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 March 31, 1997
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: MARCH 31, 1997
Common Stock 8,109,338
PENEDERM INCORPORATED
TABLE OF CONTENTS
FORM 10-Q
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations -
Three months ended March 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
Signature Page 13
PENEDERM INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
March 31, December 31,
1997 1996
ASSETS ------------ ------------
Current Assets:
Cash and cash equivalents $3,357 $3,062
Short-term marketable securities 6,869 2,259
Accounts receivable 3,061 276
Inventory 1,705 1,539
Employee note receivable 125 125
Prepaid expenses and other current assets 1,111 524
------------ ------------
Total current assets 16,228 7,785
Marketable securities 1,000 1,099
Property and equipment, at cost, less
accumulated depreciation and amortization 281 277
Intangible and other assets 1,493 1,533
------------ ------------
Total assets $19,002 $10,694
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,052 $1,196
Accrued liabilities 1,770 863
Current portion of long-term obligations 17 16
------------ ------------
Total current liabilities 2,839 2,075
Long-term obligations, less current portion 24 28
------------ ------------
Total liabilities 2,863 2,103
------------ ------------
Shareholders' equity:
Common stock, no par value 56,049 46,984
Accumulated deficit (39,910) (38,393)
------------ ------------
Total shareholders' equity 16,139 8,591
------------ ------------
Total liabilities and shareholders'
equity $19,002 $10,694
============ ============
See accompanying notes.
PENEDERM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
(unaudited)
Three Months Ended
March 31,
1997 1996
-------- --------
Revenues:
Product sales $2,601 $593
Licensing revenues 300 207
-------- --------
Total revenues 2,901 800
-------- --------
Costs and expenses:
Cost of product sales 763 428
Research and development 1,223 1,862
Selling, general and administrative 2,491 1,186
-------- --------
Total costs and expenses 4,477 3,476
-------- --------
Loss from operations (1,576) (2,676)
Interest income, net 59 176
-------- --------
Net loss ($1,517) ($2,500)
======== ========
Net loss per share ($0.20) ($0.34)
======== ========
Number of shares used in computing net loss per share 7,583 7,254
======== ========
See accompanying notes.
PENEDERM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
Three Months Ended
March 31,
1997 1996
-------- --------
Cash flows from operating activities:
Net loss ($1,517) ($2,500)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 81 70
Decrease (increase) in accounts receivable (2,785) 57
Decrease (increase) in inventory (166) 46
Decrease (increase) in prepaid expenses and
other current assets (587) 16
Increase (decrease) in accounts payable, accrued
and other liabilities 763 (119)
Increase in other assets (2) --
-------- --------
Net cash used in operating activities (4,213) (2,430)
-------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities (5,013) (6,405)
Maturities of available-for-sale securities 253 3,550
Sales of available-for-sale securities 249 260
Aquisition of intangible asset -- (100)
Aquisition of property and equipment (43) (77)
-------- --------
Net cash used in investing activities (4,554) (2,772)
-------- --------
Cash flows from financing activities:
Net proceeds from private placement stock offering 8,975 --
Proceeds from issuance of common stock 90 32
Repayment of long-term obligations (3) (10)
-------- --------
Net cash provided by financing activities 9,062 22
-------- --------
Net increase (decrease) in cash and cash equivalents 295 (5,180)
Cash and cash equivalents at beginning of period 3,062 8,695
-------- --------
Cash and cash equivalents at end of period $3,357 $3,515
======== ========
See accompanying notes.
PENEDERM INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Interim Unaudited Financial Information
The accompanying interim unaudited condensed
consolidated financial statements of the Company for
the three months ended March 31, 1997 and 1996, 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 audited financial
statements and notes included as part of the Company's
Form 10-K for the year ended December 31, 1996.
2. Net Loss Per Share
Net loss per share is computed using the weighted
average number of common shares outstanding during the
period. Common stock equivalents relating to stock
options are excluded from the computation as their
effect is anti-dilutive.
In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" (SFAS 128) which
is required to be adopted in periods ending after
December 15, 1997. SFAS 128 simplifies the calculation
of earnings per share in most situations, excluding
common stock equivalents in the computation of basic
earnings per share. SFAS 128 will have no impact on
the Company's computation of loss per share in the
periods ended March 31, 1997 and 1996 or in previously
disclosed periods as common stock equivalents have been
excluded due to their anti-dilutive effect.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Recent Events
The Company received United Kingdom regulatory approval
in February to market its retinoic acid cream and gel
formulations for the treatment of acne. The United
Kingdom will be Penederm's sponsor country to gain
approval in other European nations through the European
Mutual Recognition Process.
