<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended June 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-19651
Magainin Pharmaceuticals Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3445668
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
5110 Campus Drive
Plymouth Meeting, Pennsylvania 19462
(Address of principal executive offices) (ZIP Code)
610-941-4020
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (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 [ ]
The number of outstanding shares of the Registrant's Common Stock, par value
$.002 per share, on July 28, 1999 was 22,911,616.
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MAGAININ PHARMACEUTICALS INC.
<TABLE>
<CAPTION>
INDEX TO FORM 10-Q
<S> <C> <C>
Page
----
Part I Financial Information
Item 1. Financial Statements (unaudited)
Balance Sheets as of June 30, 1999 and December 31, 1998.......................................................... 2
Statements of Operations for the three and six months ended June 30, 1999 and June 30, 1998....................... 3
Statements of Cash Flows for the six months ended June 30, 1999 and June 30, 1998................................. 4
Notes to Financial Statements..................................................................................... 5
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition............................. 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk........................................................19
Part II Other Information.................................................................................................20
</TABLE>
1
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MAGAININ PHARMACEUTICALS INC.
BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
-------------- ------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 743 $ 4,495
Short-term investments (Note 3).................................................... 14,950 18,376
Prepaid expenses and other......................................................... 198 179
--------- ---------
Total current assets.............................................................. 15,891 23,050
Fixed assets, net................................................................... 2,266 2,765
Other assets........................................................................ 169 76
--------- ---------
Total assets..................................................................... $ 18,326 $ 25,891
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses (Note 7)..................................... $ 8,024 $ 8,653
Note payable (Note 3).............................................................. 2,500 2,500
--------- ---------
Total current liabilities......................................................... 10,524 11,153
Deferred rent....................................................................... 59 58
--------- ---------
Total liabilities................................................................ 10,583 11,211
--------- ---------
Commitments, contingencies and other matters
Stockholders' equity (Note 4):
Preferred stock--$.001 par value; shares authorized--9,211; none issued............. - -
Common stock--$.002 par value; shares authorized--45,000; shares issued
and outstanding--22,912 and 22,910, at June 30, 1999 and December 31,
respectively....................................................................... 46 46
Additional paid-in capital.......................................................... 147,646 147,553
Accumulated other comprehensive income--unrealized (loss) gain on investments....... (8) 9
Accumulated deficit................................................................. (139,941) (132,928)
--------- ---------
Total stockholders' equity........................................................ 7,743 14,680
--------- ---------
Total liabilities and stockholders' equity....................................... $ 18,326 $ 25,891
========= =========
</TABLE>
See accompanying notes to financial statements.
2
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MAGAININ PHARMACEUTICALS INC.
STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
---------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenues................................ $ - $ - $ - $ -
Costs and expenses:
Research and development................ 3,207 5,684 5,666 11,905
General and administrative.............. 770 968 1,632 1,878
------- ------- ------- --------
3,977 6,652 7,298 13,783
------- ------- ------- --------
Loss from operations..................... (3,977) (6,652) (7,298) (13,783)
Interest income.......................... 163 429 388 944
Interest expense......................... (50) (50) (103) (84)
------- ------- ------- --------
Net loss................................. $ (3,864) $ (6,273) $ (7,013) $ (12,923)
======= ======= ======= ========
Net loss per share--basic and diluted.... $ (0.17) $ (0.28) $ (0.31) $ (0.58)
======= ======= ======= ========
Weighted average shares outstanding...... 22,912 22,256 22,911 22,174
======= ======= ======= ========
</TABLE>
See accompanying notes to financial statements.
3
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<TABLE>
<CAPTION>
MAGAININ PHARMACEUTICALS INC.
STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
Six Months Ended
June 30,
-------------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss............................................................................. $ (7,013) $(12,923)
Adjustments to reconcile net loss to net cash used in operating activities:
Fair value of stock, options and warrants issued.................................... - 859
Depreciation and amortization....................................................... 535 598
Amortization of investment discounts/premiums....................................... (291) (360)
Compensation expense under stock and option awards.................................. 93 -
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses and other assets............................ (112) 36
Increase (decrease) in accounts payable and accrued expenses........................ (629) 1,022
Increase (decrease) in deferred rent................................................ 1 (19)
-------- --------
Net cash used in operating activities................................................. (7,416) (10,787)
-------- --------
Cash Flows From Investing Activities:
Purchase of investments.............................................................. (17,300) (22,644)
Proceeds from maturities and sales of investments.................................... 21,000 33,900
Capital expenditures................................................................. (36) (913)
-------- --------
Net cash provided by investing activities............................................. 3,664 10,343
-------- --------
Cash Flows From Financing Activities:
Payment of notes payable............................................................. (2,500)
Proceeds from notes payable.......................................................... 2,500 1,000
Payments on capitalized equipment leases............................................. - (28)
Proceeds from sale of stock and exercise of options and warrants..................... - 127
-------- --------
Net cash provided by financing activities............................................. - 1,099
-------- --------
Net increase (decrease) in cash and cash equivalents.................................. (3,752) 655
Cash and cash equivalents at beginning of period...................................... 4,495 487
-------- --------
Cash and cash equivalents at end of period............................................ $ 743 $ 1,142
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest.............................................. $ 99 $ 80
======== ========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
MAGAININ PHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
1. The Company
Magainin Pharmaceuticals Inc. (the "Company") was incorporated on June 29,
1987. The Company is a biopharmaceutical company engaged in the development of
medicines for serious diseases. The Company's development efforts are focused on
anti-infectives, oncology, and pulmonary and allergic disorders.
The Company announced on July 26, 1999 that it has received notification from
the U.S. Food and Drug Administration (FDA) that its New Drug Application (NDA)
for its lead product candidate, LOCILEX(TM) Cream (formerly referred to as
pexiganan acetate), has been deemed not approvable. (See "Risk Factors" in
"Management's Discussion and Analysis of Results of Operations and Financial
Condition")
The Company is conducting research on an aminosterol class of compounds. One
such compound, squalamine, is currently being evaluated in Phase II clinical
testing in patients with non-small cell lung cancer. The Company conducts
additional research efforts in the genomics of asthma.
