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, 1998
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 Identification Number
incorporation or organization)
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: MARCH 31, 1998
- ----- ---------------------------------
Common Stock 8,256,057
<PAGE>
PENEDERM INCORPORATED
TABLE OF CONTENTS
FORM 10-Q
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets-
March 31, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations-
Three months ended March 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows-
Three months ended March 31, 1998 and 1997 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 2. Sale of Unregistered Securities 13
Item 6. Exhibits and Reports on Form 8-K 13
Signature Page 14
<PAGE>
PENEDERM INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1998 and December 31, 1997
(in thousands)
March 31, December 31,
1998 1997
----------- -----------
(unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 1,608 $ 1,519
Short-term marketable securities 1,000 3,102
Accounts receivable 2,760 1,013
Inventory 1,962 1,501
Prepaid expenses and other current assets 654 466
---------- ----------
Total current assets 7,984 7,601
Marketable securities - 1,000
Property and equipment, at cost, less
accumulated depreciation and amortization 304 267
Intangible and other assets 1,746 1,363
---------- ----------
Total assets $ 10,034 $ 10,231
========== ==========
LIABILITIES
Current liabilities:
Accounts payable $ 1,321 $ 1,264
Accrued liabilities 3,982 3,763
---------- ----------
Total current liabilities 5,303 5,027
Long-term obligations 8 10
---------- ----------
Total liabilities 5,311 5,037
STOCKHOLDERS' EQUITY
Common stock, $.01 par value 83 82
Additional paid-in capital 57,160 56,222
Accumulated deficit (52,520) (51,110)
---------- ----------
Total stockholders' equity 4,723 5,194
---------- ----------
Total liabilities and stockholders' equity $ 10,034 $ 10,231
========== ==========
See accompanying notes.
Note: The condensed consolidated balance sheet at December 31, 1997 has been
derived from audited financial statements as of that date.
<PAGE>
PENEDERM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
(unaudited)
Three Months Ended
March 31,
------------------
1998 1997
---- ----
Revenues:
Product sales $ 2,730 $ 2,601
Licensing revenues 1,271 300
---------- ----------
Total revenues 4,001 2,901
---------- ----------
Costs and expenses:
Cost of product sales 726 763
Research and development 2,392 1,223
Sales and marketing 1,829 2,163
General and administrative 508 328
---------- ----------
Total costs and expenses 5,455 4,477
---------- ----------
Loss from operations (1,454) (1,576)
Interest income, net 44 59
---------- ----------
Net loss $ (1,410) $ (1,517)
========== ==========
Basic and diluted net loss per share $ (0.17) $ (0.20)
========== ==========
Number of shares used in computing basic
and diluted net loss per share 8,191 7,583
========== ==========
See accompanying notes.
<PAGE>
PENEDERM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
March 31,
------------------
Increase (decrease) in cash and cash equivalents 1998 1997
---- ----
Cash flows from operating activities:
Net loss $ (1,410) $ (1,517)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 94 81
Increase in accounts receivable (1,747) (2,785)
Increase in inventory (461) (166)
Increase in prepaid expenses and other
current assets (188) (587)
Increase in accounts payable and accrued
liabilities 278 763
Increase in other assets (32) (2)
-------- --------
Net cash used in operating activities (3,466) (4,213)
-------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities - (5,013)
Maturities of available-for-sale securities 2,102 253
Sales of available-for-sale securities 1,000 249
Acquisition of intangible assets (400) -
Acquisition of fixed assets (82) (43)
-------- --------
Net cash provided by (used in) investing activities 2,620 (4,554)
-------- --------
Cash flows from financing activities:
Issuance of common stock in private placement - 8,975
Issuance of common stock under equity line of credit 890 -
Proceeds from issuance of common stock 49 90
Repayment of long-term obligations (4) (3)
-------- --------
Net cash provided by financing activities 935 9,062
-------- --------
Net increase in cash and cash equivalents 89 295
Cash and cash equivalents at beginning of period 1,519 3,062
-------- --------
Cash and cash equivalents at end of period $ 1,608 $ 3,357
======== ========
See accompanying notes.
<PAGE>
PENEDERM INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Interim Unaudited Financial Information
The accompanying interim unaudited condensed
consolidated financial statements of Penederm
Incorporated (the Company) for the three month periods
ended March 31, 1998 and 1997, 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, 1997.
2. Inventory
Inventories are stated at the lower of cost (first-in,
first-out) or market and consisted of the following:
March 31, December 31,
(In thousands) 1998 1997
---- ----
Raw materials $ 691 $ 572
Finished goods 1,271 929
------- -------
$ 1,962 $ 1,501
======= =======
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.
