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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 September 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 November 12, 1999 was 26,943,116.
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MAGAININ PHARMACEUTICALS INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I - Financial Information
Item 1. Financial Statements (unaudited)
Balance Sheets as of September 30, 1999 and December 31, 1998................................. 2
Statements of Operations for the three and nine months ended September 30, 1999
and September 30, 1998..................................................................... 3
Statements of Cash Flows for the nine months ended September 30, 1999 and September 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.................................... 20
Part II - Other Information............................................................................. 21
</TABLE>
1
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MAGAININ PHARMACEUTICALS INC.
BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................ $ 169 $ 4,495
Short-term investments (NOTE 3).......................................... 9,267 18,376
Prepaid expenses and other............................................... 177 179
-------- ---------
Total current assets................................................... 9,613 23,050
Fixed assets, net........................................................... 2,040 2,765
Other assets................................................................ 172 76
-------- ---------
Total assets........................................................... $ 11,825 $ 25,891
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses (NOTE 7)........................... $ 1,285 $ 8,653
Note payable (NOTE 3).................................................... 2,500 2,500
-------- ---------
Total current liabilities.............................................. 3,785 11,153
Accrued development expense - long-term (NOTE 5)............................ 2,933 -
Deferred rent............................................................... 59 58
-------- ---------
Total liabilities...................................................... 6,777 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 September 30, 1999 and
December 31, 1998 respectively........................................... 46 46
Additional paid-in capital.................................................. 147,686 147,553
Accumulated other comprehensive income--unrealized gain on investments...... 0 9
Accumulated deficit......................................................... (142,684) (132,928)
-------- --------
Total stockholders' equity............................................. 5,048 14,680
-------- ---------
Total liabilities and stockholders' equity........................... $ 11,825 $ 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 Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues................................................ $ - $ - $ - $ -
Costs and expenses:
Research and development.............................. 2,327 5,138 7,993 17,042
General and administrative............................ 598 668 2,230 2,547
----------- ----------- ----------- -----------
2,925 5,806 10,223 19,589
----------- ----------- ----------- -----------
Loss from operations.................................... (2,925) (5,806) (10,223) (19,589)
Interest income......................................... 229 393 617 1,336
Interest expense........................................ (47) (56) (150) (140)
----------- ----------- ----------- -----------
Net loss................................................ $ (2,743) $ (5,469) $ (9,756) $ (18,393)
=========== =========== =========== ===========
Net loss per share--basic and diluted................... $ (0.12) $ (0.25) $ (0.43) $ (0.83)
=========== =========== =========== ===========
Weighted average shares outstanding..................... 22,912 22,287 22,911 22,213
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
3
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MAGAININ PHARMACEUTICALS INC.
STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1999 1998
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss................................................................................... $ (9,756) $ (18,393)
Adjustments to reconcile net loss to net cash used in operating activities:
Fair value of stock, options and warrants issued......................................... - 859
Depreciation and amortization............................................................ 806 842
Amortization of investment discounts/premiums............................................ (397) (580)
Compensation expense under stock and option awards....................................... 133 100
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses and other assets................................. (94) 159
Decrease (increase) in accounts payable and accrued expenses............................. (7,368) 2,373
Increase in accrued development expenses - long-term..................................... 2,933 -
Increase (decrease) in deferred rent..................................................... 1 (27)
--------- -----------
Net cash used in operating activities........................................................ (13,742) (14,667)
--------- -----------
Cash Flows From Investing Activities:
Purchase of investments..................................................................... (21,003) (33,980)
Proceeds from maturities of investments..................................................... 29,500 48,900
Proceeds from sale of investments........................................................... 1,000 -
Capital expenditures........................................................................ (81) (1,044)
--------- -----------
Net cash provided by investing activities.................................................... 9,416 13,876
--------- -----------
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.......................... - 138
--------- -----------
Net cash provided by financing activities.................................................... - 1,110
--------- -----------
Net increase (decrease) in cash and cash equivalents......................................... (4,326) 319
Cash and cash equivalents at beginning of period............................................. 4,495 487
--------- -----------
Cash and cash equivalents at end of period................................................... $ 169 $ 806
========= ===========
Supplemental Cash Flow Information:
Cash paid during the period for interest..................................................... $ 146 $ 133
========= ===========
</TABLE>
See accompanying notes to financial statements.
4
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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
oncology, anti-infectives, 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. In order to again seek
approval of LOCILEX(TM) Cream, the FDA indicated that the Company must conduct
further development activities, including clinical and manufacturing activities.
The Company is currently considering the feasibility of continuing this program.
(See "Risk Factors" section 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 respiratory area.
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, 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 $2.5 million 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 approximately $2.7 million at the bank as
collateral for the note payable.
