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, 1997
Commission File Number 0-22314
PENEDERM INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 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)
(650) 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, 1997
Common Stock 8,143,051
_______________
PENEDERM INCORPORATED
TABLE OF CONTENTS
FORM 10-Q
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations -
Three months ended September 30, 1997 and 1996 and
nine months ended September 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 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 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signature Page 15
PENEDERM INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 1997 and December 31, 1996
(in thousands)
September 30, December 31,
1997 1996
------------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 714 $ 3,062
Short-term marketable securities 5,111 2,259
Accounts receivable 2,166 276
Inventory 1,689 1,539
Prepaid expenses and other
current assets 587 649
------- -------
Total current assets 10,267 7,785
Marketable securities 1,000 1,099
Property and equipment, at cost,
less accumulated depreciation
and amortization 277 277
Intangible and other assets 1,407 1,533
------- -------
Total assets $12,951 $10,694
======= =======
LIABILITIES
Current liabilities:
Accounts payable $ 998 $ 1,196
Accrued liabilities 2,093 879
------- -------
Total current liabilities 3,091 2,075
Long-term obligations 14 28
------- -------
Total liabilities 3,105 2,103
SHAREHOLDERS' EQUITY
Common stock, $.01 par value 81 --
Additional paid in capital 56,130 46,984
Accumulated deficit (46,365) (38,393)
------- -------
Total stockholders' equity 9,846 8,591
------- -------
Total liabilities and
stockholders' equity $12,951 $10,694
======= =======
See accompanying notes.
PENEDERM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
(unaudited)
Three Months Nine Months
Ended Ended
September 30, September 30,
------------------- --------------------
1997 1996 1997 1996
------- ------- ------- -------
Revenues:
Product sales $ 962 $ 52 $ 5,206 $ 1,745
Licensing revenues 925 10 1,585 217
------- ------- ------- -------
Total revenues 1,887 62 6,791 1,962
------- ------- ------- -------
Costs and expenses:
Cost of product sales 527 16 2,135 1,131
Research and development 1,947 1,019 4,429 4,140
Sales and marketing 3,097 231 7,029 957
General and administrative 577 514 1,508 2,096
------- ------- ------- -------
Total costs and expenses 6,148 1,780 15,101 8,324
------- ------- ------- -------
Loss from operations (4,261) (1,718) (8,310) (6,362)
Interest income, net 128 115 338 445
-------- -------- -------- --------
Net loss $(4,133) $(1,603) $(7,972) $(5,917)
======== ======== ======== ========
Net loss per share $ (0.51) $ (0.22) $ (1.00) $ (0.81)
======== ======== ======== ========
Number of shares used in
computing net loss per share 8,138 7,288 7,944 7,266
======== ======== ======== ========
See accompanying notes.
PENEDERM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
September 30,
Increase (decrease) in cash and cash 1997 1996
equivalents ------- -------
Cash flows from operating activities:
Net loss $(7,972) $(5,917)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 243 191
Decrease (increase) in accounts receivable (1,890) 526
Increase in inventory (150) (748)
Decrease in prepaid expenses and other
current assets 62 20
Increase (decrease) in accounts payable,
accrued liabilities and rent 1,014 (1,220)
Decrease (increase) in other assets (2) 2
------- -------
Net cash used in operating activities (8,695) (7,146)
------- -------
Cash flows from investing activities:
Purchases of available-for-sale securities (7,032) (6,905)
Maturities of available-for-sale securities 1,278 5,850
Sales of available-for-sale securities 3,001 761
Acquisition of intangible assets -- (125)
Acquisition of fixed assets (115) (101)
------- -------
Net cash used in investing activities (2,868) (520)
------- -------
Cash flows from financing activities:
Net proceeds from private placement stock offering 8,975 --
Proceeds from issuance of common stock 252 145
Repayment of long-term debt (12) (27)
------- -------
Net cash provided by financing activities 9,215 118
------- -------
Net decrease in cash and cash equivalents (2,348) (7,548)
Cash and cash equivalents at beginning of period 3,062 8,695
------- -------
Cash and cash equivalents at end of period $ 714 $1,147
======= =======
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 and nine month periods ended September 30,
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.
In July 1997, the Company changed the state of its
incorporation from California to Delaware.
2. Product Reserve
The Company maintains a product reserve which it
considers sufficient to cover product returns and bad
debts.
3. 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 September 30, 1997 and 1996 or in
previously disclosed periods as common stock
equivalents have and had been excluded due to their
anti-dilutive effect.
4. Comprehensive Income
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," which
establishes standards for reporting and displaying
comprehensive income and its components in a full set
of general-purpose financial statements and is required
to be adopted by the Company beginning in fiscal 1998.