The Company has not generated any revenues from product sales, and has funded
operations primarily from the proceeds of public and private placements of
securities. Substantial additional financing will be required by the Company in
the near term to fund its continuing research and development activities. No
assurance can be given that any such financing will be available when needed or
that the Company's research and development efforts will be successful. (See
"Risk Factors" section, "If We Do Not Raise Additional Capital in the Near Term,
We May Not Be Able to Continue Our Research and Development Programs and May
Never Commercialize Any Products")
2. Basis of Presentation
The accompanying financial statements are unaudited and have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). The December 31, 1998 balance sheet was derived from audited
financial statements, however, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to SEC
rules and regulations. The Company believes that the financial statements
include all adjustments of a normal and recurring nature necessary to present
fairly the results of operations, financial position, changes in stockholders'
equity and cash flows for the periods presented. Results of operations for
interim periods are not necessarily indicative of those to be achieved for full
fiscal years. These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1998. There have been no material
changes in accounting policies from those stated in the Company's Annual Report
on Form 10-K for the year ended December 31, 1998.
3. Note Payable
The Company refinanced its $2,500,000 note payable in the second quarter of
1999. Under the terms of this arrangement, the Company makes monthly interest-
only payments at a rate of 7.375%, with principal due in June 2000. The Company
maintains investments of $2,750,000 at the bank as collateral for the note
payable.
5
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4. Stockholders' Equity
The changes in stockholders' equity from December 31, 1998 to June 30, 1999
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Stock Additional Compre- Stock-
-----------------
Number Paid-in hensive Accumulated holders'
of Shares Amount Capital Income Deficit Equity
--------- ------ ---------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998...... 22,910 $46 $147,553 $ 9 $(132,928) $14,680
Exercise of stock options, and
compensation expense under
stock and options awards........ 2 - 93 - - 93
Comprehensive loss
Net loss..................... - - - - (7,013) (7,013)
Carrying value adjustment.... - - - (17) - (17)
-------
Total comprehensive loss......... - - - - - (7,030)
--------- ------ ---------- ----------- ----------- -------
Balance at June 30, 1999.......... 22,912 $46 $147,646 $ (8) $(139,941) $ 7,743
========= ====== ========== =========== =========== =======
</TABLE>
5. Manufacturing Agreement
The Company has an arrangement with Abbott providing for the purchase of
approximately $10 million of bulk drug substance for LOCILEX(TM) Cream. As FDA
approval of LOCILEX(TM) Cream has not occurred, the Company expects to discuss
with Abbott possible revisions to this arrangement. Through June 30, 1999, the
Company has paid Abbott $656,000 under this arrangement, and the contractual
terms provide for the additional payments to be made in 1999 and early 2000. The
Company's prior development arrangement with Abbott provides for the issuance to
Abbott of up to 500,000 shares of Magainin Common Stock and the obligation to
pay a royalty on any future sales of LOCILEX(TM) Cream. When the Company issued
stock to Abbott it was required to record a charge to earnings representing the
fair value of the shares when issued. As of June 30, 1999, the Company has
issued 250,000 shares of common stock to Abbott, including 125,000 shares issued
during the six months ended June 30, 1998. The issuance of such shares resulted
in the recording of an earnings charge of $859,000 in the six months ended June
30, 1998. Possible future stock issuances are related to the achievement by
Abbott of contractual performance milestones.
6. Collaborative Agreements
In February 1997, the Company entered into a development, supply and
distribution agreement (the "SmithKline Agreement") in North America with
SmithKline Beecham ("SmithKline") for LOCILEX(TM) Cream. SmithKline has paid the
Company $10.0 million under this agreement, and may make additional payments to
Magainin of up to $22.5 million, upon the occurrence of approval and certain
product milestones. SmithKline will also fund a percentage of any development
expenses for any additional indications for LOCILEX(TM) Cream. Upon the
commencement of commercial sales by SmithKline, Magainin will be responsible for
the supply of LOCILEX(TM) Cream and SmithKline will be responsible for the
marketing and sale of LOCILEX(TM) Cream. Magainin will receive certain
percentages of SmithKline sales revenues under agreed upon terms. The SmithKline
Agreement also gives SmithKline rights to terminate the arrangement, and, under
certain conditions, the right to negotiate for rights to another Magainin
product development candidate. (see "Note 1" regarding LOCILEX(TM) Cream FDA
notification on July 26, 1999)
In December 1998, the Company entered into a collaborative research and option
agreement with Genentech Inc. ("Genentech") relating to a protein therapeutic in
asthma. Under this agreement, Genentech will be provided access to a therapeutic
target (IL9), which is in Magainin's proprietary asthma gene database, and the
companies will conduct a collaborative program to evaluate the utility of a
blocking antibody to IL9 in suppressing the asthmatic response. Genentech made
an initial equity investment in the Company of $2.0 million, and has an option
to enter into a development and commercialization agreement with the Company.
Any such development and commercialization agreement could provide for payments
to the Company of up to $35.0 million, upon terms to be negotiated, and royalty
payments on sales of products developed by Genentech in the field.
6
<PAGE>
The Company has rights under license agreements to certain patents and patent
applications under which the Company expects to owe royalties on sales of any
products which are covered by issued patent claims. Additionally, certain of
these agreements also provide that if the Company elects not to pursue the
commercial development of any licensed technology, or does not adhere to an
acceptable schedule of commercialization, then the Company's exclusive rights to
such technology would terminate. The Company also funds research at certain
institutions, and these relationships may provide us with an option to license
any results of the research.
7. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
<S> <C> <C>
Accounts payable.................... $ 131 $ 179
Clinical and regulatory costs....... 323 448
Manufacturing development costs..... 6,709 7,171
Preclinical costs................... 146 117
Professional fees................... 190 253
Other............................... 525 485
------ ------
$8,024 $8,653
====== ======
</TABLE>
Manufacturing development costs principally include amounts accrued under the
Company's agreement with Abbott, providing for the purchase of approximately $10
million of bulk drug substance for LOCILEX Cream.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
This report contains, in addition to historical information, statements by us
with regard to our expectations as to financial results and other aspects of our
business that involve risks and uncertainties and may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Such statements reflect management's current views and are based on
certain assumptions. Actual results could differ materially from those currently
anticipated as a result of a number of factors, including, but not limited to,
the risks and uncertainties discussed in this report, particularly those related
to present or anticipated scientific progress, development of LOCILEX Cream or
any other potential pharmaceutical products, future revenues, capital
expenditures, manufacturing, sales and marketing requirements and capabilities,
research and pharmaceutical products, regulatory approvals, research and
development, future financings, competition, protection of patents and
proprietary information, collaboratioins, personnel, third-party reimbursement,
Year 2000 readiness and stock price that are discussed under "Risk Factors" set
forth below. Given these uncertainties, current or prospective investors are
cautioned not to place undue reliance on any such forward-looking statements.
