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 JUNE 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: JUNE 30, 1996
Common Stock 7,257,524
<PAGE>
Part I: Financial Information
PENEDERM INCORPORATED
Condensed Consolidated Balance Sheets
June 30, 1996 and December 31, 1995 (in thousands)
June 30, December 31,
1996 1995
----------- ----------
ASSETS (unaudited)
Current Assets:
Cash and cash equivalents $ 1,525 $ 8,695
Short-term marketable securities 6,050 4,796
Accounts receivable 968 862
Inventory 401 301
Prepaid expenses and other
current assets 544 467
----------- ----------
Total current assets 9,488 15,121
Marketable Securities 2,863 1,520
Fixed assets, at cost, less
accumulated depreciation and
amortization 298 282
Intangible and other assets 1,085 1,045
------------ -----------
Total assets $ 13,734 $ 17,968
=========== ===========
LIABILITIES
Current liabilities:
Accounts payable $ 776 $ 791
Accrued and other liabilities 1,174 1,166
------------ -----------
Total current liabilities 1,950 1,957
Long-term debt obligations 50 77
------------ -----------
Total liabilities 2,000 2,034
SHAREHOLDERS' EQUITY
Common stock, no par value 46,798 46,684
Accumulated Deficit (35,064) (30,750)
------------ -----------
Total shareholders' equity 11,734 15,934
------------ -----------
Total liabilities and
shareholders' equity $ 13,734 $ 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 Six Months Ended
June 30, June 30,
1996 1995 1996 1995
------ ------ ------ ------
REVENUES
Product sales $ 1,100 $ 1,020 $ 1,693 $ 2,354
License and research
contract income -- 600 207 600
--------- --------- --------- ---------
Total revenues 1,100 1,620 1,900 2,954
--------- --------- --------- ---------
COSTS AND EXPENSES
Cost of sales 687 702 1,115 1,344
Research and
development 1,259 1,234 3,121 2,347
Selling, general and
administration 1,122 984 2,308 2,136
--------- --------- --------- ---------
Total costs and
expenses 3,068 2,920 6,544 5,827
--------- --------- --------- ---------
Loss from operations (1,968) (1,300) (4,644) (2,873)
-------- -------- -------- --------
Interest income, net 154 255 330 510
-------- -------- -------- --------
Net loss $(1,814) $(1,045) $(4,314) $(2,363)
======== ======== ======== ========
Net loss per share $( 0.25) $( 0.15) $( 0.59) $( 0.33)
======== ======== ======== ========
Number of shares used
in computing net
loss per share 7,257 7,153 7,256 7,147
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
PENEDERM INCORPORATED
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Six Months Ended
June 30,
1996 1995
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $( 4,314) $( 2,363)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Loss on disposal of fixed assets -- 127
Depreciation and amortization 130 117
Increase in accounts receivable ( 106) ( 645)
Decrease (increase) in inventory ( 100) 293
Increase in prepaid expenses and
other current assets ( 77) ( 19)
Decrease in accounts payable,
accrued liabilities and deferred
rent ( 10) ( 1,221)
--------- --------
Net cash used in operating
activities ( 4,477) ( 3,711)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturity of held-to-maturity
securities -- 1,000
Purchase of available-for-sale
securities ( 6,908) ( 3,932)
Maturity of available-for-sale
securities 4,051 4,686
Sale of available-for-sale securities 260 --
Acquisition of technology ( 100) ( 1,098)
Acquisition of fixed assets ( 86) ( 139)
--------- ---------
Net cash from (used in)
investing activities ( 2,783) 517
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 114 139
Borrowing (repayment) of long-term
debt, net ( 24) 1
-------- --------
Net cash provided by financing
activities 90 140
-------- --------
Net decrease in cash and cash
equivalents ( 7,170) ( 3,054)
Cash and cash equivalents at
beginning of period 8,695 6,728
-------- --------
Cash and cash equivalents at end
of period $ 1,525 $ 3,674
======== ========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
PENEDERM INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Interim Unaudited Financial Information:
The accompanying interim unaudited condensed financial statements of the
Company for the three and six month periods ended June 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
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. Penederm has recently received notification from
the FDA that its NDA for MENTAX (trademark)(topical athlete's foot
treatment), is approvable. The Company currently has NDAs pending
before the FDA for treatment of other skin fungus indications with
MENTAX and for AVITA (trademark) gel and AVITA cream topical retinoic
acid acne treatments, and has two other pharmaceutical products for
psoriasis and nail fungus in 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 June 30, 1996, the Company incurred a
cumulative net loss of $35,064,000. 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.
