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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
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 NUMBER: 0-23490
------------------------
VIVUS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-3136179
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
545 MIDDLEFIELD ROAD, SUITE 200, MENLO PARK, CA 94025
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(415) 325-5511
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 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. [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
At May 1, 1997, 16,507,906 shares of common stock were outstanding. Exhibit
index on page 19.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VIVUS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- -------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................... $ 6,549 $ 555
Available-for-sale securities..................................... 57,278 60,710
Trade and other receivables....................................... 12,780 748
Inventories....................................................... 4,666 4,540
Prepaid expenses and other........................................ 605 587
-------- -------
Total current assets...................................... 81,878 67,140
Property, net....................................................... 6,956 6,332
Available-for-sale securities, non-current.......................... 23,929 23,060
-------- -------
Total..................................................... $ 112,763 $ 96,532
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 2,150 $ 3,324
Accrued and other liabilities..................................... 9,603 3,428
-------- -------
Total current liabilities................................. 11,753 6,752
-------- -------
Stockholders' equity:
Preferred stock; no par value; shares authorized -- 5,000,000;
shares outstanding -- none..................................... -- --
Common stock; $.001 par value; shares authorized -- 30,000,000;
shares outstanding -- March 31, 1997, 16,440,719; December 31,
1996, 16,227,170;.............................................. 16 16
Paid in capital................................................... 158,062 156,189
Unrealized gain (loss) on securities.............................. (225) 77
Deferred compensation............................................. (243) (348)
Accumulated deficit............................................... (56,600) (66,154)
-------- -------
Total stockholders' equity................................ 101,010 89,780
-------- -------
Total..................................................... $ 112,763 $ 96,532
======== =======
</TABLE>
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VIVUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1997 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net product sales.................................................... $27,791 $ --
Milestone revenue.................................................... 5,000 --
------- -------
Net revenues....................................................... 32,791 --
Cost of goods sold................................................... 8,066 --
------- -------
Gross margin......................................................... 24,725 --
Operating expenses:
Research and development........................................... 2,027 5,359
Selling, general and administrative................................ 11,809 1,379
------- -------
Total operating expenses................................... 13,836 6,738
------- -------
Income (loss) from operations........................................ 10,889 (6,738)
Interest income...................................................... 1,121 503
------- -------
Income (loss) before taxes................................. 12,010 (6,235)
Income taxes......................................................... 2,456 --
------- -------
Net income (loss).......................................... $ 9,554 $(6,235)
======= =======
Net income (loss) per common and equivalent share.................... $ 0.54 $ (0.45)
======= =======
Shares used in the computation of net income (loss) per share........ 17,827 13,991
======= =======
</TABLE>
3
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VIVUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1997
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................................................... $ 9,554 $(6,235)
Adjustments to reconcile net income (loss) to net cash provided (used)
for operating activities:
Depreciation and amortization...................................... 403 238
Amortization of deferred compensation.............................. 105 110
Changes in assets and liabilities:
Receivables...................................................... (12,032) (67)
Inventories...................................................... (126) --
Prepaid expenses and other....................................... (18) (33)
Accounts payable................................................. (1,174) (5)
Accrued and other liabilities.................................... 6,175 636
-------- -------
Net cash provided by (used for) operating activities.......... 2,887 (5,356)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property purchases.................................................... (1,027) (499)
Securities purchases.................................................. (56,418) (4,978)
Proceeds from sale/maturity of securities............................. 58,679 10,523
-------- -------
Net cash provided by investing activities..................... 1,234 5,046
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of common stock options...................................... 1,873 263
-------- -------
Net cash provided by financing activities..................... 1,873 263
-------- -------
Net Increase (Decrease) in Cash and Cash Equivalents.................... 5,994 (47)
CASH AND CASH EQUIVALENTS:
Beginning of period................................................... 555 973
End of period......................................................... $ 6,549 $ 926
======== =======
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Unrealized loss on securities......................................... $ (302) $ (161)
</TABLE>
4
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VIVUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule 10
of Regulations S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three month period ended March 31,
1997 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1997. For further information, refer to the financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1996.
2. PROVISION FOR INCOME TAXES
The Company has recorded a provision for income taxes of twenty percent of
income before taxes in 1997. This tax rate includes the effect of net operating
losses (NOLs) carried forward from prior periods. The tax rate would have been
substantially higher if the NOLs were not available to offset current income.
The Company expects to fully utilize all NOLs during 1997, and accordingly, the
Company's effective tax rate is expected to increase in the future.
3. NET INCOME (LOSS) PER SHARE
For the three months ended March 31, 1997, net income per common and
equivalent share is based on the weighted average number of common and
equivalent shares outstanding during the period, including outstanding options
and warrants. Such options and warrants are excluded from the net loss per
common and equivalent shares for the three months ended March 31, 1996 because
they are antidilutive.
4. IMPACT OF NEW ACCOUNTING PRONOUNCEMENT
The Company will adopt SFAS No. 128, "Earnings per Share," effective
December 15, 1997 for the year ending December 31, 1997. Had the new
pronouncement been in effect for the three months ended March 31, 1997, basic
earnings per share would be reported as $0.58 and diluted earnings per share
would be $0.54.
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<PAGE> 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DESCRIPTION OF BUSINESS
VIVUS, Inc. ("VIVUS" or the "Company") is a leading developer of advanced
therapeutic systems for the treatment of erectile dysfunction. Erectile
dysfunction, commonly referred to as impotence, is the inability to achieve and
maintain an erection of sufficient rigidity for sexual intercourse. The
Company's transurethral system for erection is a non-invasive, easy to use
system that delivers pharmacologic agents topically to the urethral lining. In
November 1996, the Company obtained regulatory marketing clearance from the U.S.
Food and Drug Administration (the "FDA") to manufacture and market its first
product, MUSE(R) (alprostadil). The Company commenced product shipments to
wholesalers in December 1996 and commercially introduced MUSE (alprostadil) in
the United States through its direct sales force beginning in January 1997. In
addition, the Company submitted applications for regulatory approval to market
MUSE (alprostadil) in the United Kingdom and Sweden in 1996, Norway in January
1997 and in Australia and New Zealand in April 1997. These applications will be
subject to rigorous approval processes, and there can be no assurance such
approval will be granted in a timely manner, if at all. Furthermore, the Company
received FDA clearance in December 1996 for ACTIS(R), an adjustable elastomeric
venous flow control device designed for those patients who suffer from
veno-occlusive dysfunction (commonly referred to as venous leak syndrome). ACTIS
is currently being studied for adjunctive use with MUSE, however, there can be
no assurance that such studies will demonstrate that adjunctive use of ACTIS
with MUSE (alprostadil) is an effective treatment for erectile dysfunction.