Furthermore, the Company disclaims any obligation or intent to update any such
factors or forward-looking statements to reflect future events or developments.
GENERAL
We are a biopharmaceutical company engaged in the development of medicines for
serious diseases. Our development efforts are focused on anti-infectives,
oncology, and pulmonary and allergic disorders.
We announced on July 26, 1999 that we received notification from the U.S. Food
and Drug Administration (FDA) that our New Drug Application (NDA) for
LOCILEX(TM) Cream (formerly referred to as pexiganan acetate) has been deemed
not approvable. (See "Risk Factors")
We are conducting research on an aminosterol class of compounds. One such
compound, squalamine, is currently being evaluated in Phase II clinical testing
in patients with non-small cell lung cancer. We are conducting additional
research efforts in the genomics of asthma.
Since commencing operations in 1988, we have not generated any revenue from
product sales, and we have funded operations primarily from the proceeds of
public and private placements of securities. We have incurred a loss in each
year since our inception, and we expect to incur substantial additional losses
for at least the next several years. We expect that losses will fluctuate from
quarter to quarter, and that such fluctuations may be substantial. As such,
results of operations for interim periods are not necessarily indicative of
those to be achieved for full fiscal years. At June 30, 1999, our accumulated
deficit was approximately $139.9 million. We will need to raise additional funds
in the near future.
RISK FACTORS
The FDA Has Deemed Our NDA for LOCILEX Cream to Be Not Approvable, Which Will
Prevent Near Term Commercialization of the Product.
We announced on July 26, 1999 that we received notification from the U.S. Food
and Drug Administration (FDA) that our New Drug Application (NDA) for
LOCILEX(TM) Cream has been deemed not approvable.
LOCILEX(TM) Cream, a topical cream antibiotic for the treatment of infection
in diabetic foot ulcers, has been our lead product development candidate. We
had hoped to commercialize LOCILEX(TM) Cream in the near term. However, with the
FDA's decision, near term commercialization of LOCILEX(TM) Cream will not occur,
and we will generate no revenues from LOCILEX(TM) Cream in the near future.
In order to again seek approval of LOCILEX(TM) Cream, the FDA has indicated
that we must conduct further development activities, including clinical and
manufacturing activities. The specific nature of the clinical activities will
be determined after consultations with the FDA. As a result of its review of
manufacturing of the cream product, the FDA issued certain observations of
deficiencies in compliance with good manufacturing
8
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procedures. In any additional clinical studies to be conducted, new batches of
the cream product will need to be manufactured from the bulk drug substance, in
compliance with good manufacturing procedures, and meeting strict product
specifications. Further clinical and manufacturing development efforts may again
not be successful. The time required to conduct such activities may be lengthy,
and the costs considerable.
We are considering the feasibility of continuing the program, and are
consulting with SmithKline Beecham, our marketing partner, as to the further
development of the product.
If We Do Not Raise Additional Capital in the Near Term, We May Not Be Able to
Continue Our Research and Development Programs and May Never Commercialize Any
Products.
We will need to raise substantial additional funds in the near future to
continue our research and development programs and to commercialize our
potential products. If we are unable to raise such funds, we may be unable to
complete our development activities for any of our proposed products.
We maintained cash and investments of $15.7 million at June 30, 1999. At June
30, 1999, we had current liabilities of $10.5 million. In the absence of
raising additional funds or significantly reducing expenses, we do not have
sufficient resources to sustain operations beyond 1999.
We regularly explore alternative means of financing our operations and seek
funding through various sources, including public and private securities
offerings and collaborative arrangements with third parties. We currently do not
have any commitments to obtain additional funds, and may be unable to obtain
sufficient funding in the future on acceptable terms. If we cannot obtain
funding, we will need to delay, scale back or eliminate research and development
programs or enter into collaborations with third parties to commercialize
potential products or technologies that we might otherwise seek to develop or
commercialize ourselves, or seek other arrangements. If we engage in
collaborations, we will receive lower consideration upon commercialization of
such products than if we had not entered into such arrangements, or if we
entered into such arrangements at later stages in the product development
process.
Particularly with the lack of approval of LOCILEX(TM) Cream, our prospects of
completing any near term equity financing are diminished. As a result, we
expect to evaluate all available strategic alternatives to finance our programs
and technology, including broad-based alliances or mergers with better-financed
entities.
We expect to Continue to Incur Substantial Losses and Continue to Have
Negative Results of Operations.
To date, we have engaged primarily in the research and development of drug
candidates. We have not generated any revenues from product sales and have
incurred losses in each year since our inception. As of June 30, 1999, we had
an accumulated deficit of approximately $139.9 million.
Most of our proposed products are in a relatively early developmental stage
and will require significant research, development and testing. We must obtain
regulatory approvals for all of our proposed products prior to commercialization
of the product. Our operations are also subject to various competitive and
regulatory risks. As a result, we are unable to predict when or if we will
achieve any product revenues. We expect to experience substantial losses in the
foreseeable future as we continue our significant research, development and
testing efforts, which will cause us to have continued negative results of
operations.
If We Do Not Develop and Maintain Relationships With Contract Manufacturers,
We May Not Successfully Commercialize Our Products.
1) Contract Manufacturing:
We currently have neither the resources, facilities nor capabilities to
manufacture any of our proposed products in the quantities and quality required
for commercial sale. We have no plans to establish a manufacturing facility.
We depend upon contract manufacturers for commercial scale manufacturing of our
proposed products in accordance with regulatory standards. This dependence may
restrict our ability to develop and deliver products on a timely, profitable and
competitive basis. Additionally, the number of companies capable of producing
bulk peptides on the scale that we expect to require to commercialize LOCILEX
(TM) Cream
9
<PAGE>
is limited. We may be unable to maintain arrangements with qualified
outside contractors to manufacture materials at costs which are affordable to
us, if at all.
