCORPORATED
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
------ ------ ------ ------
REVENUES
Product sales $ 52 $ 452 $ 1,745 $ 2,806
License and contract
research revenues 10 350 217 950
--------- --------- --------- ---------
Total revenues 62 802 1,962 3,756
--------- --------- --------- ---------
COSTS AND EXPENSES
Cost of sales 16 356 1,131 1,700
Research and
development 1,019 1,604 4,140 3,951
Selling, general and
administration 745 748 3,053 2,884
--------- --------- --------- ---------
Total costs and
expenses 1,780 2,708 8,324 8,535
--------- --------- --------- ---------
Loss from operations (1,718) (1,906) (6,362) (4,779)
Interest income, net 115 220 445 730
-------- -------- -------- --------
Net loss $(1,603) $(1,686) $(5,917) $(4,049)
======== ======== ======== ========
Net loss per share $( 0.22) $( 0.23) $( 0.81) $( 0.57)
======== ======== ======== ========
Number of shares used
in computing net
loss per share 7,288 7,175 7,266 7,157
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
PENEDERM INCORPORATED
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine Months Ended
September 30,
1996 1995
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $( 5,917) $( 4,049)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Loss on disposal of fixed assets -- 127
Depreciation and amortization 191 184
Decrease (increase) in accounts
receivable 526 ( 161)
Decrease (increase) in inventory ( 748) 375
Decrease in prepaid expenses and
other current assets 20 122
Decrease in other assets 2 --
Decrease in accounts payable,
accrued liabilities and deferred
rent ( 1,220) ( 917)
--------- --------
Net cash used in operating
activities ( 7,146) ( 4,319)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturity of held-to-maturity
securities -- 2,000
Purchase of available-for-sale
securities ( 6,905) ( 5,983)
Maturity of available-for-sale
securities 5,850 6,865
Sales of available-for-sale securities 761 --
Acquisition of technology ( 125) ( 1,098)
Acquisition of fixed assets ( 101) ( 142)
--------- ---------
Net cash from (used in)
investing activities ( 520) 1,642
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 145 148
Repayment of long-term debt, net ( 27) ( 16)
-------- --------
Net cash provided by financing
activities 118 132
-------- --------
Net decrease in cash and cash
equivalents ( 7,548) ( 2,545)
Cash and cash equivalents at
beginning of period 8,695 6,728
-------- --------
Cash and cash equivalents at end
of period $ 1,147 $ 4,183
======== ========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
PENEDERM INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Interim Unaudited Financial Information:
The accompanying interim unaudited condensed consolidated financial
statements of the Company for the three and nine month periods ended
September 30, 1996 and 1995, have been prepared in accordance with
generally accepted accounting principles for interim financial
statements and include all adjustments (consisting of normal and
recurring adjustments) that the Company considers necessary for a fair
presentation of the operating results and cash flows for these
periods. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for an entire
year. These financial statements should be read in conjunction with
the financial statements and notes included as part of the Company's
Form 10-K for the year ended December 31, 1995.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Recent Events
In October 1996, the FDA granted final approval to the Company
to market MENTAX (trademark), the Company's 1% butenafine HCl cream.
MENTAX, a prescription topical antifungal, is approved for
use against interdigital tinea pedis, or athlete's foot.
Overview
Penederm is developing and commercializing topically
administered prescription dermatology products that use the
Company's proprietary delivery technology or novel drug
compounds to achieve enhanced safety or efficacy profiles.
The Company currently has NDAs pending before the FDA for
treatment of tinea corporis (ringworm) and tinea cruris (groin
fungus) with MENTAX and for AVITA (trademark) gel and AVITA cream
topical retinoic acid acne treatments, and has several other
pharmaceutical products for psoriasis, nail fungus, and
antifungal line extensions in Phase II human clinical trials.
The Company also sells its patented TopiCare Delivery
Compounds (registered trademark) for use in cosmetics and personal
care products.The Company has several agreements with various
pharmaceutical companies, as follows:
COMPANY PRODUCT AREA TERRITORY
- ----------------- ----------------- ------------------
Schering-Plough Prescription & over-the-counter U.S. and Canada
HealthCare (OTC) Nail and Skin Antifungals
Products, Inc.