In May 1996, the Company entered into an international marketing agreement
with Astra AB ("Astra"). Astra will purchase the Company's products for resale
in Europe, South America, Central America, Australia and New Zealand. As
consideration for execution of the international marketing agreement, Astra paid
the Company $10 million in June 1996. In September 1996, the Company received a
$10 million milestone payment from Astra upon filing an application for
marketing authorization for MUSE (alprostadil) in the United Kingdom. The
Company will be paid up to an additional $10 million in the event certain other
milestones are achieved. However, there can be no assurance that such milestones
will be achieved.
In January 1997, the Company entered into an international marketing
agreement with Janssen Pharmaceutica International ("Janssen"), a subsidiary of
Johnson & Johnson. Janssen will purchase the Company's products for resale in
China, multiple Pacific Rim countries (excluding Japan), Canada, Mexico and
South Africa. As consideration for execution of the international marketing
agreement, Janssen paid the Company $5 million. The Company will receive
additional payments in the event certain other milestones are achieved. However,
there can be no assurance that such milestones will be achieved.
The Company has sought and will continue to seek pharmacologic agents for
the treatment of erectile dysfunction that are suitable for transurethral
delivery for which significant safety data already exists. The Company believes
that such agents may progress rapidly through clinical development and the
regulatory process due to the preexisting safety data. The Company expects to
begin a Phase III multi-center trial in 1997 for its second product candidate, a
combination of alprostadil and prazosin delivered via the Company's
transurethral system for erection. The Company has several other product
candidates in preclinical development.
The Company has limited experience in manufacturing and selling MUSE
(alprostadil) in commercial quantities. Whether the Company can successfully
manage the transition to a large scale commercial enterprise will depend upon
successful further development of its manufacturing capability and its
distribution network, and attainment of foreign regulatory approvals for MUSE
(alprostadil). Failure to make such a transition successfully would have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's New Jersey manufacturing facility at Paco Pharmaceutical
Services Inc. was inspected by the FDA for the first time after the preapproval
inspection during twelve days in February and March 1997. That inspection
resulted in the issuance by the FDA of an extensive Form FDA 483, which detailed
specific areas where the FDA inspector observed that the Company's operations
were not in full compliance with some
6
<PAGE> 7
areas of the Good Manufacturing Practices ("cGMPs") regulations. A corrective
action plan addressing all identified cGMP deficiencies was initiated
immediately, and the Company submitted a written response to the Form FDA 483
and requested a meeting with the FDA District Office officials to discuss the
matter. Approximately 30 days after submitting the initial written response, the
Company provided the FDA with a written update of the progress made against the
corrective action plan. The FDA has provided the Company with written comments
on the initial response, which included requests for clarification and
additional information. There can be no assurance that the FDA will accept the
Company's corrective action plan, supplemental information or the time frame for
completing the corrective action plan. If the corrective action plan is accepted
it is likely that the FDA would reinspect the facility shortly after completion
of the corrective action plan. The scope of any FDA reinspection could be more
comprehensive than the initial inspection. Failure to adequately address these
cGMP deficiencies within a reasonable time frame would have an adverse effect on
the Company's ability to supply its product in the US and internationally, which
would have a material adverse effect on the Company's business, financial
condition and results of operations. Accordingly, the Company has undertaken a
complete review of its cGMP compliance. However, there can be no assurance that
the FDA will deem the Company's corrective action or the timing for the
corrective action to be adequate or that additional corrective action, in areas
not addressed by Form FDA 483, will not be required. Failure to achieve
satisfactory cGMP compliance would have a material adverse effect on the
Company's ability to continue to market and distribute its products and in the
most serious cases, could result in the issuance of a Warning Letter, seizure or
recall of products, civil fines or closure of the Company's New Jersey
manufacturing facility until cGMP compliance is achieved.
Based on a published study of more than 1,200 men in Massachusetts, the
Company estimates that more than 30% of males in the United States between the
ages of 40 and 70 suffer from moderate to complete erectile dysfunction. The
Company believes that similar rates of erectile dysfunction prevail outside the
United States. An estimate from the National Institute of Health ("NIH")
Consensus Statement on Impotence (1992) suggests that the number of men in the
United States with erectile dysfunction may be 10 to 20 million. The rate of
erectile dysfunction increases significantly with age. In addition to the
Company's transurethral system for erection, the primary medical therapies
currently used to treat erectile dysfunction are needle injection of
pharmacologic agents into the penis, vacuum constriction devices, penile
implants and oral medications. Despite the detrimental effect erectile
dysfunction may have on a couple's quality of life, the Company believes that,
due in part to the limitations of other therapies, less than 10% of men
suffering from erectile dysfunction received medical treatment prior to the
introduction of MUSE (alprostadil). The Company believes that MUSE (alprostadil)
could become first line therapy for erectile dysfunction.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 and 1996
Product revenues of $27,791,000 were recorded for the three months ended
March 31, 1997. This amount includes $2,636,000 for product shipped in December
of 1996; these shipments were made to initially stock wholesalers and were
allowed one-time extended rights-of-return which expired during the three months
ended March 31, 1997. As consideration for execution of the Janssen marketing
agreement, Janssen paid the Company $5 million in January 1997. The Company
recorded this receipt as milestone revenue in the condensed consolidated
statement of operations.
For the three months ended March 31, 1997, research and development
expenses were $2,027,000 compared with $5,359,000 for the three months ended
March 31, 1996, an decrease of 62%. Research and development expenses were less
than the same period in 1996 due principally to higher clinical and regulatory
costs in 1996 associated with the preparation and filing of the Company's New
Drug Application (NDA) for MUSE (alprostadil) and pre-launch manufacturing
expenses.
Selling, general and administrative expenses for the three months ended
March 31, 1997 were $11,809,000 compared with $1,379,000 for the three months
ended March 31, 1996, an increase of 756%. The
7
<PAGE> 8
increase primarily resulted from the addition of a fifty person field sales
force, higher marketing expenses and the costs associated with adding personnel
to support the growth of the Company's operations and the commercial launch of
MUSE (alprostadil).
Spending levels will continue to increase during 1997 as the Company
further develops its commercial manufacturing, marketing and sales capabilities.
Interest income for the three months ended March 31, 1997 was $1,121,000
compared with $503,000 for the three months ended March 31, 1996, an increase of
123%. The increases were primarily the result of higher average invested cash
balances.
Income taxes for the three months ended March 31, 1997 were $2,456,000,
approximately 20% of income before taxes, compared with zero for the three
months ended March 31, 1996. The increase is due to the increase in taxable
income. The 1997 tax rate includes the effect of net operating losses (NOLs)
carried forward from prior periods. The tax rate would have been substantially
higher if the NOLs were not available to offset current income. The Company
expects to fully utilize all NOLs during 1997, and accordingly, the Company's
effective tax rate is expected to increase in the future.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed operations primarily from the
sale of preferred and common stock. Through March 31, 1997, VIVUS has raised
$149,467,000 from financing activities. Cash, cash equivalents and securities
available-for-sale totaled $87,756,000 at March 31, 1997 compared with
$84,325,000 at December 31, 1996. The Company maintains its current excess cash
balances in a variety of interest bearing investment-grade financial investments
such as United States treasury, federal agency and state government securities,
repurchase agreements, corporate debt and bank certificates of deposit.