Contract manufacturers may utilize their own technology, our technology, or
technology acquired or licensed from third parties in developing a manufacturing
process. In order to engage another manufacturer, we may need to obtain a
license or other technology transfer from the original contract manufacturer.
Even if a license is available from the original contract manufacturer on
acceptable terms, we may be unable to successfully effect the transfer of the
technology to the new contract manufacturer. Any such technology transfer may
also require the transfer of requisite data for regulatory purposes, including
information contained in a proprietary drug master file held by a contract
manufacturer. We will rely more heavily on a contract manufacturer that owns the
drug master file because our ability to change contract manufacturers may be
more limited.
We are also currently working with outside contractors for the chemical
production of squalamine. Production of squalamine and other proposed products
will also require significant expenditure.
2) Abbott Laboratories:
We have been working for many years with Abbott Laboratories in the
development of a process to manufacture bulk drug substance for LOCILEX(TM)
Cream. We currently depend upon Abbott for the production of bulk drug substance
for LOCILEX(TM) Cream. If Abbott cannot manufacture bulk drug substance for
LOCILEX(TM) Cream, we will need to secure other manufacturing arrangements. The
process developed by Abbott is proprietary. If we desire to utilize, or have
another party utilize such process, we would be required to pay Abbott a
license fee.
We have an arrangement with Abbott Laboratories that provides for the purchase
of approximately $10 million of bulk drug substance for LOCILEX(TM) Cream. As
FDA approval of LOCILEX(TM) Cream has not occurred, we expect to discuss with
Abbott possible revisions to this arrangement. Through June 30, 1999, we have
paid Abbott $656,000 under this arrangement, and the contractual terms provide
for the additional payments to be made in 1999 and early 2000.
Our prior development arrangement with Abbott provides for the issuance to
Abbott of up to 500,000 shares of our Common Stock and the obligation to pay a
royalty on any future sales of LOCILEX(TM) Cream. When we issued stock to Abbott
we were required to record a charge to earnings representing the fair value of
the shares when issued. As of June 30, 1999, we have issued 250,000 shares of
common stock to Abbott. Possible future stock issuances are related to the
achievement by Abbott of contractual performance milestones.
3) Alternative Production Processes:
The production of peptides, such as LOCILEX(TM) Cream and other magainin
peptides, is expensive relative to the production of the traditional
antibiotics. We are pursuing alternative manufacturing sources, including
recombinant manufacturing, in order to improve the gross margins available to us
on sales of LOCILEX(TM) Cream. These programs, however, are at an early stage
and will require significant expenditures over an extended period of time.
Ultimately, we may be unable to develop a more cost-effective manufacturing
process and, even if we develop a more cost-effective process, the FDA may not
approve such a process.
4) Alternative Future Uses of LOCILEX(TM) Cream There are no currently
identified alternative uses of bulk drug substance for LOCILEX(TM) Cream.
If We Do Not Obtain Required Regulatory Approvals, We Will Not Be Able to
Commercialize Any of Our Product Candidates.
Numerous governmental authorities, including the FDA in the United States,
regulate our business and activities. Federal, state and foreign governmental
agencies impose rigorous preclinical and clinical testing and approval
requirements on our product candidates. In general, the process of obtaining
government approval is time consuming and costly.
Governmental authorities may delay or deny the approval of any of our drug
candidates. In addition, governmental authorities may enact new legislation or
regulations that could limit or restrict our efforts. A delay or denial of
regulatory approval for any of our drug candidates, such as that which has
occured for
10
<PAGE>
LOCILEX(TM) Cream, will materially affect our business. Even if we receive
approval of a product candidate, it may be conditioned upon certain limitations
and restrictions as to the drugs used and may be subject to continuous review.
If we fail to comply with any applicable regulatory requirements, we could be
subject to penalties, including:
. warning letters;
. fines;
. withdrawal of regulatory approval;
. product recalls;
. operating restrictions;
. injunctions; and
. criminal prosecution.
1) FDA Marketing Approval:
The primary regulatory agency overseeing all phases of our drug development
and marketing programs is the FDA. In order to obtain approval from the FDA to
market any drug, we must submit proof of safety, efficacy and quality for each
of our proposed products for each treatment, which requires extensive and time
consuming preclinical and clinical testing. The results of preclinical studies
are submitted to the FDA as part of an Investigational New Drug Application,
IND. Once the IND is effective, human clinical trials may be conducted. The
results of the clinical trials are submitted to the FDA as part of a New Drug
Application, NDA. Following review of the NDA, the FDA may:
. grant marketing approval;
. require additional testing or information; or
. deny the application.
2) FDA Manufacturing Approval:
Detailed manufacturing information is also required to be included in the NDA
for review and approval by the FDA. All manufacturing facilities and processes
must comply with the good manufacturing practices regulations prescribed by the
FDA. All manufacturers must, among other things, pass manufacturing plant
inspections and provide records of detailed manufacturing processes. Among
other things, it must be demonstrated that:
. the drug product can be consistently manufactured at the same quality
standard;
. the drug product is stable over time; and
. the level of chemical impurities in the drug product are under a designated
level.
Peptides are an especially difficult class of compounds to manufacture at
these standards, particularly in the quantities at which we anticipate
LOCILEX(TM) Cream will be required to be manufactured. Additionally, there have
been a number of changes over time in the manufacture of LOCILEX(TM) Cream bulk
drug substance and final cream product, including changes in process, scale and
vendors. It is necessary to demonstrate the product has been consistently
manufactured over time despite such changes.
As a result of its review of manufacturing of the cream product, the FDA
issued certain observations of deficiencies in compliance with good
manufacturing procedures. In any additional clinical studies to be conducted,
new batches of the cream product will need to be manufactured from the bulk drug
substance, in compliance with good manufacturing procedures, and meeting strict
product specifications.
3) Ongoing FDA Oversight:
We will continue to be subject to regulation by the FDA even after our drug
products have been approved and commercialized. Among other things, the FDA
may:
. require additional submissions if there are any modifications to the drug
product including, for example, any changes in manufacturing process, labeling,
or manufacturing facility;
. require post-marketing testing and surveillance to monitor the effects of
approved drug products; and
. enforce conditional approvals that restrict the commercial applications of a
drug product.
11
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Further, the FDA has numerous requirements governing labeling, promotional
material, storage, record keeping and reporting.
The Prescription Drug User Fee Act of 1992 imposes substantial fees on a one-
time basis for applications for approval, and on an annual basis for
manufacturing and marketing, of prescription drugs.