In January 1997, the Company announced it entered into
a co-promotion agreement with a division of Merck KGaA
(Merck), under which it will sell two of Merck's
topical products in the U.S. The companies will share
profits according to their respective co-promotion
efforts.
In March 1997, Penederm signed an agreement with
SmithKline Beecham (SmithKline) to co-develop an
undisclosed OTC product using Penederm's patented
TopiCare Delivery Compounds with a proprietary
SmithKline formulation. Both companies will contribute
their scientific and technical expertise to the
collaboration. SmithKline has the exclusive option to
market the finished product worldwide. Penederm will
receive milestone payments and royalties on the sale of
products resulting from the collaboration, as well as
revenues from the supply of TopiCare Delivery
Compounds.
In March 1997, the Company completed a private
placement for which the net proceeds were approximately
$9,000,000.
Overview
Penederm is a pharmaceutical company that specializes
in developing and marketing dermatology products.
Penederm recently launched Mentax, a once-a-day
prescription topical treatment for three skin fungal
conditions: tinea pedis (athlete's foot), tinea
corporis (ringworm) and tinea cruris (groin fungus).
Penederm also recently received FDA approval to begin
marketing its Avita prescription cream product for the
treatment of acne and contingent approval to begin
marketing its Avita gel product upon expiration of a
third party patent in January 1998. Penederm has
several other pharmaceutical products for psoriasis,
nail fungus and Mentax skin treatment line extensions
in Phase II human clinical trials. The Company also
sells its patented TopiCare Delivery Compounds
for use in cosmetics and personal care products, and
markets its own over-the-counter (OTC) skin care
products through corporate partners.
The Company has several agreements with various
pharmaceutical companies, as follows:
<TABLE>
COMPANY PRODUCT AREA TERRITORY
<S> <C> <C>
In-License and Co-Development
Agreements:
- -------------------------------
Kaken Pharmaceutical Company Penederm in-licensed butenafine, U.S. Canada, Mexico and Latin America
Ltd. (Kaken) the active ingredient incorporated for skin antifungal; U.S., Canada,
in Mentax Europe, Mexico, Latin America, Australia
& New Zealand for nail antifungal.
The Merck KGaA Group/Center Co-promote Akne-Mycin and Cloderm U.S.
Laboratories
SmithKline Beecham (SmithKline) Undisclosed OTC product SmithKline option to market worldwide
Out-License Agreements:
- -------------------------------
Schering-Plough HealthCare Prescription & OTC Nail and co- U.S. and Canada
Products, Inc. (Schering- promote prescription skin
Plough) antifungal
UCB Group of Belgium (UCB) Prescription antifungal products Europe, Africa and Middle East
Warner Wellcome Consumer Health OTC Dry Skin U.S. and Canada
Products (Warner)
SmithKline Beecham (SmithKline) OTC Consumer Products Europe & Eastern Europe
Pierre Fabre Inc. (Pierre DuraScreen sunscreen U.S.
Fabre)
</TABLE>
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 March 31, 1997, the Company incurred
a cumulative net loss of $39,910,000. Penederm's
sources of working capital have been equity financings,
product sales to corporate partners, sales of Mentax
and over-the-counter products, product license fees and
sales of TopiCare Delivery Compounds and interest
earned on investments.
Results of Operations
Three Months Ended March 31, 1997 and 1996
Total revenues for the three months ended March 31,
1997 of $2,901,000 increased from $800,000 in the
same period of 1996. This increase is due primarily
to the initial product stocking shipments of the
Company's recently launched Mentax and out-license
milestone payments from corporate partners.
The Company expects its future revenues in the
near term to be derived principally from the sale of
its recently approved pharmaceutical products, and for
the revenues derived from OTC and cosmetic products to
become less significant relative to total revenues.
The Company's cost of sales increased to $763,000
in the three months ended March 31, 1997
from $428,000 in the same period of 1996 primarily
due to the 1997 launch of Mentax sales. Gross margins
improved in the first quarter of 1997 compared to the
same period of 1996 due to the 1997 launch of Mentax,
the Company's first pharmaceutical product, which
contributes higher margins than the Company's OTC and
cosmetic products.