Principal preservation, liquidity and safety are the primary investment
objectives.
Cash flow from operations in the three months ended March 31, 1997 was
$2,887,000 compared with cash used of $5,356,000 in the three months ended March
31, 1996. The decreased use of cash was primarily due to net income of
$9,554,000.
Trade and other receivables at March 31, 1997 were $12,780,000 compared
with $748,000, an increase of $12,032,000. The increase primarily resulted from
the increase in trade receivables resulting from the launch of MUSE
(alprostadil).
Current liabilities were $11,753,000 at March 31, 1997 compared with
$6,752,000 at December 31, 1996, an increase of $5,001,000. The increase was
related primarily to an increase in manufacturing expenditures and accrued
income taxes in 1997.
Capital expenditures in the three months ended March 31, 1997 were
$1,027,000 compared with $499,000 for the same period ended March 31, 1996.
Capital expenditures during the period in 1997 and 1996 consisted primarily of
manufacturing and quality control equipment. Capital expenditures were higher in
1997 due to the purchase of additional manufacturing equipment for use at the
Company's dedicated manufacturing operation within the Paco Pharmaceutical
Services, Inc. ("Paco") facility in Lakewood, New Jersey. Capital expenditures
over the next two years are likely to increase as they are expected to include
manufacturing facilities in the United States and Europe, and a new corporate
headquarters and research and development laboratory facility in the United
States.
The Company expects to incur substantial additional costs, including
expenses related to a second manufacturing facility in the United States and one
in Europe, new product preclinical and clinical costs, ongoing research and
development activities, and general corporate purposes. The Company anticipates
that its existing capital resources will be sufficient to support the Company's
operations through the commercial introduction of MUSE (alprostadil) in Europe,
but may not be sufficient for the introduction of any additional future
products. The Company anticipates that it may be required to issue additional
equity or debt securities and may use other financing sources including, but not
limited to, corporate alliances and lease financings to
8
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fund the future development and possible commercial launch of its products. The
sale of additional equity securities would result in additional dilution to the
Company's stockholders. There can be no assurance that such funds will be
available on terms satisfactory to the Company, or at all. Failure to obtain
adequate funding could cause a delay or cessation of the Company's product
development and marketing efforts and would have a material adverse effect upon
the Company's business, financial condition and results of operations. The
Company's working capital and additional funding requirements will depend upon
numerous factors, including: (i) the level of resources that the Company devotes
to sales and marketing capabilities; (ii) the level of resources that the
Company devotes to expanding manufacturing capacity; (iii) the activities of
competitors; (iv) the progress of the Company's research and development
programs; (v) the timing and results of preclinical testing and clinical trials;
(vi) technological advances; and (vii) continued profitability.
The Results of Operations and Liquidity and Capital Resources sections
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1993, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended. Actual results could differ materially from
those projected in the forward-looking statements as a result of the factors set
forth in this Liquidity and Capital Resources section, the Risk Factors section,
the Results of Operations section and the Description of Business section. The
discussion of those factors is incorporated herein by this reference as if said
discussion was fully set forth at this point.
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This Quarterly Report on Form 10-Q contains forward looking statements that
involve risks and uncertainties. The Company's actual results could differ from
those set forth in such forward looking statements as a result of certain
factors, including those set forth in this Risk Factors section.
RISK FACTORS
LIMITED MANUFACTURING EXPERIENCE AND DEPENDENCE ON SOLE CONTRACT MANUFACTURER
The Company has only limited experience in manufacturing MUSE (alprostadil)
in commercial quantities. Since the commercial launch of its product in January
1997, the Company has experienced product shortages due to higher than expected
demand. If the Company encounters any manufacturing difficulties, including
problems involving production yields, quality control and assurance, supplies of
components or raw materials or shortages of qualified personnel, it could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The formulation, filling, packaging and testing of MUSE (alprostadil) is
performed by Paco Pharmaceutical Services, Inc. ("Paco"), a wholly owned
subsidiary of The West Company, at its facility in Lakewood, New Jersey. In June
1995, the Company completed construction of its approximately 6,000 square feet
manufacturing and testing space within Paco's facility. Due to higher than
expected demand, the Company has leased two adjacent buildings in New Jersey,
totaling 90,000 square feet, that will be built out to support expansion of the
Company's manufacturing capabilities. Until the Company develops an in-house
manufacturing capability, it will be entirely dependent upon Paco for the
manufacture of its products. There can be no assurance that the Company's
reliance on Paco for the manufacture of its products will not result in problems
with product supply, and there can be no assurance that the Company will be able
to establish a second manufacturing facility. Interruptions in the availability
of products could delay or prevent the development and commercial marketing of
MUSE (alprostadil) and other potential products and would have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company and its third party contract manufacturers, including
manufacturers of materials and components, are subject to routine periodic
inspections by the FDA and certain state and foreign regulatory agencies for
compliance with cGMPs and other applicable regulations. The FDA stringently
applies regulatory standards for manufacturing. The Company's third party
contract manufacturers were inspected for cGMP compliance as part of the
approval process. However, upon routine re-inspection of its contract
manufacturers, there can be no assurance that the FDA will find the
manufacturing process or facilities to be in compliance with cGMPs and other
regulations. Failure to achieve satisfactory cGMP compliance as confirmed by
routine regulatory inspections would have a significant adverse effect on the
Company's ability to continue to manufacture and distribute its products and, in
the most serious cases, result in the issuance of a regulatory warning letter or
seizure or recall of products, injunction and/or civil fines.
The Company's New Jersey manufacturing facility at Paco Pharmaceutical
Services Inc. was inspected by the FDA for the first time after the preapproval
inspection during twelve days in February and March 1997. That inspection
resulted in the issuance by the FDA of an extensive Form FDA 483, which detailed
specific areas where the FDA inspector observed that the Company's operations
were not in full compliance with some areas of the cGMP regulations. A
corrective action plan addressing all identified cGMP deficiencies was initiated
immediately, and the Company submitted a written response to the Form FDA 483
and requested a meeting with the FDA District Office officials to discuss the
matter. There can be no assurance that the FDA will accept the Company's
corrective action plan or the time frame for completing the corrective action
plan. If the corrective action plan is accepted it is likely that the FDA would
reinspect the facility shortly after completion of the corrective action plan.
The scope of any FDA reinspection could be more comprehensive than the initial
inspection. Failure to adequately address these cGMP deficiencies within a
reasonable time frame would have an adverse effect on the Company's ability to
supply its product, which would have a material adverse effect on the Company's
business, financial condition and results of operations. Accordingly, the
Company has undertaken a complete review of its cGMP compliance. However, there
can be no assurance
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that the FDA will deem the Company's corrective action or the timing for the
corrective action to be adequate or that additional corrective action, in areas
not addressed by Form FDA 483, will not be required. Failure to
achieve satisfactory cGMP compliance would have a material adverse effect on the
Company's ability to continue to market and distribute its products and in the
most serious cases, could result in the issuance of a Warning Letter, seizure or
recall of products, civil fines or closure of the Company's New Jersey
manufacturing facility until cGMP compliance is achieved.