4) Other Regulatory Bodies:
We are also subject to regulation by other regulatory authorities, including
the Occupational Safety and Health Administration, the Environmental Protection
Agency, the Nuclear Regulatory Commission, the Drug Enforcement Agency and the
United States Department of Agriculture, and to regulation under the Toxic
Substances Control Act, the Resource Conservation and Recovery Act and other
regulatory statutes. In the future, we may be subject to additional federal,
state or local regulations.
Drug product marketing outside the United States is subject to foreign
regulatory requirements which may or may not be influenced by FDA approval.
While the requirements vary widely from country to country, generally, the drug
product must be approved by a foreign regulatory authority comparable to the FDA
prior to marketing the product in those countries. The time required to obtain
foreign approvals may be longer than that in the United States.
In the future, we may be subject to additional federal, state or local
regulations or additional fees. Efforts are continually underway to reform
federal regulation of drug products. Although some of these changes could
streamline and otherwise benefit development, marketing and related requirements
for drugs, others could increase regulatory requirements.
We Rely on Our Marketing and Development Partners and if They Do Not Perform
as Expected, We May Not Successfully Commercialize Our Products.
We do not have our own sales and marketing staff. In order to successfully
develop and market our products, we must enter into marketing and distribution
arrangements with third parties. We also expect to delegate the responsibility
for all or a significant portion of the development and regulatory approval for
certain products to partners. If our partners do not develop an approvable or
marketable product or do not market a product successfully, we may not achieve
necessary product revenues. Additionally, we may be unable to enter into
successful arrangements like these, as is required in our business.
We currently maintain two collaborative relationships. We maintain a
development, supply and distribution agreement with SmithKline Beecham in North
America for LOCILEX(TM) Cream, and a collaborative research and option agreement
with Genentech in the asthma area.
SmithKline may terminate our agreement with them at any time. If they
terminate our agreement, we would have difficulty finding an alternate partner
that could market our product as effectively as SmithKline. Our potential sales
and profits could suffer if SmithKline terminated our agreement. Future
milestone payments and sales proceeds from SmithKline occur only in the event
that LOCILEX(TM) Cream is approved.
Genentech may choose not to exercise its option to negotiate a fuller asthma
development and commercialization agreement with us. We will need partners in
this area to assist us, and we may be unable to enter into a similar agreement
or find as effective a partner. Without support from partners in this area, our
development and commercialization efforts would suffer.
We do not have control over the amount and timing of resources to be devoted
to our products by our collaborative partners. In the future, the interests of
our collaborators may not be consistent with our interests. Collaborators may
develop products independently or through third parties which could compete with
our proposed products. SmithKline maintains a significant presence in the
antibiotic area and currently sells a topical antibiotic product indicated for
the treatment of certain skin infections.
We may also decide to establish our own sales force to market and sell certain
products. Although certain members of our management have experience in the
marketing of pharmaceutical products, we have no experience with respect to
marketing our products. If we choose to pursue this alternative, we will need
to spend significant additional funds and devote significant management
resources and time to establish a
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<PAGE>
successful sales force. Given our inexperience in establishing and managing a
salesforce, this effort may not be successful. Given our financial resources,
efforts in this area would likely be modest compared to our competitors.
If LOCILEX(TM) Cream Does Not Achieve Market Acceptance, We May Not Achieve
Any Significant Revenues.
Even if we eventually received regulatory approval for LOCILEX(TM) Cream,
after submission of additional clinical and manufacturing data, we may be unable
to achieve market acceptance of the drug. Without market acceptance, we may be
unable to generate revenue levels necessary for profitability.
A number of factors may affect market acceptance of LOCILEX(TM) Cream,
including:
. the perception by physicians and other members of the health care community
of the safety and efficacy of LOCILEX(TM) Cream on an absolute basis or in
comparison to other drugs;
. the price of LOCILEX(TM) Cream relative to other competing treatment
alternatives;
. the availability of third-party reimbursement; and
. the effectiveness of our sales and marketing efforts relative to the sales and
marketing efforts of competitors.
In addition, side effects or unfavorable publicity concerning LOCILEX(TM)
Cream or comparable drugs on the market may affect our ability to obtain
physician, patient or third-party payer acceptance.
If We Are Not Able to Innovate and Develop Products as Rapidly as Our
Competitors, Our Products May Not Achieve Market Acceptance.
The pharmaceutical industry is characterized by intense competition. Many
companies, research institutions and universities are conducting research and
development activities in a number of areas similar to our fields of interest.
We are aware that research on compounds derived from animal host-defense systems
is being conducted by others. Many companies are also currently involved in
research and development activities focused on the pathogenesis of disease, and
the competition among companies attempting to find genes responsible for disease
is intense. Most of these entities have substantially greater financial,
technical, manufacturing, marketing, distribution and other resources than we
have. We will also face competition from companies using different or advanced
techniques that may render our products obsolete.
We expect technological developments in the biopharmaceutical field to occur
at a rapid rate and expect competition to intensify as advances in this field
are made. Accordingly, we must continue to devote substantial resources and
efforts to research and development activities in order to maintain a
competitive position in this field. Our compounds, products or processes may
become obsolete before we are able to recover a significant portion of our
research and development expenses. We will be competing with companies that
have significantly more experience in undertaking preclinical testing and human
clinical trials of new or improved therapeutic products and obtaining regulatory
approvals of such products. Some of these companies may be in advanced phases
of clinical testing of various drugs that may be competitive with our proposed
products.
Colleges, universities, governmental agencies and other public and private
research organizations are becoming more active in seeking patent protection and
licensing arrangements to collect royalties for use of technology that they have
developed, some of which may be directly competitive with our technology. In
addition, these institutions, along with pharmaceutical and specialized
biotechnology companies, can be expected to compete with us in recruiting highly
qualified scientific personnel.
Even if eventually approved, LOCILEX(TM) Cream may not be successfully
marketed against oral antibiotics for the treatment of infection in diabetic
foot ulcers. These infections have historically been treated with systemically
administered antibiotics, which may be perceived by some medical professionals
as having certain advantages over LOCILEX(TM) Cream. In addition, we may be
unable to manufacture LOCILEX(TM) Cream at a cost which will allow it to be sold
at a competitive price relative to oral antibiotics or other topical antibiotics
that may be used for this indication.