(Schering-Plough)
UCB Group of Prescription Nail Antifungal Europe, Africa and
Belgium (UCB) Middle East
Warner Wellcome Consumer OTC Dry Skin U.S. and Canada
Health Products (Warner)
SmithKline Beecham OTC Consumer Products Europe
(SmithKline)
The Company has been unprofitable since inception and expects
to incur significant additional operating losses in the near
future. For the period from inception through September 30,
1996, the Company incurred a cumulative net loss of
$36,667,000. Penederm's sources of working capital have been
equity financings, product sales to Warner, sales of over-the-
counter products, product license fees and contract research
revenues, sales of TopiCare Delivery Compounds and interest
earned on investments.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
Results of Operations
Three Months Ended September 30, 1996 and 1995
Total revenues for the three months ended September 30, 1996 of
$62,000 decreased from $802,000 in the same period of 1995, due
primarily to lower quantities of Lubriderm products shipped to
Warner as compared to 1995 launch quantities, a decline in Penederm
cream and lotion sales as a result of reduced promotional spending
against the brand, and reduced license revenues. The Company
reduced promotional spending on Penederm cream and lotion in order
to direct more resources to prescription product human clinical
trials. Based on current product demand forecasts from Warner, the
Company anticipates sales to Warner will continue to be less than
previous levels for the remainder of 1996.
The Company's cost of sales decreased to $16,000 in the three months
ended September 30, 1996 from $356,000 in the same period of 1995
due to the decrease in revenues. Gross margins declined in the
third quarter of 1996 compared to the same period of 1995 due to
lower sales levels and change in the mix of product revenues.
The Company's research and development expenses decreased 36% to
$1,019,000 in the three months ended September 30, 1996 from
$1,604,000 in the same period of 1995 primarily due to completion of
clinical trials for the three month period.
Sales, marketing, general and administrative expenses decreased
slightly to $745,000 in the three months ended September 30, 1996
from $748,000 in the same period of 1995, due primarily to increased
legal costs related to enforcement of patent rights, and the costs
of pre-launch preparations for MENTAX offset by continued reductions
in OTC promotions and reduced personnel costs.
Interest income for the three months ended September 30 decreased
48% to $115,000 in 1996 from $220,000 for the same period in 1995.
This decrease is primarily the result of lower cash balances
available for investment in the three months ended September 30,
1996.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
Nine Months Ended September 30, 1996 and 1995
Total revenues for the nine months ended September 30, 1996 of
$1,962,000 decreased 48% from $3,756,000 in the same period of 1995,
due primarily to lower quantities of Lubriderm products shipped to
Warner as compared to 1995 launch quantities, a decline in Penederm
cream and lotion sales as a result of reduced promotional spending
against the brand, and reduced licensing revenues.
The Company's cost of sales decreased to $1,131,000 in the nine
months ended September 30, 1996 from $1,700,000 in the same period
of 1995 due to the decrease in revenues. Gross margins declined in
1996 compared to the same period of 1995 due to lower sales levels
and change in the mix of product revenues.
The Company's research and development expenses increased 5% to
$4,140,000 in the nine months ended September 30, 1996 from
$3,951,000 in the same period of 1995 primarily due to the cost of
human clinical trials to establish additional marketing claims for
both AVITA (acne treatment) and MENTAX (skin antifungal). These
studies encompassed 1,600 patients over 26 sites across the U.S. and
Canada.
Sales, marketing, general and administrative expenses increased 6%
to $3,053,000 in the nine months ended September 30, 1996 from
$2,884,000 in the same period of 1995 due primarily to increased
legal costs related to enforcement of patent rights and the costs of
pre-launch preparations for MENTAX, the Company's topical antifungal
product, partially offset by reduced personnel costs.
Interest income for the nine months ended September 30 decreased 39%
to $445,000 in 1996 from $730,000 for the same period in 1995. This
decrease is primarily the result of lower cash balances available
for investment in the nine months ended September 30, 1996.
The Company expects that future operating results may be subject to
quarterly variations that may impact cash flow from operations.