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4. Stockholders' Equity
The changes in stockholders' equity from December 31, 1998 to September 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 - 133 - - 133
Comprehensive loss
Net loss................................... - - - - (9,756) (9,756)
Carrying value adjustment.................. - - - (9) - (9)
--------- ------ ---------- ---------- ----------- -------
Total comprehensive loss....................... - - - - - (9,765)
--------- ------ ---------- ---------- ----------- -------
Balance at September 30, 1999................... 22,912 $ 46 $ 147,686 $ - $ (142,684) $ 5,048
========= ====== ========== ========== =========== =======
</TABLE>
5. Manufacturing Agreement
The Company had an agreement with Abbott Laboratories 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 has
renegotiated this agreement with Abbott. As a result, the Company has agreed to
pay Abbott $4.2 million, of which $4.0 million has been paid through September
30, 1999, and the Company will receive partial delivery of material. An
additional $3.4 million is due to Abbott and payable if Magainin receives in
excess of $10.0 million of additional funds in any year beginning in 2000, in
which case 15% of such excess over $10.0 million shall be payable to Abbott. The
Company has accrued $2.9 million as the present value of this conditional
obligation, assuming it would be payable in full in early 2001. The Company has
no further purchase commitments to Abbott, and Abbott has no further supply
requirements to Magainin.
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. The Company 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
the Company will generate no revenues from LOCILEX(TM) Cream in the near future.
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, 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.
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
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certain institutions, and these relationships may provide the Company 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>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Accounts payable.................................... $ 128 $ 179
Clinical and regulatory costs....................... 310 448
Manufacturing development costs..................... 52 7,171
Preclinical costs................................... 93 117
Professional fees................................... 164 253
Other............................................... 538 485
---------- ---------
$ 1,285 $ $8,653
========== =========
</TABLE>
8. Subsequent Event
On October 21, 1999 the Company completed a public offering of 4,000,000
shares of its common stock. The Company sold 3,860,000 shares of common stock to
its three largest institutional shareholders at $1.00 per share, a formula-based
average stock price over an agreed upon period of time through October 15, 1999,
the date the Company's registration statement was declared effective. Members of
the Company's board of directors also purchased an aggregate of 140,000 shares
of common stock at $1.125 per share, the closing price on Friday, October 15,
1999. Proceeds from the offering totaled approximately $4.0 million.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Our disclosure and analysis in this report contains, in addition to historical
information, some forward-looking statements. Forward-looking statements give
our current expectations or forecasts of future events. You can identify these
statements by the fact that they do not relate strictly to historical or current
facts. Such statements may include words such as ''anticipate,'' ''estimate,''
''expect,'' ''project,'' ''intend,'' ''plan,'' ''believe'' and other words and
terms of similar meaning in connection with any discussion of future operating
or financial performance. In particular, these include statements relating to
present or anticipated scientific progress, development of LOCILEX(TM) Cream and
any other potential pharmaceutical products, future revenues, capital
expenditures, research and development expenditures, future financing and
collaborations, personnel, manufacturing requirements and capabilities, Year
2000 readiness, stock price and other statements regarding matters that are not
historical facts or statements of current condition.
Any or all of our forward-looking statements in this report may turn out to be
wrong. They can be affected by inaccurate assumptions we might make or by known
or unknown risks and uncertainties. Many factors mentioned in the discussion
below will be important in determining future results. Consequently, no forward-
looking statement can be guaranteed. Actual future results may vary materially.
We undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise. Also note
that we provide the following cautionary discussion of risks and uncertainties
relevant to our business. These are factors that we think could cause our actual
results to differ materially from expected results. Other unanticipated
occurrences besides those listed here could also adversely affect us. This
discussion is provided as permitted by the Private Securities Litigation Reform
Act of 1995.
GENERAL
We are a biopharmaceutical company engaged in the development of medicines for
serious diseases. Our development efforts are focused on oncology, anti-
infectives, and pulmonary and allergic disorders.
On July 26, 1999, we announced 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 respiratory area.
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 September 30, 1999, our
accumulated deficit was approximately $142.7 million. We will need to raise
additional funds in the future to continue our operations.
RISK FACTORS
The FDA Has Deemed Our NDA for LOCILEX(TM) 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 FDA that
our 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
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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 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.
If We Do Not Raise Additional Capital, 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 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.
On October 21, 1999 the Company completed a public offering of 4,000,000
shares of its common stock. The Company sold 3,860,000 shares of common stock to
its three largest institutional shareholders at $1.00 per share, a formula-based
average stock price over an agreed upon period of time through October 15, 1999,
the date the Company's registration statement was declared effective. Members of
the Company's board of directors also purchased an aggregate of 140,000 shares
of common stock at $1.125 per share, the closing price on Friday, October 15,
1999. Proceeds from the offering totaled approximately $4.0 million.
We maintained cash and investments of $9.4 million at September 30, 1999. At
September 30, 1999, we had current liabilities of $3.8 million. In the absence
of raising additional funds beyond the October 1999 offering, or significantly
reducing expenses, we do not have sufficient resources to sustain operations
beyond 2000.