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<PAGE>
Many companies are working to develop and market products intended for the
additional disease areas being targeted, including cancer and asthma. A number
of major pharmaceutical companies have significant franchises in these disease
areas, and can be expected to invest heavily to protect their interests. In the
cancer field, anti-angiogenic agents are under development at a number of
companies. In the asthma field, other biopharmaceutical companies have also
reported the discovery of genes relating to asthma.
We Depend on Our Intellectual Property and If We Are Unable to Protect Our
Intellectual Property, We May Not Realize Optimal Value From Our Technology.
1) Patents:
Our success depends, in part, on our ability to develop and maintain a strong
patent position for our products and technologies both in the United States and
other countries. As with most biotechnology and pharmaceutical companies, our
patent position is highly uncertain and involves complex legal and factual
questions. Without patent and other protections, other companies could offer
substantially identical products for sale without incurring the sizeable
development and testing costs that we have incurred. Our ability to recoup
these expenditures and realize profits upon commercialization could be
diminished.
We cannot be certain that:
. patents will issue from any of our patent applications;
. our patent rights will be sufficient to protect our technology;
. our patents will not be successfully challenged or circumvented by our
competitors; or
. our patent rights will provide us with any commercial advantages.
The process of obtaining patent rights can be time consuming and expensive.
Even after significant expenditure, a patent may not issue. We can never be
certain that we were the first to develop the technology or that we were the
first to file a patent application for the particular technology because U.S.
patent applications are maintained in secrecy until a patent issues and
publications in the scientific or patent literature lag behind actual
discoveries.
Even after we are issued patent rights, we cannot be certain that:
. others will not develop similar technologies or duplicate the technology;
. others will not design around the patented aspects of the technology;
. we will not be obliged to defend ourselves in court against allegations of
infringement of third-party patents;
. our issued patents will be held valid in court; and
. an adverse outcome in a suit would not subject us to significant liabilities
to third parties, require rights to be licensed from third parties, or require
us to cease using such technology.
The cost of litigation can be substantial, regardless of the outcome.
2) Potential Ownership Disputes:
There may be disputes arising as to the ownership of our technology. Most of
our research and development personnel previously worked at other biotechnology
companies, pharmaceutical companies, universities, or research institutions.
These entities may raise questions as to when technology was developed, and
assert rights to the technology. These kind of disputes have occurred in the
past. We may not prevail in any such disputes.
Similar technology ownership disputes may arise in the context of consultants,
vendors or third parties, such as contract manufacturers. For example, our
consultants are employed by or have consulting agreements with third parties.
There may be disputes as to the capacity in which consultants are operating when
they make certain discoveries. We may not prevail in any such disputes.
3) Other Intellectual Property:
In order to protect our proprietary technology and processes, we also rely on
trade secrets and confidentiality agreements with our corporate partners,
employees, consultants, outside scientific collaborators,
14
<PAGE>
and other advisors. We may find that these agreements will be breached, or that
our trade secrets have otherwise become known or independently developed or
discovered by our competitors.
Certain of our exclusive rights to patents and patent applications are
governed by contract. Generally, such contracts require that we pay royalties
on sales of any products which are covered by patent claims. If we are unable to
pay the royalties we may lose our patent rights. Additionally, some of these
agreements also require that we develop the licensed technology under certain
timelines. If we do not adhere to an acceptable schedule of commercialization,
we may lose our patent rights.
If We Cannot Recruit and Retain Qualified Management, We May Not Be Able to
Successfully Develop and Commercialize Our Products.
We depend to a considerable degree on a limited number of key personnel. Many
key responsibilities have been assigned to a relatively small number of
individuals. We do not maintain "key man" insurance on any of our employees.
The loss of certain management and technical personnel could adversely affect
our ability to develop and commercialize products.
We Are Subject to Product Liability Claims, Which Could Result In Significant
Expense if a Claim Arose.
We are subject to significant potential product liability risks inherent in
the testing, manufacturing and marketing of human therapeutic products,
including the risk that:
. our proposed products cause some undesirable side effects or injury during
clinical trials;
. our commercialized products cause undesirable side effects or injury; or
. third parties that we have agreed to indemnify incur liability.
While we carry insurance, this coverage is expensive and we may be unable to
maintain adequate coverage on acceptable terms.
If We Do Not Receive Adequate Third-Party Reimbursement for Any of Our Drug
Candidates, Some Patients May Be Unable to Afford Our Products, and Sales Could
Suffer.
In both the United States and elsewhere, the availability of reimbursement
from third-party payers, such as government health administration authorities,
private health insurers and other organizations impacts prescription
pharmaceutical sales. These organizations are increasingly challenging the
prices charged for medical products and services, particularly where they
believe that there is only an incremental therapeutic benefit which does not
justify the additional cost. Coverage and reimbursement may not be available
for our proposed products or, if available, may not be adequate. Without
insurance coverage, many patients may be unable to afford our products, and we
may not reach optimal sales levels.
There has also been a trend toward government reforms intended to contain or
reduce the cost of health care. In certain foreign markets, pricing or
profitability of prescription pharmaceuticals is subject to government control.
In the United States, there have been a number of federal and state proposals to
implement similar government control.
We expect this reform trend to continue, but we cannot predict the nature or
extent of any reform that results. It is possible that reform could impact
pharmaceutical marketing and pricing. Not only would this affect possible
future profit margins, it could adversely affect our ability to obtain financing
for the continued development of our proposed products. Furthermore, reforms
could have a broader impact by limiting overall growth of health care spending,
such as Medicare and Medicaid spending, which could also adversely effect our
business.
Our Stock Price Is Extremely Volatile Due to a Number of Factors.
The market prices and trading volumes for securities of biopharmaceutical and
biotechnology companies, including ours, have historically been, and may
continue to be, highly volatile. Future events affecting our business or that
of our competitors may significantly impact our stock price, including:
15
<PAGE>
. product testing results,
. technological innovations,
. new commercial products,
. government regulations,
. proprietary rights,
. regulatory actions, and
. litigation.
Some of these factors are beyond our control.
We May Be Subject to Year 2000 Compliance Risks, Which Could Disrupt Our
Operations and the Operations of Our Collaborators.