LIMITED SALES AND MARKETING EXPERIENCE; DEPENDENCE ON THIRD PARTIES
Before commercially launching its first product, MUSE (alprostadil), in
January 1997, the Company had no experience in the sale, marketing and
distribution of pharmaceutical products. The Company is marketing and selling
its products initially through a direct sales force in the United States. There
can be no assurance that the Company's domestic sales and marketing efforts will
be successful.
In February 1996, the Company entered into a distribution agreement with
CORD Logistics, Inc. ("CORD"), a wholly owned subsidiary of Cardinal Health,
Inc. Under this agreement, CORD warehouses the Company's finished goods, takes
customer orders, picks, packs and ships its product, invoices customers and
collects related receivables. As a result of this distribution agreement with
CORD, the Company is heavily dependent on CORD's efforts to fulfill orders and
warehouse its products effectively. There can be no assurance such efforts will
be successful.
In May 1996, the Company entered into an international marketing agreement
with Astra to purchase the Company's products for resale in Europe, South
America, Central America, Australia and New Zealand. As consideration for
execution of the international marketing agreement, Astra paid the Company $10
million in June 1996. In September 1996, the Company received a $10 million
milestone payment from Astra upon filing an application for marketing
authorization for MUSE (alprostadil) in the United Kingdom. The Company will be
paid up to an additional $10 million in the event certain other milestones are
achieved. However, there can be no assurance that such milestones will be
achieved. The marketing agreement does not have minimum purchase commitments,
and Astra may take up to twelve months to introduce a product in a given country
following regulatory approval in such country. As a result of this marketing
agreement with Astra, the Company is dependent on Astra's efforts to market,
distribute and sell the Company's products effectively in the above mentioned
markets. There can be no assurance that such efforts will be successful.
In July 1996, the Company entered into a distribution agreement with ASD, a
subsidiary of Bergen Brunswig Corporation. ASD provides "direct-to-physician"
distribution, telemarketing and customer service capabilities in support of the
U.S. marketing and sales efforts. Pursuant to the terms of this agreement, ASD
developed a customer service organization to respond to all the Company's sales
representative and physician inquiries. As a result of this distribution
agreement with ASD, the Company is dependent on ASD's efforts to distribute,
telemarket, and provide customer service effectively. There can be no assurance
that such efforts will be successful.
In January 1997, the Company signed an international marketing agreement
with Janssen, a subsidiary of Johnson & Johnson. Janssen will purchase the
Company's products for resale in China, multiple Pacific Rim countries
(excluding Japan), Canada, Mexico and South Africa. As consideration for
execution of the international marketing agreement, Janssen paid the Company $5
million. The Company will receive additional payments in the event certain other
milestones are achieved. However, there can be no assurance that such milestones
will be achieved. As a result of this distribution agreement with Janssen, the
Company is dependent on Janssen's efforts to distribute and sell the Company's
products effectively in the above mentioned markets. There can be no assurance
that such efforts will be successful.
The Company intends to market and sell its products in other foreign
markets through distribution, co-promotion or license agreements with corporate
partners. To date, the Company has entered into international marketing
agreements with Astra and Janssen. There can be no assurance that the Company
will be able to successfully enter into additional agreements with corporate
partners upon reasonable terms, if at all. To the extent that the Company enters
into distribution, co-promotion or license agreements for the sale of its
products, the Company will be dependent upon the efforts of third parties. These
third parties may have
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<PAGE> 12
other commitments, and there can be no assurance that they will commit the
necessary resources to effectively market, distribute and sell the Company's
product.
DEPENDENCE ON THE COMPANY'S TRANSURETHRAL SYSTEM FOR ERECTION
The Company currently relies upon a single therapeutic approach to treat
erectile dysfunction, its transurethral system for erection. Certain side
effects have been found to occur with the use of MUSE (alprostadil). Occasional
mild to moderate transient penile/perineal pain was suffered by 21% to 42% of
patients, depending on dosage, treated with MUSE (alprostadil) in the Company's
Phase II/III Dose Ranging study. Moderate to severe (i.e., syncope) decreases in
blood pressure were experienced by 1% to 4% of patients, depending on dosage
treated with MUSE (alprostadil) in such study. The existence of side effects or
dissatisfaction with product results may impact a patient's decision to use or
continue to use, or a physician's decision to recommend, MUSE (alprostadil) as a
therapy for the treatment of erectile dysfunction thereby affecting the
commercial viability of MUSE (alprostadil). In addition, technological changes
or medical advancements could diminish or eliminate the commercial viability of
the Company's products. As a result of the Company's single therapeutic approach
and its current focus on MUSE (alprostadil), the failure to successfully
commercialize such product would have an adverse effect on the Company and could
threaten the Company's ability to continue as a viable entity.
GOVERNMENT REGULATION AND UNCERTAINTY OF PRODUCT APPROVALS
The Company's research, preclinical development, clinical trials,
manufacturing and marketing of its products are subject to extensive regulation
by numerous governmental authorities in the United States and other countries.
Clinical trials, manufacturing and marketing of the Company's products will be
subject to the rigorous testing and approval processes of the FDA and equivalent
foreign regulatory agencies. The process of obtaining FDA and other required
regulatory approvals is lengthy and expensive. The Company completed pivotal
clinical trials in 1995 and submitted an NDA for its first product, MUSE
(alprostadil), to the FDA in March 1996. In November 1996, the Company received
final marketing clearance from the FDA for MUSE (alprostadil). In addition, the
Company submitted applications for approval of MUSE (alprostadil) in the United
Kingdom and Sweden in 1996, in Norway in January 1997 and in Australia and New
Zealand in April 1997. These applications will be subject to rigorous approval
processes. There can be no assurance that approval in these or other countries
will be granted on a timely basis, if at all, or if granted, that such approval
will not contain significant limitations in the form of warnings, precautions or
contraindications with respect to conditions of use. Any delay in obtaining, or
failure to obtain, such approval would adversely affect the Company's ability to
generate product revenue.
The Company's clinical trials for future products will seek safety data as
well as efficacy data and will require substantial time and significant funding.
There is no assurance that clinical trials related to future products will be
completed successfully within any specified time period, if at all. Furthermore,
the FDA may suspend clinical trials at any time if it is believed that the
subjects participating in such trials are being exposed to unacceptable health
risks. There can be no assurance that FDA or other regulatory approvals for any
products developed by the Company will be granted on a timely basis, if at all,
or if granted, that such approval will not contain significant limitations in
the form of warnings, precautions or contraindications with respect to
conditions of use. Any delay in obtaining, or failure to obtain, such approvals
would adversely affect the Company's ability to generate product revenue.