Operating results for the three and nine month period ended
September 30, 1996 are not necessarily indicative of future
operating results.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
Liquidity and Capital Resources
In November 1993, the Company completed its initial public offering
of Common Stock, raising approximately $23,000,000 net of expenses.
Prior to the initial public offering, the Company financed
operations primarily through private placements of its equity
securities, interest income earned on investment of cash, initial
sales of products and product license fees. At September 30, 1996,
the Company had cash, cash equivalents and investments totaling
$7,757,000.
Cash expenditures related to operating activities, the acquisition
of fixed assets and repayment of long-term debt totaled $7,274,000
in the nine months ended September 30, 1996 and $4,477,000 for the
same period in fiscal 1995, and were used to finance research,
development, clinical trials, product sales, promotion and general
administration activities. The Company also made milestone payments
of $125,000 related to the in-licensing of drug compounds in the
nine months ended September 30, 1996. The Company expects that
amounts expended historically are not indicative of future
expenditures by the Company, which the Company believes will
increase. The Company expects to continue to incur substantial
expenditures related to the further research and development of its
technologies, development of its products, acquisition of additional
products and rights to drug compounds and sales and marketing.
The Company believes that existing capital resources, and the
interest income earned thereon, together with anticipated revenues
(consisting of product sales, license fees and royalties), will
satisfy the Company's working capital and identified capital
expenditure requirements through 1997. However, the Company's future
capital requirements will depend on many factors, including the
progress of the Company's collaborative and independent research and
development programs, payments received under collaborative
agreements with other companies, if any, the results and costs of
preclinical and clinical testing for the Company's products, the
costs associated with and the timing of regulatory approvals,
technological advances, the status of competitive products, and the
commercial success of Penederm's licensing and marketing efforts.
There can be no assurance that additional funds, if required, will
be available to the Company on favorable terms, if at all, to permit
the Company to continue with its plan for operations.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
Liquidity and Capital Resources
Uncertainties Related to Forward-Looking Statements
Any statements contained in this 10-Q that relate to future plans,
events or performance, including the planned product marketing efforts, are
forward-looking statements that involve risks and uncertainties
including, but not limited to, product development and market acceptance
risks, product manufacturing risks, risks associated with the
establishment and management of a contract sales force, the impact of
competitive products and pricing, the results of financing efforts,
developments regarding intellectual property rights and litigation,
risks of product non-approval or delays or post-approval reviews by the
FDA or foreign regulatory authorities, and other risks identified in the
Company's Securities and Exchange Commission filings. Actual results,
events or performance may differ materially. Readers are cautioned not
to place undo reliance on these forward-looking statements, which speak
only as of the date hereof. The Company undertakes no obligation to
publicly release the results of any revisions to these forward-looking
statements that may be made to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
<PAGE>
PENEDERM INCORPORATED
Part II: OTHER INFORMATION
Item 1. Legal Proceedings -
On July 22, 1996, Johnson & Johnson filed a complaint against
Penederm in the U.S. District Court, Northern District of
California, alleging that AVITA gel, one of the Company's retinoic
acid acne formulations, infringes a Johnson & Johnson patent (the
"J&J Patent"). The J&J Patent expires on January 27, 1998. Based on
opinion of counsel, Penederm believes that AVITA does not
infringe the J&J Patent. The Company believes that the litigation
will not affect the timing of the FDA's review of the NDA for the
Company's AVITA cream formulations and will not have a material
adverse effect on the Company's business, financial position and
results of operations. However, pursuant to FDA regulations,
although the FDA can issue an approval it cannot make any approval
for the AVITA gel effective prior to the expiration of the J&J
Patent if the lawsuit is pending. There can be no assurance that
the lawsuit will not delay the timing of the market introduction of
AVITA gel, will not result in a substantial diversion of management
attention or will not require substantial expenditures to defend or
resolve.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K - Not Applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
PENEDERM INCORPORATED
/S/ Lloyd H. Malchow November 14, 1996
Lloyd H. Malchow, President
and Chief Executive Officer
/S/ Edgar Luce November 14, 1996
Edgar Luce, Vice President of
Finance and Administration
<PAGE>
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