Recent Events
In April 1996, the FDA notified the Company that its NDA for MENTAX
(butenafine HCl cream), a topical treatment for interdigital tinea pedis
(athlete's foot) was approvable. The Company must supply certain data to
the FDA and complete its product labeling discussions with the agency
prior to obtaining final approval.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
Recent Events, continued
In May 1996 Mr. Robert F. Allnutt, Executive Vice President of the
Pharmaceutical Manufacturers Association, and Mr. Mark J. Gabrielson,
President of Access Management Services, Inc. and General Partner of
Prince Ventures, joined the Board of Directors to fill vacancies created
by Tom McConnell, a General Partner of New Enterprise Associates, and
Philip Young, a General Partner of U.S. Venture Partners, not standing
for re-election.
In June 1996, the Company received a non-approvable letter from the FDA
regarding its NDAs for AVITA, the Company's retinoic acid formulations
for acne treatment. The FDA requested an additional study to document
the efficacy of the gel formulation. The Company had already completed
an additional efficacy trial on AVITA gel and submitted the results to
the FDA in a July 1996 amendment.
Results of Operations
Three Months Ended June 30, 1996 and 1995
Total revenues for the three months ended June 30, 1996 of $1,100,000
decreased 32% from $1,620,000 in the same period of 1995, due primarily
to lower quantities of Lubriderm products shipped to Warner as compared
to 1995 launch quantities and a decline in Penederm cream and lotion
sales, as a result of reduced promotion spending. 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 and 1997.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
Results of Operations, continued
The Company's cost of sales decreased to $687,000 in the three months
ended June 30, 1996 from $702,000 in the same period of 1995 primarily
due to the decrease in the manufacturing of products for Warner. Gross
margins declined in the second quarter of 1996 compared to the same
period of 1995 due to lower sales levels and a change in the mix of
product revenues.
The Company's research and development expenses remained relatively flat
for the second quarter at $1,259,000 in the three months ended June 30,
1996 compared to $1,234,000 in the same period of 1995.
Sales, marketing, general and administrative expenses increased 14% to
$1,122,000 in the three months ended June 30, 1996 from $984,000 in the
same period of 1995 due primarily to increased legal costs related to
enforcement of patent rights, commissions on increased TopiCare Delivery
Compound sales 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 three months ended June 30 decreased 40% to
$154,000 in 1996 from $255,000 for the same period in 1995. This
decrease is primarily the result of lower cash balances available for
investment in the three months ended June 30, 1996.
Six Months Ended June 30, 1996 and 1995
Total revenues for the six months ended June 30, 1996 of $1,900,000
decreased 36% from $2,954,000 in the same period of 1995, due primarily
to lower quantities of Lubriderm products shipped to Warner as compared
to 1995 launch quantities and a decline in Penederm cream and lotion
sales, as a result of reduced promotion spending.
The Company's cost of sales decreased to $1,115,000 in the six months
ended June 30, 1996 from $1,344,000 in the same period of 1995 primarily
due to the decrease in the manufacturing of products for Warner. Gross
margins declined in the first half of 1996 compared to the same period
of 1995 due to lower sales levels and a change in the mix of product
revenues.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
Results of Operations, continued
Six Months Ended June 30, 1996 and 1995, continued
The Company's research and development expenses increased 33% to
$3,121,000 in the six months ended June 30, 1996 from $2,347,000 in the
same period of 1995 primarily due to the cost of human clinical trials
to establish additional 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 8% to
$2,308,000 in the six months ended June 30, 1996 from $2,136,000 in the
same period of 1995 due primarily to increased legal costs related to
enforcement of patent rights, commissions on increased TopiCare Delivery
Compound sales 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 six months ended June 30 decreased 35% to
$330,000 in 1996 from $510,000 for the same period in 1995. This
decrease is primarily the result of lower cash balances available for
investment in the six months ended June 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 quarter and six month period ended June 30,
1996 are not necessarily indicative of future operating results.