Failure to comply with the applicable regulatory requirements can, among other
things, result in fines, suspensions of regulatory approvals, product recalls,
operating restrictions and criminal prosecution. In addition, the marketing and
manufacturing of pharmaceutical products are subject to continuing FDA review,
and later discovery of previously unknown problems with a product, manufacturer
or facility may result in the FDA requiring further clinical research or
restrictions on the product or the manufacturer, including withdrawal of the
product from the market. The restriction, suspension or revocation of regulatory
approvals or any other failure to comply with regulatory requirements would have
a material adverse effect on the Company's business, financial condition and
results of operations.
The Company obtains the necessary raw materials and components for the
manufacture of MUSE (alprostadil) from third parties. The Company currently
contracts with contract manufacturing organizations,
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<PAGE> 13
including foreign manufacturers, that are required to comply with strict
standards established by the Company. All contract manufacturers are required by
the Federal Food, Drug, and Cosmetic Act, as amended, and by FDA regulations to
follow cGMP and are subject to routine periodic inspections by the FDA and
certain state and foreign regulatory agencies for compliance with cGMPs and
other applicable regulations. The FDA stringently applies regulatory standards
for manufacturing. The Company's third party contract manufacturers were
inspected for cGMP compliance as part of the approval process. However, upon
routine re-inspection of the manufacturing facilities, there can be no assurance
that the FDA will find the manufacturing process or facilities to be in
compliance with cGMPs and other regulations. Failure to achieve satisfactory
cGMP compliance as confirmed by routine inspections could have a significant
adverse effect on the Company's ability to continue to manufacture and
distribute its products and, in the most serious case, result in the issuance of
a regulatory warning letter or seizure or recall of products, injunction and/or
civil fines.
The Company's New Jersey manufacturing facility at Paco Pharmaceutical
Services Inc. was inspected by the FDA for the first time after the preapproval
inspection during twelve days in February and March 1997. That inspection
resulted in the issuance by the FDA of an extensive Form FDA 483, which detailed
specific areas where the FDA inspector observed that the Company's operations
were not in full compliance with some areas of the cGMP regulations. A
corrective action plan addressing all identified cGMP deficiencies was initiated
immediately, and the Company submitted a written response to the Form FDA 483
and requested a meeting with the FDA District Office officials to discuss the
matter. Approximately 30 days after submitting the initial written response, the
Company provided the FDA with a written update of the progress made against the
corrective action plan. The FDA has provided the Company with written comments
on the initial response, which included requests for clarification and
additional information. There can be no assurance that the FDA will accept the
Company's corrective action plan or the time frame for completing the corrective
action plan. If the corrective action plan is accepted it is likely that the FDA
would reinspect the facility shortly after completion of the corrective action
plan. The scope of any FDA reinspection could be more comprehensive than the
initial inspection. Failure to adequately address these cGMP deficiencies within
a reasonable time frame would have an adverse effect on the Company's ability to
supply its product in the US and internationally, which would have a material
adverse effect on the Company's business, financial condition and results of
operations. Accordingly, the Company has undertaken a complete review of its
cGMP compliance. However, there can be no assurance that the FDA will deem the
Company's corrective action or the timing for the corrective action to be
adequate or that additional corrective action, in areas not addressed by Form
FDA 483, will not be required. Failure to achieve satisfactory cGMP compliance
would have a material adverse effect on the Company's ability to continue to
market and distribute its products and in the most serious cases, could result
in the issuance of a Warning Letter, seizure or recall of products, civil fines
or closure of the Company's New Jersey manufacturing facility until cGMP
compliance is achieved.
INTENSE COMPETITION
Competition in the pharmaceutical and medical products industries is
intense and is characterized by extensive research efforts and rapid
technological progress. Certain treatments for erectile dysfunction exist, such
as needle injection therapy, vacuum constriction devices, penile implants and
oral medications, and the manufacturers of these products will continue to
improve these therapies. In July 1995, the FDA approved the use of alprostadil
in The Upjohn Company's needle injection therapy product for erectile
dysfunction. Previously, Upjohn had obtained approval in a number of European
countries. Additional competitive therapies under development include an oral
medication by Pfizer, Inc., which is currently in Phase III clinical trials.
Other large pharmaceutical companies are also actively engaged in the
development of therapies for the treatment of erectile dysfunction. These
companies have substantially greater research and development capabilities as
well as substantially greater marketing, financial and human resources than the
Company. In addition, these companies have significantly greater experience than
the Company in undertaking preclinical testing, human clinical trials and other
regulatory approval procedures. There are also small companies, academic
institutions, governmental agencies and other research organizations that are
conducting research in the area of erectile dysfunction. For instance, Zonagen,
Inc. and Pentech Pharmaceutical, Inc. have oral medications under development.
These entities may also market commercial products either on their own or
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<PAGE> 14
through collaborative efforts. The Company's competitors may develop
technologies and products that are more effective than those being developed by
the Company. Such developments would render the Company's products less
competitive or even obsolete. The Company is also competing with respect to
marketing capabilities and manufacturing efficiency, areas in which it has
limited experience.
PROPRIETARY RIGHTS AND RISK OF LITIGATION
The Company's success will depend, in large part, on the strength of its
current and future patent position relating to the transurethral delivery of
pharmacologic agents for the treatment of erectile dysfunction. The Company's
patent position, like that of other pharmaceutical companies, is highly
uncertain and involves complex legal and factual questions. Claims made under
patent applications may be denied or significantly narrowed and issued patents
may not provide significant commercial protection to the Company. The Company
could incur substantial costs in proceedings before the United States Patent
Office, including interference proceedings. These proceedings could also result
in adverse decisions as to the priority of the Company's licensed or assigned
inventions. There is no assurance that the Company's patents will not be
successfully challenged or designed around by others. The Company is aware of a
US patent application involving the transurethral application of prostaglandin
E(2). The corresponding application in Europe has been abandoned. Failure of the
Company's licensed patents to block issuance of such patent could have a
material adverse effect on the Company's business, financial condition and
results of operations.
There can be no assurance that the Company's products do not or will not
infringe on the patent or proprietary rights of others. A patent opposition to
the Company's exclusively licensed European patents has been filed with the
European Patent Office. The Company is vigorously defending the patents, however
an adverse decision could affect the Company's ability, based on its patent
rights, to limit potential competition in Europe. The Company may be required to
obtain additional licenses to the patents, patent applications or other
proprietary rights of others. There can be no assurance that any such licenses
would be made available on terms acceptable to the Company, if at all. If the
Company does not obtain such licenses, it could encounter delays in product
introductions while it attempts to design around such patents, or the
development, manufacture or sale of products requiring such licenses could be
precluded. The Company believes there will continue to be significant litigation
in the pharmaceutical industry regarding patent and other intellectual property
rights.