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.
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 September 30, 1999, we
had an accumulated deficit of approximately $142.7 million.
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
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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 the technical
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 our proposed products 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. If we rely on a contract manufacturer that owns the drug master
file, our ability to change contract manufacturers may be more limited.
2. Abbott Laboratories:
We had an agreement with Abbott Laboratories 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, we renegotiated this agreement
with Abbott. As a result, we have agreed to pay Abbott $4.2 million, of which
$4.0 million has been paid to date, and we will receive partial delivery of
material. An additional $3.4 million is due to Abbott and payable if we receive
in excess of $10.0 million of additional funds in any year beginning in 2000, in
which case 15% of such excess over $10.0 million shall be payable to Abbott. We
have no further purchase commitments to Abbott, and Abbott has no further supply
requirements to us.
3. Alternative Production Processes:
The production of peptides, such as LOCILEX 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 any sales of these products. 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 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.
4. Alternative Future Uses of LOCILEX(TM) Cream
There are no currently identified alternative uses of bulk drug substance for
LOCILEX(TM) Cream.
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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
occurred for 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 indication, 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 or
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 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, or GMP, 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.
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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.
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.
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 Will Rely on 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 a collaborative research and option agreement with
Genentech, Inc. in the asthma area, which expires in December 1999. 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.
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We also have a development, supply distribution agreement with SmithKline
Beecham for LOCILEX(TM) Cream. Future milestone payments and sales proceeds from
SmithKline will occur only in the event that LOCILEX(TM) Cream is eventually
approved.
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. For example, 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 limited
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 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 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.
Many companies are working to develop and market products intended for the
additional disease areas being targeted by us, 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.
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<PAGE>
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 patents 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; or
. 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.
14
<PAGE>
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, 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 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 Potential 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 proposed 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 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.
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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 will
likely continue to be, highly volatile. Future events affecting our business or
that of our competitors may significantly impact our stock price, including:
. product testing results,
. technological innovations,
. new commercial products,
. government regulations,
. proprietary rights,
. regulatory actions, and
. litigation.
We May Be Unable to Maintain the Standards for Listing on the Nasdaq National
Market, Which Could Make it More Difficult for Investors to Dispose of Our
Common Stock and Could Subject Our Common Stock to the "Penny Stock" Rules.
Our common stock is listed on the Nasdaq National Market. Nasdaq requires
listed companies to maintain standards for continued listing, including either a
minimum bid price for shares of a company's stock or a minimum tangible net
worth. If we are unable to maintain these standards, our common stock could be
delisted. Trading in our stock would then be conducted on the Nasdaq Small Cap
Market unless we are unable to meet the requirements for inclusion. If we were
unable to meet the requirements for inclusion in the Small Cap Market, our
common stock would be traded on an electronic bulletin board established for
securities that do not meet the Nasdaq listing requirements or in quotations
published by the National Quotation Bureau, Inc. that are commonly referred to
as the "pink sheets." As a result, it could be more difficult to sell, or obtain
an accurate quotation as to the price of, our common stock.
In addition, if our common stock were delisted, it would be subject to the
so-called penny stock rules. The SEC has adopted regulations that define a
"penny stock" to be any equity security that has a market price of less than
$5.00 per share, subject to certain exceptions. For any transaction involving a
penny stock, unless exempt, the rules impose additional sales practice
requirements on broker-dealers subject to certain exceptions.
For transactions covered by the penny stock rules, a broker-dealer must
make a special suitability determination for the purchaser and must have
received the purchaser's written consent to the transaction prior to the sale.
The penny stock rules also require broker-dealers to deliver monthly statements
to penny stock investors disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks. Prior
to the transaction, a broker-dealer must provide a disclosure schedule relating
to the penny stock market. In addition, the broker-dealer must disclose the
following:
. commissions payable to the broker-dealer and the registered
representative; and
. current quotations for the security as mandated by the applicable
regulations.
If our common stock were delisted and determined to be a "penny stock," a
broker-dealer may find it to be more difficult to trade our common stock, and an
investor may find it more difficult to acquire or dispose of our common stock in
the secondary market.
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The Exercise of Options and Warrants and Other Issuances of Shares Could Have
Dilutive Effect on Our Stock Price.