The Company's research and development expenses
decreased 34% to $1,223,000 in the three months ended
March 31, 1997 from $1,862,000 in the same period of
1996 primarily due to the timing and size of human
clinical trials. The Company was conducting a large
Phase III study in the first quarter of 1996 whereas
several smaller Phase II studies were being conducted
for the same period in 1997.
Selling, general and administrative expenses increased
110% to $2,491,000 in the three months ended March 31,
1997 from $1,186,000 in the same period of 1996 due
primarily to marketing and other expenses related to
the product launch of Mentax and detailing support for
Akne-mycin and Cloderm.
Net interest income decreased 66% to $59,000 in the
three months ended March 31, 1997 from $176,000 in the
same period of 1996. This decrease is primarily as a
result of lower average cash balances available for
investment in the first quarter of 1997.
The Company expects that annual revenues, and costs and
expenses will continue to increase in the future, due
principally to further commercialization of its
recently approved pharmaceutical products. Sales and
marketing expenses are expected to increase
significantly from the prior year as these products are
promoted and sold in the marketplace. The Company also
expects modest expansion of research and development
programs, increased patent and regulatory costs,
expansion of regulatory, clinical and quality
assurance capabilities, and increased administrative
support costs. Therefore, additional operating losses
are expected in the near future.
In addition, sales of a product upon initial market
introduction generally include a significant amount of
initial orders for inventory by wholesalers and
distributors and are not necessarily indicative of
actual demand for that product by patients and
physicians. There can be no assurance that
distributors and wholesalers will be able to forecast
demand for product accurately. Fluctuations in
operating results will occur to the extent that sell
through of products does not meet distributors' or
wholesalers' expectations. The Company also expects
that future operating results may be subject to
quarterly variations that may impact cash flow from
operations. Operating results for the three months
ended March 31, 1997 are not necessarily indicative of
future operating results.
Liquidity and Capital Resources
The Company's principal sources of capital to date
have been the proceeds from public and private
offerings of its equity securities, including a March
1997 private placement for which the net proceeds were
approximately $9,000,000. At March 31, 1997, the
Company had cash, cash equivalents and investments
totaling $11,226,000.
Cash expenditures related to operating activities, the
acquisition of fixed assets and repayment of long-term
obligations totaled $4,259,000 in the three months
ended March 31, 1997 and $2,517,000 for the same period
in 1996. Operating activities were comprised of
research and development, clinical trials, product
sales, promotion and general administration activities.
The Company also made milestone payments of $100,000
related to the in-licensing of drug compounds in the
quarter ended March 31, 1996. No similar milestone
payments were made in the first quarter of 1997.
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,
including the interest income earned on its invested
cash balances, together with the anticipated revenues
(consisting of product sales, license fees and
royalties), will satisfy the Company's working capital
and identified capital expenditure requirements at
least 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.
The statements in "Management's Discussion and
Analysis of Financial Condition and Results of
Operations" that relate to future plans, events or
performance, including statements relating to future
revenue and expense levels, are forward-looking
statements which 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 current and future
licensing and other collaborative relationships, the
results of financing efforts, developments regarding
intellectual property rights and litigation, risks of
product nonapproval 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 undue reliance on these forward-
looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to
publicly release the result of any revisions to these
forward-looking statements that may be needed to
reflect events or circumstances after the date hereof
or to reflect the occurrence of unanticipated events.
PENEDERM INCORPORATED
Part II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K - Not Applicable
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
May 14, 1997 /s/ Lloyd H. Malchow
Date Lloyd H. Malchow, President
and Chief Executive Officer
May 14, 1997 /s/ Michael A. Bates
Date Michael A. Bates, Director
of Finance and Administration
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,357
<SECURITIES> 6,869
<RECEIVABLES> 3,061
<ALLOWANCES> 0
<INVENTORY> 1,705
<CURRENT-ASSETS> 16,228
<PP&E> 1,497
<DEPRECIATION> 1,216
<TOTAL-ASSETS> 19,002
<CURRENT-LIABILITIES> 2,839
<BONDS> 0
0
0
<COMMON> 56,049
<OTHER-SE> (39,910)
<TOTAL-LIABILITY-AND-EQUITY> 19,002
<SALES> 2,601
<TOTAL-REVENUES> 2,901
<CGS> 763
<TOTAL-COSTS> 763
<OTHER-EXPENSES> 1,223
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> (1,517)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,517)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,517)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