Penederm's management is currently evaluating the
implication of this statement on the Company's
statement of operations.
5. Segment Reporting
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and
Related Information," which establishes standards for
the way the public business enterprises report
information in annual statements and interim financial
reports regarding operating segments, products and
services, geographic areas and major customers. SFAS
131 will first be reflected in the Company's 1998
Annual Report and will apply to both annual and interim
financial reporting subsequent to this date.
Penederm's management is currently evaluating the
implication of this statement on the Company's
statement of operations.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Recent Events
Penederm recently commenced its commercial launch of
Avita cream, a topical form of retinoic acid, for the
treatment of acne. The U.S. Patent and Trademark
Office issued a patent to Penederm which broadly covers
topical formulations of Avita that include Penederm's
TopiCare Delivery Compounds. The issued patent covers
retinoic acid-containing polyether-polyurethane
formulations which can be used for the treatment of
acne vulgaris and other skin disorders. The polyether-
polyurethane compounds (TopiCare Delivery Compounds)
are liquid polymers that deposit and hold drugs and
other skin care agents on and in the upper layers of
the skin.
In September 1997, in order to facilitate the sale of
the products by Merck KGaA (Merck) to a third party and
to allow the Company to focus on the promotion of its
own brands, Penederm terminated its January 1997 co-
promotion agreement with a division of Merck under
which it had previously promoted two topical products
in the United States. The agreement was terminated at
no cost to the Company.
In October 1997, clinicians at a meeting of the Skin
Disease Education Foundation in Santa Fe, New Mexico
reported results of a recently completed Phase II study
demonstrating that a new combination therapy of
butenafine HCl 1% and betamethasone dipropionate 0.05%
cream effectively treats tinea pedis (athlete's foot)
when applied twice daily for only seven days. If these
results can be replicated in further clinical studies,
this new drug, which combines butenafine and a topical
steroid in a seven-day treatment, could offer
significant safety and compliance advantages over
current 28-day combination therapies that expose
patients to steroids for a long dosing period.
In November 1997, Penederm announced it licensed two
pharmaceutical products to Allergan-Lok Produtos
Pharmaceuticos, Ltda. (Allergan-Lok Produtos), a
Brazilian subsidiary of Allergan, Inc. Under the terms
of the agreement, Allergan-Lok Produtos will pursue
regulatory approval of the products and pay milestones
and royalties to Penederm in exchange for the licenses
to manufacture and market the products.
Overview
Penederm is a pharmaceutical company that specializes
in developing and marketing dermatology products. In
the first quarter of 1997, Penederm 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 launched its Avita prescription cream
product, a topical form of retinoic acid for the
treatment of acne in the second quarter of 1997.
Penederm also received FDA 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 fungal
inflammatory conditions, psoriasis, nail fungus and
Mentax skin treatment line extensions in 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 pharmaceutical companies as follows:
COMPANY PRODUCT AREA TERRITORY
In-License and Co-Development Agreements:
- -----------------------------------------
Kaken Penederm in-licensed U.S., Canada, Mexico
Pharmaceutical butenafine, the and Latin America for
Company Ltd. active ingredient skin antifungal; U.S.,
(Kaken) incorporated in Canada, Europe, Mexico,
Mentax Latin America,
Australia and New
Zealand for nail
antifungal.
SmithKline Beecham Undisclosed OTC SmithKline option to
(SmithKline) product market worldwide
Out-License Agreements:
- -----------------------------------------
Schering-Plough Prescription & OTC U.S. and Canada
HealthCare Nail and co-promote
Products, Inc. prescription skin
(Schering-Plough) cream antifungal
UCB Group of Prescription Europe, Africa and
Belgium (UCB) antifungal products Middle East
Warner Wellcome OTC Dry Skin U.S. and Canada
Consumer Health
Products (Warner)
SmithKline Beecham OTC Consumer Europe and Eastern
(SmithKline) Products Europe
Pierre Fabre Inc. DuraScreen sunscreen U.S.
(Pierre Fabre)
Allergan, Inc. Butenafine topical Central and South
antifungal and America
retinoic acid cream
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, 1997, the Company
incurred a cumulative net loss of $46,365,000.
Penederm's sources of working capital have been equity
financings, product sales to corporate partners, sales
of Mentax, Avita and over-the-counter products, product
license fees, sales of TopiCare Delivery Compounds and
interest earned on investments.
Results of Operations
Three Months Ended September 30, 1997 and 1996
Total revenues for the three months ended
September 30, 1997 of $1,887,000 increased from $62,000
in the same period of 1996. This increase is due
primarily to the sale of Penederm's Avita and Mentax
products launched in 1997, increased sales of the
Company's other products and out-license milestone
and co-promotion payments from corporate partners.