As of September 30, 1999, there were outstanding options to purchase an
aggregate of 4,016,000 shares of our common stock at prices ranging from $0.40
per share to $16.75 per share, of which approximately 2,276,000 were exercisable
as of such date. Also outstanding at September 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 1,158,210 shares of our common
stock, currently exercisable from $5.35-$7.37 per share, reflecting our October
1999 offering of 4,000,000 shares of common stock, and subject to adjustment
with future offerings. Exercise of options and warrants at prices below the
market price of our common stock could adversely affect the price of our common
stock. Additional dilution may result from the issuance of shares in connection
with collaborations or manufacturing arrangements, or in connection with other
financing efforts.
Our Certificate of Incorporation and Delaware Law Contain Provisions that Could
Discourage a Takeover.
Our certificate of incorporation provides our board of directors the power
to issue shares of preferred stock without stockholder approval. This preferred
stock could have voting rights, including voting rights that could be superior
to that of our common stock, and the board of directors has the power to
determine these voting rights. In addition, Section 203 of the Delaware General
Corporation Law contains provisions which impose restrictions on stockholder
action to acquire control of Magainin. The effect of these provisions of our
certificate of incorporation and Delaware law provisions would likely discourage
third parties from seeking to obtain 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, or 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 identified, through internal testing and discussions with significant
vendors, that some administrative computers and software, as well as some
laboratory systems used for research, were not Y2K compliant. In order to make
these systems compliant, we have elected to replace hardware or upgrade software
systems. Our critical internal systems and computers have been replaced and
upgraded and have tested Y2K compliant, all at a cost of less than $100,000.
In the process of contacting significant vendors about potential Y2K risks
during the year, 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
17
<PAGE>
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 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.
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 nine months
ended September 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.
General and Administrative Expenses
General and administrative expenses consist principally of personnel costs
and professional fees and have decreased for both the three and nine months
ended September 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 nine months ended September
30, 1999 as compared to the same periods of the prior year due to lower
investment balances during these periods.
Net Loss
Our goal is to conduct significant research, pre-clinical development,
clinical testing and manufacturing activities over the next several years. 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 $9,436,000 at September 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;
18
<PAGE>
. $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;
. $ 2,000,000 raised from a private placement completed in December 1998;
and
. $ 4,000,000 raised from a public offering completed in October 1999.
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 $7,368,000 to $1,285,000 at
September 30, 1999, due principally to the payment of $4,000,000 to Abbott and
the reclassification to long-term of the $2,933,000 obligation described below.
Long-term liabilities increased by $2,933,000 reflecting the present value
of additional amounts due to Abbott under certain conditions. (See "Note 5" in
"Notes to Financial Statments")
Under the terms of our $2,500,000 note payable, we make monthly interest-
only payments at a rate of 7.375%, with principal due in June 2000. We maintain
investments of $2,739,000 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. We had
hoped to commercialize LOCILEX(TM) Cream in the near term. However, with the
FDA's decision, near term commercialization of LOCILEX Cream will not occur, and
we will generate no revenues from LOCILEX(TM) Cream in the near future. 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 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.
On October 21, 1999 the Company completed a public offering of 4,000,000
shares of its common stock. The Company sold 3,860,000 shares of common stock to
its three largest institutional shareholders at $1.00 per share, a formula-based
average stock price over an agreed upon period of time through October 15, 1999,
the date the Company's registration statement was declared effective. Members of
the Company's board of directors also purchased an aggregate of 140,000 shares
of common stock at $1.125 per share, the closing price on Friday, October 15,
1999. Proceeds from the offering totaled approximately $4.0 million.
We maintained cash and investments of $9.4 million at September 30, 1999.
At September 30, 1999, we had current liabilities of $3.8 million. In the
absence of raising additional funds beyond the October 1999 financing, or
significantly reducing expenses, we do not have sufficient resources to sustain
operations beyond 2000.
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
19
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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.
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 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 any sales of these products. 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 had an agreement with Abbott Laboratories 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, we renegotiated this agreement
with Abbott. As a result, we have agreed to pay Abbott $4.2 million, of which
$4.0 million has been paid to date, and we will receive partial delivery of
material. An additional $3.4 million is due to Abbott and payable if we receive
in excess of $10.0 million of additional funds in any year beginning in 2000, in
which case 15% of such excess over $10.0 million shall be payable to Abbott. We
have no further purchase commitments to Abbott, and Abbott has no further supply
requirements to us.
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 September 30, 1999.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
None
20
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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
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended September 30, 1999, the Registrant filed the
following Current Reports on Form 8-K.
. On July 26, 1999, Magainin filed a Current Report on Form 8-K for the
Regulatory Notification that LOCILEX(TM) Cream Is Not Approvable
. On September 28, 1999, Magainin filed a Current Report on Form 8-K for
the Renegotiation of the Abbott Laboratories Contract
21
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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: November 12, 1999 /s/ Michael R. Dougherty
----------------------------------
Michael R. Dougherty
President, Chief Executive Officer
and Chief Financial Officer
22
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