4. Comprehensive Income
As of January 1, 1998, the company adopted Statement of
Financial Accounting Standard (SFAS) No. 130, Reporting
Comprehensive Income. SFAS 130 establishes new rules
for the reporting and display of comprehensive income
and its components; however, the adoption of this
statement had no impact on the Company's net loss or
stockholders' equity.
<PAGE>
Part I Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward Looking Statements
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 sales force,
the development of competitive therapies, the pricing
of competitive therapies, 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 most recent
Form 10-K and other Securities and Exchange Commission
filings. Actual results, events or performance may
differ materially. The Company undertakes no obligation
to update these forward-looking statements to reflect
events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
Recent Events
Penederm announced in January 1998 that it had entered
into an agreement with Alpharma Inc., a leading
multinational pharmaceutical company, to market
Alpharma's recently approved permethrin cream 5% for
the treatment of sarcoptes scabiei (scabies infection)
under its trade name Acticin. In February, the Company
announced that it had received approval from the United
States Food and Drug Administration to market its Avita
gel product in the United States for the treatment of
acne. Penederm recently commenced the commercial launch
of Avita gel and Acticin, increasing the number of
dermatologic pharmaceutical products offered by the
Company to four.
On March 31 1998, the Company amended its current
agreement with Kaken Pharmaceutical Co. Ltd. to provide
the Company with an option to develop and market oral
forms of butenafine (the active drug in Mentax) in
North and South America. If the option for the oral
form of butenafine is exercised, and assuming an oral
drug product could be successfully developed, the
development process would be expected by management to
take several years before such product could be
commercialized.
<PAGE>
During the first quarter of 1998, the Company met
certain development milestones under one of its
agreements with SmithKline Beecham plc. The agreement
involves the co-development by the companies of a new
formulation of an undisclosed currently marketed over-
the-counter (OTC) topical product. The Company was
paid a related development milestone payment and
intends to negotiate a final license agreement related
to the product during the second quarter of 1998.
In March 1998, the Company entered into an agreement
for generic tretinoin 0.025% cream to be manufactured
by its contract manufacturer for an undisclosed generic
pharmaceutical company. The Company believes that
Retin-A (Ortho) has 97% of the 0.025% cream tretinoin
market segment. The Company will receive royalties and
certain other minimum payments under the agreement.
Penederm also met certain development milestones for a
topical nail antifungal product being co-developed by
the Company and Schering-Plough HealthCare Products
Inc. and was paid a related milestone payment during
the quarter. The Company also reacquired promotional
rights related to the podiatry promotion of
prescription Mentax cream effective April 15, 1998.
Overview
Penederm is a pharmaceutical company that specializes
in developing and marketing dermatology products.
Penederm now offers four prescription topical drug
treatments to dermatologists:
- Mentax, a prescription topical cream treatment
for three skin fungal conditions: tinea pedis
(athlete's foot), tinea corporis (ringworm) and
tinea cruris (groin fungus)
- Avita cream and gel, prescription topical
treatments for acne, and
- Acticin, a prescription topical cream treatment
for scabies infection.
<PAGE>
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. Penederm has
established collaborative relationships with other
pharmaceutical companies as follows:
COMPANY PRODUCT AREA TERRITORY
------- ------------ ---------
In-License and Co-
Development Agreements:
- -----------------------
Kaken Pharmaceutical Penederm in-licensed United States, Canada,
Company Ltd. (Kaken) butenafine, the active Mexico and Latin
ingredient incorporated in America for skin
Mentax antifungal; U.S.,
Canada, Europe, Mexico,
Latin America,
Australia and New
Zealand for nail
antifungal
SmithKline Beecham plc Undisclosed OTC product SmithKline option to
(SmithKline) market worldwide
Alpharma, Inc. Acticin for scabies United States
(Alpharma)
Out-License Agreements:
- -----------------------
Schering-Plough Prescription and OTC skin United States and
HealthCare antifungal and nail Canada
Products, Inc. antifungal
(Schering-Plough)
UCB Group of Belgium Prescription antifungal Europe, Africa and
(UCB) products Middle East
Warner Wellcome Consumer OTC dry skin Canada
Health Products (Warner)
SmithKline OTC consumer products Europe and Eastern
Europe
Pierre Fabre Inc. DuraScreen sunscreen United States
(Pierre Fabre)
Allergan, Inc. Butenafine topical Central and South
(Allergan) antifungal and retinoic America
acid cream and gel
Mylan Laboratories, Inc. Co-promote Mentax cream to United States
(Mylan) primary care physicians
<PAGE>
The Company has been unprofitable since inception.