A former consultant to the Company has claimed that he is the inventor of
certain technology disclosed in two of the Company's patents. The former
consultant further claims that the Company defrauded him by allegedly failing to
inform him that it intended to use and patent this technology and by failing to
compensate him for the technology in the manner allegedly promised. On May 28,
1996, the Company filed a complaint for declaratory judgment against the former
consultant in the United States District Court for the Northern District of
California, which seeks a declaration from the court that the former consultant
is not an inventor of any of the technology disclosed in the patent. On July 17,
1996, the former consultant filed a lawsuit that seeks to have two of the
Company's patents declared invalid on the grounds that they fail to list him as
an inventor. On September 16, 1996, the Court dismissed the consultant's
lawsuit, and ordered the consultant to refile his claims or counterclaims to the
action initiated by the Company on May 28, 1996. The consultant filed his
counterclaim on September 26, 1996. The Company has conducted a review of the
circumstances surrounding this matter and believes that the allegations are
without merit. Although the Company believes that it should prevail, the
uncertainties inherent in litigation prevent the Company from giving any
assurances about the outcome of such litigation.
In a separate matter, on April 10, 1996, the licensors in an agreement by
which the Company acquired a patent license filed a lawsuit in a Texas State
court that alleges that they were defrauded in connection with the renegotiation
of a license agreement between the Company and the licensors. On May 8, 1996,
the action was removed to the United States District Court for the Western
District of Texas. In addition to monetary damages, the licensors seek to return
to the terms of an earlier superseded license agreement. In March 1997, the
parties to the Texas action reached an agreement to settle the case. Pursuant to
the terms of the Agreement, neither the Company nor its officers will pay any
damages to plaintiffs, and the license agreement will remain in effect. The
parties are currently negotiating the final terms of the agreement, however,
there can
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<PAGE> 15
be no assurance that such agreement will be finalized. In the event that no
final agreement is executed, although the Company believes it should prevail in
the matter, the uncertainties inherent in litigation prevent the Company from
giving any assurances concerning the outcome of such litigation.
The Company also relies on trade secrets and other unpatented proprietary
technology. No assurance can be given that the Company can meaningfully protect
its rights in such unpatented proprietary technology or that others will not
independently develop substantially equivalent proprietary products and
processes or otherwise gain access to the Company's proprietary technology. The
Company seeks to protect its trade secrets and proprietary know-how, in part,
with confidentiality agreements with employees and consultants. There can be no
assurance that these agreements will not be breached, that the Company will have
adequate remedies for any breach or that the Company's trade secrets will not
otherwise become known or be independently developed by competitors. In
addition, protracted and costly litigation may be necessary to enforce and
determine the scope and validity of the Company's proprietary rights.
DEPENDENCE ON DUAL SOURCE OF SUPPLY
To date, the Company has obtained its supply of alprostadil from two
sources. The first is Spolana Chemical Works AS ("Spolana") pursuant to a supply
agreement that expires at the end of 1997. A renewal agreement is currently
being negotiated. In January 1996, the Company entered into a long-term
alprostadil supply agreement with Chinoin. Chinoin is the Hungarian subsidiary
of the French pharmaceutical company Sanofi Winthrop. Alprostadil, a generic
drug, is extremely difficult to manufacture and is only available to the Company
from a limited number of other suppliers, none of which currently produce it in
commercial quantities. While the Company is seeking additional sources, there
can be no assurance that it will be able to identify and qualify such sources.
The Company is required to identify its suppliers to the FDA. The FDA may
require additional clinical trials or other studies prior to accepting a new
supplier. Unless the Company secures and qualifies additional sources of
alprostadil, it will be entirely dependent upon Spolana and Chinoin for the
delivery of alprostadil. If interruptions in the supply of alprostadil were to
occur for any reason, including a decision by Spolana and/or Chinoin to
discontinue manufacturing, political unrest, labor disputes or a failure of
Spolana and/or Chinoin to follow regulatory guidelines, the development and
commercial marketing of MUSE (alprostadil) and other potential products could be
delayed or prevented. An interruption in the Company's supply of alprostadil
would have a material adverse effect on the Company's business, financial
condition and results of operations.
HISTORY OF LOSSES AND LIMITED OPERATING HISTORY
The Company has generated a cumulative net loss of $56.6 million for the
period from its inception through March 31, 1997. To sustain profitability, the
Company must successfully manufacture and market MUSE (alprostadil). The Company
is subject to a number of risks including its ability to scale-up manufacturing
capabilities and secure adequate supplies of raw materials, its ability to
successfully market, distribute and sell its product, its reliance on a single
therapeutic approach to erectile dysfunction and intense competition. There can
be no assurance that the Company will be able to achieve profitability on a
sustained basis. Accordingly, there can be no assurance of the Company's future
success.
The Company began generating revenues from product sales in January 1997.
The Company has limited experience in manufacturing and selling MUSE
(alprostadil) in commercial quantities. Whether the Company can successfully
manage the transition to a large scale commercial enterprise will depend upon
successful further development of its manufacturing capability and its
distribution network and attainment of foreign regulatory approvals for MUSE
(alprostadil). Failure to make such a transition successfully would have a
material adverse effect on the Company's business, financial condition and
results of operations.
FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FINANCING
The Company expects to incur substantial additional costs, including
expenses related to building its marketing and sales organization, a second
manufacturing plant in the United States and one in Europe, new product
preclinical and clinical costs, ongoing research and development activities, and
general corporate
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<PAGE> 16
purposes. The Company anticipates that its existing capital resources will be
sufficient to support the Company's operations through commercial introduction
of MUSE (alprostadil) in Europe but may not be sufficient for the introduction
of any additional future products. Accordingly, the Company anticipates that it
may be required to issue additional equity or debt securities and may use other
financing sources including, but not limited to, corporate alliances and lease
financings to fund the future development and possible commercial launch of its
products. The sale of additional equity securities would result in additional
dilution to the Company's stockholders. There can be no assurance that
additional funds will be available on terms satisfactory to the Company, or at
all. Failure to obtain adequate funding could cause a delay or cessation of the
Company's product development and marketing efforts and would have a material
adverse effect upon the Company's business, financial condition and results of
operations. The Company's working capital and additional funding requirements
will depend upon numerous factors, including: (i) the level of resources that
the Company devotes to sales and marketing capabilities; (ii) the level of
resources that the Company devotes to expanding manufacturing capacity; (iii)
the activities of competitors; (iv) the progress of the Company's research and
development programs; (v) the timing and results of preclinical testing and
clinical trials; (vi) technological advances; and (vii) continued profitability.
DEPENDENCE ON KEY PERSONNEL
The Company's progress to date has been highly dependent upon the skills of
a limited number of key management personnel. To reach its future business
objectives, the Company will need to hire numerous other qualified personnel in
the areas of sales, manufacturing, clinical trial management and preclinical
testing. There can be no assurance that the Company will be able to hire such
personnel, as the Company must compete with other companies, academic
institutions, government entities and other agencies. The loss of any of the
Company's key personnel or the failure to attract or retain necessary new
employees could have an adverse effect on the Company's research, product
development and business operations.