The Company's cost of sales increased to $527,000
in the three months ended September 30, 1997 from
$16,000 in the same period of 1996 primarily due to the
1997 launch of Avita and Mentax. Gross margins
improved in the third quarter of 1997 compared to the
same period of 1996 due to the 1997 launch of Avita and
Mentax, which contribute higher margins than the
Company's nonprescription products.
The Company's research and development expenses
increased 91% to $1,947,000 in the three months ended
September 30, 1997 from $1,019,000 in the same period
of 1996 due to the timing and size of human clinical
trials. The Company commenced two Phase III human
clinical studies of its 501 cream combination product
during the third quarter of 1997. These studies are
being conducted at over 32 clinical sites and involve
over 1,600 patients. Sales and marketing expenses
increased to $3,097,000 in the three months ended
September 30, 1997 from $231,000 for the same period of
1996 due primarily to marketing and other expenses
related to the product launches of Mentax and Avita.
General and administrative expenses increased 12% to
$577,000 in the three months ended September 30, 1997
from $514,000 in the same period of 1996.
Net interest income was $128,000 in the three months
ended September 30, 1997 and $115,000 in the same
period of 1996.
Nine Months Ended September 30, 1997 and 1996
Total revenues for the nine months ended September
30, 1997 of $6,791,000 increased from $1,962,000 in the
same period of 1996. This increase is due primarily to
the initial product stocking shipments of the Company's
Mentax trade launch in January and Avita trade launch
in June 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
$2,135,000 in the nine months ended September 30, 1997
from $1,131,000 in the same period of 1996 due
primarily to the 1997 launch of Mentax and Avita.
Gross margins improved in the first nine months of 1997
compared to the same period of 1996 due to the 1997
launch of Mentax and Avita, the Company's first
pharmaceutical products, which contribute higher
margins than the Company's nonprescription products.
The Company's research and development expenses
increased 7% to $4,429,000 in the nine months ended
September 30, 1997 from $4,140,000 in the same period
of 1996 due to the timing and size of human clinical
trials. Sales and marketing expenses increased 634% to
$7,029,000 in the nine months ended September 30, 1997
from $957,000 in the same period of 1996 due primarily
to marketing and other expenses related to the product
launch of Mentax in the first quarter of 1997 and Avita
in the third quarter of 1997. General and
administrative expenses decreased 28% to $1,508,000 in
the nine months ended September 30, 1997 from
$2,096,000 in the same period of 1996. General and
administrative expenses in the prior year period
included legal costs related to prosecuting violations
of certain of the Company's patents. A court award
related to this patent case resulted in the recovery of
a portion of the Company's legal fees in the first
quarter of 1997 which reduced the Company's general and
administrative expenses.
Net interest income decreased 24% to $338,000 in the
nine months ended September 30, 1997 from $445,000 in
the same period of 1996. This decrease is primarily as
a result of lower average cash balances available for
investment in the nine months 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 signifi-
cantly from the prior year as these products are
promoted in the marketplace. The Company also expects
some expansion of research and development programs,
increased patent and regulatory costs, expansion of
regulatory, clinical and quality assurance capabil-
ities, 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 nine months
ended September 30, 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 September 30, 1997, the
Company had cash, cash equivalents and investments
totaling $6,825,000.
Cash expenditures related to operating activities, the
acquisition of fixed assets and repayment of long-term
obligations totaled $8,822,000 in the nine months ended
September 30, 1997 and $7,274,000 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
nine months ended September 30, 1996. No similar
milestone payments were made in the first nine months
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 March 31, 1998. The Company plans to
raise additional equity capital in the near future.
Management is currently evaluating proposals from a
variety of financing sources and expects to complete a
transaction within the next six months. The Company's
future capital requirements will depend on many
factors, including the commercial success of the
Company's products, 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 strategic relationships. There
can be no assurance that additional funds will be
available to the Company on favorable terms, if at all,
to permit the Company to continue with its current 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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
On August 1, 1997, Penederm filed a current report
on Form 8-K in connection with the reincorporating
of the Company in Delaware.
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
November 14, 1997 /s/ Lloyd H. Malchow
----------------- --------------------------------
Date Lloyd H. Malchow, President
and Chief Executive Officer
November 14, 1997 /s/ Michael A. Bates
----------------- --------------------------------
Date Michael A. Bates, Vice President
Finance and Administration and
Chief Financial Officer
INDEX TO EXHIBITS
Exhibit
No. Description
------- -------------------------------------------
27 Financial Data Schedule
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<COMMON> 56,211
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