For the period from inception through March 31, 1998,
the Company incurred a cumulative net loss of
$52,520,000. 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 March 31, 1998 and 1997
Total revenues for the three months ended March 31,
1998 of $4,001,000 increased 38% from $2,901,000 in
the same period of 1997. The first quarter of 1998
reflects product revenues of $2,730,000 from Avita
cream and Mentax sales and initial product stock
shipments of the Company's recently launched Acticin
and Avita gel products. Product revenues of $2,601,000
in the first quarter of 1997 consisted primarily of
initial product stocking shipments of the Company's
first pharmaceutical product, Mentax. Licensing
revenues increased to $1,271,000 in the first quarter
of 1998, compared to $300,000 in the same quarter of
the prior year, as a result of increased attainment of
performance milestones under various corporate
partnering arrangements in 1998 versus the comparable
prior year period.
The Company's cost of sales decreased to $726,000 in
the three months ended March 31, 1998 from $763,000
in the same period of 1997 primarily due to a change in
revenue mix favoring higher margin products.
<PAGE>
The Company's research and development expenses
increased 96% to $2,392,000 in the three months ended
March 31, 1998 from $1,223,000 in the same period of
1997 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
decreased to $1,829,000 in the three months ended March
31, 1998 from $2,163,000 for the same period of 1997.
The prior year period includes costs related to the
initial launch of the Company's first drug product.
These costs did not recur in 1998, but were partially
replaced by increased costs related to internalizing
the Company's sales force. General and administrative
expenses increased 55% to $508,000 in the three months
ended March 31, 1998 from $328,000 in the same period
of 1997. General and administrative expenses in the
first quarter of 1997 reflect a recovery of legal fees
related to prior patent litigation.
Net interest income was $44,000 in the three months
ended March 31, 1998 and $59,000 in the same period 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
pharmaceutical products. Sales and marketing expenses
are expected to increase significantly from the prior
year reflecting the increased costs associated with its
sales force. The Company also expects some expansion
of research and development programs, increased patent
and regulatory costs, expansion of regulatory, clinical
and quality assurance capabilities, and increased
administrative support costs.
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, 1998 are not necessarily indicative of
future operating results.
<PAGE>
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. In January 1998, the Company
entered into an agreement with an investment group for
an equity line of credit which allows the Company to
access up to $10 million through sales of its common
stock over a period ending in April 2000. At March 31,
1998, the Company had cash, cash equivalents and
investments totaling $2,608,000, and approximately
$9 million was available under the equity line of
credit.
Cash expenditures related to operating activities, the
acquisition of fixed assets and repayment of long-term
obligations totaled $3,552,000 in the three months
ended March 31, 1998 and $4,259,000 for the same period
in 1997. Operating activities were comprised of
research and development, clinical trials, product
sales, promotion and general administration activities.
The Company also made milestone payments of $400,000
related to the in-licensing of drug compounds in the
three months ended March 31, 1998. No similar
milestone payments were made in the first three 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 its capital resources,
including anticipated revenues (consisting of product
sales, license fees and royalties), proceeds from
sales of common stock under the equity
line of credit and interest income earned on
its invested cash balances, will satisfy the
Company's working capital and identified capital
expenditure requirements at least through March 31,
1999. 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.
<PAGE>
Part II Item 2. Sales of Unregistered Securities
The Company issued an aggregate of 96,983 shares of its
Common Stock (the "Shares") for an aggregate
consideration of $988,500 in an unregistered
transaction in the fiscal quarter ended March 31, 1998.
The Shares were issued pursuant to the Common Stock
Investment Agreement dated as of January 21, 1998
between the Company and Promethean Investment Group,
L.L.C. (the "Investor"). Based on representations made
by the Investor in the Agreement, the Company issued
the Shares pursuant to the exemption provided by
Section 4(2) of the Securities Act of 1933, as amended.
Part II Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
<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
May 7, 1998 /s/ Lloyd H. Malchow
----------- --------------------------------
Date Lloyd H. Malchow, President
and Chief Executive Officer
May 7, 1998 /s/ Michael A. Bates
----------- --------------------------------
Date Michael A. Bates, Vice President
Finance and Administration and
Chief Financial Officer
<PAGE>
INDEX TO EXHIBITS
Exhibit
No. Description
------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,608
<SECURITIES> 1,000
<RECEIVABLES> 2,760
<ALLOWANCES> 0
<INVENTORY> 1,962
<CURRENT-ASSETS> 7,984
<PP&E> 1,680
<DEPRECIATION> 1,376
<TOTAL-ASSETS> 10,034
<CURRENT-LIABILITIES> 5,303
<BONDS> 0
0
0
<COMMON> 57,243
<OTHER-SE> (52,520)
<TOTAL-LIABILITY-AND-EQUITY> 10,034
<SALES> 2,730
<TOTAL-REVENUES> 4,001
<CGS> 726
<TOTAL-COSTS> 726
<OTHER-EXPENSES> 2,392
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> (1,410)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,410)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,410)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