We use computers in various aspects of our business, and are therefore exposed
to year 2000, Y2K, problems. If unresolved, these computer system problems
could result in operational delays, financial miscues, manufacturing errors,
lost clinical data or other unforeseen consequences. In mid-1998, we initiated
a compliance program with the following objectives:
. identifying potentially non-compliant internal systems;
. updating and/or replacing aging hardware;
. upgrading or updating software/network systems;
. assuring company-wide Y2K compliance;
. assessing third-party risks; and
. establishing contingency plans for any third-party risks identified.
We have identified, through internal testing and discussions with significant
vendors, that some administrative computers and software, as well as some
laboratory systems used for research, are not Y2K compliant. In order to make
these systems compliant, we have elected to replace hardware or upgrade software
systems. We expect to have critical internal systems and computers Y2K compliant
by November 1, 1999 at a cost of less than $100,000. We would likely have
considered replacing or upgrading certain computers and systems independent of
Y2K concerns.
We are in the process of contacting significant vendors to determine the
extent of third-party Y2K risks. Most third-parties have advised us that they
will make every effort to be compliant prior to December 31, 1999; however,
these third-parties could not provide us with assurances that they will be
compliant on a timely basis. We have important third-party relationships with
sales and marketing partners, manufacturers and clinical study administrators.
None of our contracts with these vendors address Y2K problems or their
remediation or prevention, and no assurances of compliance can be given by these
parties. We will continue to monitor the progress of these third-party vendors
and will adjust our contingency plans if any significant risks are identified.
Necessary contingency plans or remedies could be expensive.
In a worst case scenario, we could experience delays in receiving R&D
supplies, commercial supplies and accessing data on patients enrolled in
clinical studies. These delays could slow commercialization efforts and research
and development programs, or impact our ability to effectively manage and
monitor these programs. Our Y2K compliance program is expected to reduce our
level of uncertainty about internal Y2K problems and Y2K problems of significant
third-parties with whom we conduct business.
The Exercise of Options and Warrants and Other Issuances of Shares Could Have
Dilutive Effect on Our Stock Price.
As of June 30, 1999, there were outstanding options to purchase an aggregate
of 3,552,000 shares of our common stock at prices ranging from $0.40 per share
to $16.75 per share, of which approximately 2,270,000 were exercisable as of
such date. Also outstanding at June 30, 1999 were warrants to purchase 229,739
shares of our common stock exercisable at $8.00 per share, a warrant to purchase
300,000 shares of our common stock, exercisable at $7.50 per share, and warrants
to purchase an aggregate of 1,030,905 shares of our common stock, exercisable
from $5.99-$8.31 per share, subject to adjustment. Exercise of options and
warrants at prices below the market price of the our common stock could
adversely affect the price of our common stock. Additional
16
<PAGE>
dilution may result from the issuance of shares in connection with
collaborations or manufacturing arrangements, or in connection with other
financing efforts.
RESULTS OF OPERATIONS
Revenues
We have received no revenues from product sales. Revenues recorded to date
have consisted principally of revenues recognized under collaborations with
corporate partners. We recorded revenue of $10,000,000 in 1997 reflecting the
receipt of payments under the SmithKline Agreement entered into in February,
1997 for LOCILEX(TM) Cream. We do not expect to realize additional milestone
revenues from our arrangement with SmithKline unless, and until, we receive FDA
approval of LOCILEX(TM) Cream. We have no other currently existing
collaborations that will result in the realization of research and development
revenues.
Research and Development Expenses
Research and development expenses decreased in the three and six months ended
June 30, 1999 as compared to the same periods a year ago, due principally to
reductions in manufacturing development, clinical and regulatory costs, and
personnel expenses. The level of research and development expenses in future
periods will depend principally upon the progress of our research programs.
Expenses relating to the development of LOCILEX(TM) Cream may continue to be
significant in future periods to the extent we continue to invest in development
and manufacturing programs.
General and Administrative Expenses
General and administrative expenses consist principally of personnel costs and
professional fees and have decreased for both the three and six months ended
June 30, 1999 as compared to the same periods a year ago due principally to
reductions in personnel expenses.
Other Income and Expense
Interest income decreased in both the three and six months ended June 30, 1999
as compared to the same periods of the prior year due to lower investment
balances during these periods. The increase in interest expense for the six
month period ended June 30, 1999 is due principally to higher debt balances in
the first quarter of 1999 compared to the same period a year ago.
Loss
Over the next several years we expect to conduct significant research, pre-
clinical development, clinical testing and manufacturing activities. We expect
that these activities, together with projected general and administrative
expenses, will result in continued and significant losses.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
Cash and investments were $15,693,000 at June 30, 1999 as compared to
$22,871,000 at December 31, 1998. The primary use of cash was to finance our
operations.
Since inception, we have funded our operations primarily from the proceeds of
public and private placements of securities, including:
. $17,080,000 raised from our initial public offering in December 1991;
. $21,469,000 raised from a public offering completed in February 1993;
. $18,023,000 raised from a private placement completed in October 1993;
. $32,627,000 raised from a public offering completed in August 1995;
. $11,932,000 raised from a private placement completed in August 1996;
. $19,172,000 raised from a public offering completed in December 1997; and
17
<PAGE>
. $ 2,000,000 raised from a private placement completed in December 1998.
In addition to the above, we have funded our operations from contract and
grant revenues, interest income and lease and debt financing.
Accounts payable and accrued expenses decreased $629,000 to $8,024,000 at June
30, 1999, due principally to payments made under certain manufacturing
development agreements related to LOCILEX(TM) Cream. Accounts payable and
accrued expenses may fluctuate in future periods as we continue to accrue costs
for, and make payments for, the purchase of bulk drug substance for LOCILEX(TM)
Cream.
We refinanced our $2,500,000 note payable in the second quarter of 1999. Under
the terms of this arrangement, we make monthly interest-only payments at a rate
of 7.375%, with principal due in June 2000. We maintain investments of
$2,750,000 as collateral for the note payable.
In February 1997, we entered into a development, supply and distribution
agreement in North America with SmithKline for LOCILEX(TM) Cream. SmithKline has
paid us $10,000,000 under this agreement, which we received in 1997. SmithKline
may make additional payments to us of up to $22,500,000 upon the occurrence of
approval and certain product milestones. SmithKline will also fund a percentage
of any development expenses for any additional indications for LOCILEX(TM)
Cream. Upon the commencement of commercial sales by SmithKline, we will be
responsible for the supply of LOCILEX(TM) Cream and SmithKline will be
responsible for the marketing and sales of LOCILEX(TM) Cream. We will receive
certain percentages of SmithKline sales revenues under agreed upon terms. The
SmithKline Agreement also gives SmithKline rights to terminate the arrangement,
and, under certain conditions, the right to negotiate for rights to another
Magainin product development candidate.