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 June 30, 1996, the Company had cash, cash
equivalents and investments totaling $10,438,000.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
Liquidity and Capital Resources, continued
Cash expenditures related to operating activities and the acquisition of
fixed assets and repayment of long-term obligations totaled $4,587,000
in the six months ended June 30, 1996 and $3,849,000 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 $100,000 and $1,098,000
related to the in-licensing of drug compounds in the six months ended
June 30, 1996 and 1995 respectively. 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 expenses related to the further
research and development of its technologies, development of its
products, acquisition of additional products and rights to drug
compounds, patent prosecution expenses and sales and marketing. These
expenses include, but are not limited to, increases in personnel and
personnel-related costs, inventory and accounts receivable and capital
expenditures, and may also include costs of facilities expansion.
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
the end of 1997. However, the Company's future capital requirements
will depend on many factors, including the timing of regulatory
approvals, 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 product and compound acquisition opportunities,
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, continued
Uncertainties Related to Forward-Looking Statements
Any statements contained in this 10-Q that relate to future plans,
events or performance are forward-looking statements that involve risks
and uncertainties including, but not limited to, risks of product non-
approval or delays by the FDA or foreign regulatory authorities, product
development and market acceptance risks, the impact of competitive
products and pricing, the results of current and future licensing and
other collaborative relationships, the results of financing efforts,
developments regarding intellectual property rights and litigation, and
other risks detailed in the Company's Annual Report on Form 10-K for the
year ended December 31, 1995. Actual results 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 four retinoic acid acne
formulations, infringes a Johnson & Johnson patent (the "J&J Patent").
The J&J Patent expires on January 27. 1998. Based on prior 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 three 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 some diversion of
management attention or will not require substantial expenditures to
defend or resolve.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on May 14, 1996. At
the meeting, the shareholders considered the items described below:
Each of the nominees for director Terry L. Opdendyk, Lloyd H. Malchow,
William I. Bergman, David E. Collins, Harvey S. Sadow, Ph.D., Gerald D.
Weinstein, M.D., were elected by the affirmative vote of at least
5,841,830 shares (out of 5,841,830 shares represented at the meeting).
The shareholders voted to approve an amendment to the Penederm
Incorporated Employee Stock Purchase Plan to increase by 50,000 the
number of shares reserved for issuance under the plan. The amendment
was approved by a vote of 4,336,703 shares for, 20,128 shares against
and 3,691 shares abstaining.
The shareholders voted to approve an amendment to the Penederm
Incorporated Equity Incentive Plan to increase by 400,000 the number of
shares reserved for issuance under the plan. The amendment was approved
by a vote of 3,540,022 shares for, 798,891 shares against and 1,061
shares abstaining.
The shareholders voted to approve certain amendments to the Penederm
Incorporated 1994 Nonemployee Directors Stock Option Plan to increase
the initial and annual grants to directors from 5,000 shares to 7,500
shares, toprovide that a director shall receive an annual grant at the
first board meeting following an annual meeting unless that director's
initial grant was made on or after the record date for the annual
meeting, and to provide that any non-employee director who has not
received either an initial grant or an annual grant since the record
date for the 1995 annual meeting of shareholders shall be granted an
option to purchase 12,500 shares in lieu of an annual grant for 1996.
The amendments were approved by a vote of 4,573,819 shares for, 833,688
shares against 5,330 shares abstaining.
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 August 12, 1996
Lloyd H. Malchow, President
and Chief Executive Officer
/S/ Edgar Luce August 12, 1996
Edgar Luce, Vice President of
Finance and Administration
<PAGE>
INDEX TO EXHIBITS
Exhibit
No. Description
- ---------- --------------------------------------------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000858876
<NAME> PENEDERM INCORPORATED
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-01-1996
<CASH> 1,525
<SECURITIES> 6,050
<RECEIVABLES> 968
<ALLOWANCES> 0
<INVENTORY> 401
<CURRENT-ASSETS> 9,488
<PP&E> 1,413
<DEPRECIATION> 1,115
<TOTAL-ASSETS> 13,734
<CURRENT-LIABILITIES> 1,950
<BONDS> 0
0
0
<COMMON> 46,798
<OTHER-SE> (35,064)
<TOTAL-LIABILITY-AND-EQUITY> 13,734
<SALES> 1,693
<TOTAL-REVENUES> 1,900
<CGS> 1,115
<TOTAL-COSTS> 1,115
<OTHER-EXPENSES> 3,121
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5
<INCOME-PRETAX> (4,314)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,314)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,314)
<EPS-PRIMARY> (0.59)
<EPS-DILUTED> (0.59)
</TABLE>