RISKS RELATING TO INTERNATIONAL OPERATIONS
In the event the Company receives necessary foreign regulatory approvals,
the Company plans to market its products internationally. Changes in overseas
economic and political conditions, currency exchange rates, foreign tax laws or
tariffs or other trade regulations could have a material adverse effect on the
Company's business, financial condition and results of operations. The
anticipated international nature of the Company's business is also expected to
subject it and its representatives, agents and distributors to laws and
regulations of the foreign jurisdictions in which they operate or the Company's
products are sold. The regulation of drug therapies in a number of such
jurisdictions, particularly in the European Union, continues to develop, and
there can be no assurance that new laws or regulations will not have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the laws of certain foreign countries do not protect
the Company's intellectual property rights to the same extent as do the laws of
the United States.
PRODUCT LIABILITY AND AVAILABILITY OF INSURANCE
The use of the Company's products in clinical trials and commercially may
expose the Company to product liability claims and possible adverse publicity.
The Company currently maintains product liability insurance coverage. There can
be no assurance that the Company's present or future insurance will provide
adequate coverage or be available at a reasonable cost or that product liability
claims would not adversely affect the business or financial condition of the
Company.
UNCERTAINTY OF PHARMACEUTICAL PRICING AND REIMBURSEMENT
In the United States and elsewhere, sales of pharmaceutical products
currently are dependent, in part, on the availability of reimbursement to the
consumer from third party payors, such as government and private insurance
plans. Third party payors are increasingly challenging the prices charged for
medical products and services. There can be no assurance that the Company's
products will be considered cost effective and that
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<PAGE> 17
reimbursement to the consumer will be available or sufficient to allow the
Company to sell its products on a competitive basis.
In addition, certain health care providers are moving towards a managed
care system in which such providers contract to provide comprehensive health
care services, including prescription drugs, for a fixed cost per person. The
Company hopes to further qualify its transurethral system for erection for
reimbursement in the managed care environment. However, the Company is unable to
predict the reimbursement policies employed by third-party health care payors.
Furthermore, attempts at qualifying its transurethral system for erection for
reimbursement could be adversely affected by changes in reimbursement policies
of governmental or private health care payors.
UNCERTAINTY AND POSSIBLE NEGATIVE EFFECTS OF HEALTHCARE REFORM
The healthcare industry is undergoing fundamental changes that are the
result of political, economic and regulatory influences. The levels of revenue
and profitability of pharmaceutical companies may be affected by the continuing
efforts of governmental and third party payors to contain or reduce healthcare
costs through various means. Reforms that have been and may be considered
include mandated basic healthcare benefits, controls on healthcare spending
through limitations on the increase in private health insurance premiums and
Medicare and Medicaid spending, the creation of large insurance purchasing
groups and fundamental changes to the healthcare delivery system. Due to
uncertainties regarding the outcome of healthcare reform initiatives and their
enactment and implementation, the Company cannot predict which, if any, of the
reform proposals will be adopted or the effect such adoption may have on the
Company. There can be no assurance that future healthcare legislation or other
changes in the administration or interpretation of government healthcare or
third-party reimbursement programs will not have a material adverse effect on
the Company. Healthcare reform is also under consideration in some other
countries.
CONTROL BY EXISTING STOCKHOLDERS
As of May 1, 1997, the Company's executive officers and current directors,
and certain of their affiliates, beneficially owned approximately 11.3% of the
Company's outstanding Common Stock. Also, Ardsley Advisory Partners,
Forstmann-Leff Associates and TCW Group owned 28% of the outstanding Common
Stock. Such concentration of ownership may have the effect of delaying, defining
or preventing a change in control of the Company. Additionally, these
stockholders will have significant influence over the election of directors of
the Company. This concentration of ownership may allow significant influence and
control over Board decisions and corporate actions.
POTENTIAL VOLATILITY OF STOCK PRICE
The stock market has recently experienced significant price and volume
fluctuations unrelated to the operating performance of particular companies. In
addition, the market price of the Company's Common Stock, has been highly
volatile and is likely to continue to be so. Factors such as variations in the
Company's financial results, comments by security analysts, the Company's
ability to scale up its manufacturing capability to commercial levels, the
Company's ability to successfully sell its product in the United States and
internationally, any loss of key management, the results of the Company's
clinical trials or those of its competition, adverse regulatory actions or
decisions, announcements of technological innovations or new products by the
Company or its competition, changing governmental regulations, patents or other
proprietary rights, product or patent litigation or public concern as to the
safety of products developed by the Company, may have a significant effect on
the market price of the Company's Common Stock.
ANTI-TAKEOVER EFFECT OF SHAREHOLDER RIGHTS PLAN AND CERTAIN CHARTER AND BYLAW
PROVISIONS
In February 1996, the Company's Board of Directors authorized the Company's
reincorporation in the State of Delaware (the "Reincorporation") and adopted a
Shareholder Rights Plan. The Company's reincorporation into the State of
Delaware was approved by its stockholders and effective in May 1996. The
Shareholder Rights Plan provides for a dividend distribution of one Preferred
Shares Purchase Right
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(a "Right") on each outstanding share of the Company's Common Stock. The Rights
will become exercisable following the tenth day after a person or group
announces acquisition of 20% or more of the Company's Common Stock, or announces
commencement of a tender offer, the consummation of which would result in
ownership by the person or group of 20% or more of the Company's Common Stock.
The Company will be entitled to redeem the Rights at $0.01 per Right at any time
on or before the tenth day following acquisition by a person or group of 20% of
more of the Company's Common Stock.
The Shareholder Rights Plan and certain provisions of the Company's
Certificate of Incorporation and Bylaws may have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, control of the Company. The Company's Certificate of
Incorporation allows the Company to issue Preferred Stock without any vote or
further action by the stockholders, and certain provisions of the Company's
Certificate of Incorporation and Bylaws eliminate the right of stockholders to
act by written consent without a meeting, specify procedures for director
nominations by stockholders and submission of other proposals for consideration
at stockholder meetings, and eliminate cumulative voting in the election of
directors. Certain provisions of Delaware law could also delay or make more
difficult a merger, tender offer or proxy contest involving the Company,
including Section 203, which prohibits a Delaware corporation from engaging in
any business combination with any interested stockholder for a period of three
years unless certain conditions are met. The Shareholder Rights Plan, the
possible issuance of Preferred Stock, the procedures required for director
nominations and stockholder proposals and Delaware law could have the effect of
delaying, deferring or preventing a change in control of the Company, including
without limitation, discouraging a proxy contest or making more difficult the
acquisition of a substantial block of the Company's Common Stock. These
provisions could also limit the price that investors might be willing to pay in
the future for shares of the Company's Common Stock.