In December 1998, we entered into a collaborative research and option
agreement with Genentech relating to a protein therapeutic in asthma. Under this
agreement, we will provide Genentech with access to a therapeutic target (IL9),
that is in our proprietary asthma gene database, and we will jointly conduct a
collaborative program to evaluate the utility of a blocking antibody to IL9 in
suppressing the asthmatic response. Under this collaborative agreement,
Genentech made an initial equity investment of $2,000,000 in our company, and
has an option to enter into a future development and commercialization agreement
with our company. Any such future development and commercialization agreement
could provide for payments to us of up to $35,000,000, upon terms to be
negotiated, and royalty payments on sales of products developed by Genentech in
the field.
We will need to raise substantial additional funds in the near future to
continue our research and development programs and to commercialize our
potential products. If we are unable to raise such funds, we may be unable to
complete our development activities for any of our proposed products.
We maintained cash and investments of $15.7 million at June 30, 1999. At June
30, 1999, we had current liabilities of $10.5 million. In the absence of
raising additional funds or significantly reducing expenses, we do not have
sufficient resources to sustain operations beyond 1999.
We regularly explore alternative means of financing our operations and seek
funding through various sources, including public and private securities
offerings and collaborative arrangements with third parties. We currently do not
have any commitments to obtain additional funds, and may be unable to obtain
sufficient funding in the future on acceptable terms. If we cannot obtain
funding, we will need to delay, scale back or eliminate research and development
programs or enter into collaborations with third parties to commercialize
potential products or technologies that we might otherwise seek to develop or
commercialize ourselves, or seek other arrangements. If we engage in
collaborations, we will receive lower consideration upon commercialization of
such products than if we had not entered into such arrangements, or if we
entered into such arrangements at later stages in the product development
process.
Particularly with the lack of approval of LOCILEX(TM) Cream, our prospects of
completing any near term equity financing are diminished. As a result, we
expect to evaluate all available strategic alternatives to finance our programs
and technology, including broad-based alliances or mergers with better-financed
entities.
We currently have neither the resources, facilities nor capabilities to
manufacture any of our proposed products in the quantities and quality required
for commercial sale. We have no current plans to establish a manufacturing
facility. We depend upon contract manufacturers for commercial scale
manufacturing of our
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<PAGE>
proposed products in accordance with regulatory standards. This dependence may
restrict our ability to develop and deliver products on a timely, profitable and
competitive basis. Additionally, the number of companies capable of producing
bulk peptides on the scale that we expect to require to commercialize
LOCILEX(TM) Cream is limited. We may be unable to maintain arrangements with
qualified outside contractors to manufacture materials at costs which are
affordable to us, if at all.
The production of peptides, such as LOCILEX(TM) Cream and other magainin
peptides, is expensive relative to the production of the traditional
antibiotics. We are pursuing alternative manufacturing sources, including
recombinant manufacturing, in order to improve the gross margins available to us
on sales of pexiganan. These programs, however, are at an early stage and will
require significant expenditures over an extended period of time. Ultimately, we
may be unable to develop a more cost-effective manufacturing process and, even
if we develop a more cost-effective process, the FDA may not approve such a
process.
We have an arrangement with Abbott Laboratories that provides for the purchase
of approximately $10 million of bulk drug substance for LOCILEX(TM) Cream. Since
FDA approval of LOCILEX(TM) Cream has not occurred, we expect to discuss with
Abbott possible revisions to this arrangement. Through June 30, 1999, we have
paid Abbott $656,000 under this arrangement, and the contractual terms provide
for the additional payments to be made in 1999 and early 2000.
Our prior development arrangement with Abbott provides for the issuance to
Abbott of up to 500,000 shares of our Common Stock and the obligation to pay a
royalty on any future sales of LOCILEX(TM) Cream. When we issued stock to Abbott
we were required to record a charge to earnings representing the fair value of
the shares when issued. As of June 30, 1999, we have issued 250,000 shares of
common stock to Abbott. Possible future stock issuances are related to the
achievement by Abbott of contractual performance milestones.
Our capital expenditure requirements will depend upon numerous factors,
including the progress of our other research and development programs, the time
and cost required to obtain regulatory approvals, our ability to enter into
additional collaborative arrangements, the demand for products based on our
technology, if and when such products are approved, and possible acquisitions of
products, technologies and companies. We had no significant capital commitments
as of June 30, 1999.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
None
19
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
None
ITEM 2. Changes in Securities and Use of Proceeds
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on May 18, 1999 the
stockholders' elected eight directors. The number of shares voted were as
follows:
<TABLE>
<CAPTION>
FOR WITHHELD
---------- --------
<S> <C> <C>
Zola P. Horovitz, Ph.D. 17,966,782 126,605
Bernard Canavan, M.D. 17,966,882 126,505
Michael R. Dougherty 17,966,928 126,459
Roy C. Levitt, M.D. 17,964,313 129,074
Charles A. Sanders, M.D. 17,965,732 127,655
Robert F. Shapiro 17,964,378 129,009
James B. Wyngaarden, M.D. 17,966,932 126,455
Michael A. Zasloff, M.D., Ph.D. 17,968,002 125,385
</TABLE>
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
27 Financial Data Schedule
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAGAININ PHARMACEUTICALS INC.
(Registrant)
Date: July 28, 1999 /S/ MICHAEL R. DOUGHERTY
----------------------------------
Michael R. Dougherty
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MAGAININ
PHARMACEUTICALS INC.'S FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 743
<SECURITIES> 14,950
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 15,891
<PP&E> 6,209
<DEPRECIATION> 3,944
<TOTAL-ASSETS> 18,326
<CURRENT-LIABILITIES> 10,524
<BONDS> 0
0
0
<COMMON> 46
<OTHER-SE> 7,697
<TOTAL-LIABILITY-AND-EQUITY> 18,326
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,977
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50
<INCOME-PRETAX> (3,864)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,864)
<EPS-BASIC> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