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<PAGE> 19
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A former consultant to the Company has claimed that he is the inventor of
certain technology disclosed in two of the Company's patents. The former
consultant further claims that the Company defrauded him by allegedly failing to
inform him that it intended to use and patent this technology and by failing to
compensate him for the technology in the manner allegedly promised. On May 28,
1996, the Company filed a complaint for declaratory judgment against the former
consultant in the United States District Court for the Northern District of
California, which seeks a declaration from the court that the former consultant
is not an inventor of any of the technology disclosed in the patent. On July 17,
1996, the former consultant filed a lawsuit that seeks to have two of the
Company's patents declared invalid on the grounds that they fail to list him as
an inventor. On September 16, 1996, the Court dismissed the consultant's
lawsuit, and ordered the consultant to refile his claims or counterclaims to the
action initiated by the Company on May 28, 1996. The consultant filed his
counterclaim on September 26, 1996. The Company has conducted a review of the
circumstances surrounding this matter and believes that the allegations are
without merit. Although the Company believes that it should prevail, the
uncertainties inherent in litigation prevent the Company from giving any
assurances about the outcome of such litigation.
In a separate matter, on April 10, 1996, the licensors in an agreement by
which the Company acquired a patent license filed a lawsuit in a Texas State
court that alleges that they were defrauded in connection with the renegotiation
of a license agreement between the Company and the licensors. On May 8, 1996,
the action was removed to the United States District Court for the Western
District of Texas. In addition to monetary damages, the licensors seek to return
to the terms of an earlier superseded license agreement. In March 1997, the
parties to the Texas action reached an agreement to settle the case. Pursuant to
the terms of the Agreement, neither the Company nor its officers will pay any
damages to plaintiffs, and the license agreement will remain in effect. The
parties are currently negotiating the final terms of the agreement, however,
there can be no assurance that such agreement will be finalized. In the event
that no final agreement is executed, although the Company believes it should
prevail in the matter, the uncertainties inherent in litigation prevent the
Company from giving any assurances concerning the outcome of such litigation.
ITEM 2. CHANGES IN SECURITIES.
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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits (in accordance with Item 601 of Regulation S-K)
<TABLE>
<C> <S>
****3.1 Certificate of Incorporation of the Company, as currently in effect
###3.2 Form of Amended and Restated Certificate of Incorporation of the Company, to
be filed immediately following the Company's Annual Meeting of Stockholders
if the stockholders approve Proposal 2 in the Company's Proxy
****3.3 Bylaws of the Registrant, as amended
###4.1 Specimen Common Stock Certificate of the Registrant
*4.2 Registration Rights as amended
**4.3 Form of Agreement Not to Sell by and between the Registrant and certain
shareholders and option holders
*4.4 Form of Preferred Stock Purchase Warrant issued by the Registrant to Invemed
Associates, Inc., Frazier Investment Securities, L.P., and Cristina H.
Kepner
#4.5 Second amended and Restated Preferred Shares Rights Agreement, dated as of
April 15, 1997 by and between Vivus, Inc. and Harris Trust Company of
California, including the Certificate of Determination, the form of Rights
Certificate and the Summary of Rights attached thereto as Exhibits A, B, and
C, respectively.
*+10.1 Assignment Agreement by and between Alza Corporation and the Registrant
dated December 31, 1993
*+10.2 Memorandum of Understanding by and between Ortho Pharmaceutical Corporation
and the Registrant dated February 25, 1992
*10.3 Assignment Agreement by and between Ortho Pharmaceutical Corporation and the
Registrant dated June 9, 1992
*+10.4 License Agreement by and between Gene A. Voss, M.D., Allen C. Eichler, M.D.,
and the Registrant dated December 28, 1992
*+10.5A License Agreement by and between Ortho Pharmaceutical Corporation and Kjell
Holmquist AB dated June 23, 1989
*+10.5B Amendment by and between Kjell Holmquist AB and the Registrant dated July 3,
1992
*10.5C Amendment by and between Kjell Holmquist AB and the Registrant dated April
22, 1992
*+10.5D Stock Purchase Agreement by and between Kjell Holmquist AB and the
Registrant dated April 22, 1992
*+10.6A License Agreement by and between Amsu, Ltd., and Ortho Pharmaceutical
Corporation dated June 23, 1989
*+10.6B Amendment by and between Amsu, Ltd., and the Registrant dated July 3, 1992
*10.6C Amendment by and between Amsu, Ltd., and the Registrant dated April 22, 1992
*+10.6D Stock Purchase Agreement by and between Amsu, Ltd., and the Registrant dated
July 10, 1992
*10.7 Supply Agreement by and between Paco Pharmaceutical Services, Inc., and the
Registrant dated November 10, 1993
*+10.8 Agreement by and among Pharmatech, Inc., Spolana Chemical Works AS, and the
Registrant dated June 23, 1993
*10.9 Master Services Agreement by and between the Registrant and Teknekron
Pharmaceutical Systems dated August 9, 1993
</TABLE>
20
<PAGE> 21
<TABLE>
<C> <S>
*10.10 Lease by and between McCandless-Triad and the Registrant dated November 23,
1992, as amended
***10.11 Form of Indemnification Agreements by and among the Registrant and the
Directors and Officers of the Registrant
**10.12 1991 Incentive Stock Plan and Form of Agreement, as amended
*10.13 1994 Director Option Plan and Form of Agreement
*10.14 Form of 1994 Employee Stock Purchase Plan and Form of Subscription Agreement
*10.15 Stock Restriction Agreement between the Company and Virgil A. Place, M.D.
dated November 7, 1991
*10.16 Stock Purchase Agreement between the Company and Leland F. Wilson dated June
26, 1991, as amended
*10.17 Letter Agreement between the Registrant and Leland F. Wilson dated June 14,
1991 concerning severance pay
*10.18 Letter Agreement between the Registrant and Paul Doherty dated January 26,
1994 concerning severance pay
**10.19 Guaranteed Maximum Price Contract by and between the Registrant and Marshall
Contractors, Inc. dated January 27, 1995
**10.20 Sub-lease by and among the Registrant, Argonaut Technologies, Inc.,
ESCAgenetics Corp. and Tanklage Construction Co. dated March 13, 1995
****+10.21 Distribution Services Agreement between the Registrant and Synergy
Logistics, Inc. (a wholly-owned subsidiary of Cardinal Health, Inc.) dated
February 9, 1996
****+10.22 Manufacturing Agreement between the Registrant and CHINOIN Pharmaceutical
and Chemical Works Co., Ltd. dated December 20, 1995
##+10.23 Distribution and Services Agreement between the Registrant and Alternate
Site Distributors, Inc. dated July 17, 1996
*****+10.24 Distribution Agreement made as of May 29, 1996 between the Registrant and
Astra AB
##10.25 Menlo McCandless Office Lease made as of August 30, 1996 by and between
Registrant and McCandless-Triad
##10.26 Sublease Agreement made as of August 22, 1996 by and between Registrant and
Plant Research Technologies
###++10.27 Distribution Agreement made as of January 22, 1997 between the Registrant
and Janssen Pharmaceutical International, a division of Cilag AG
International
###10.28 Lease Agreement made as of January 1, 1997 between the Registrant and
Airport Associates
###10.29 Lease Amendment No. 1 as of February 15, 1997 between Registrant and Airport
Associates
###10.30 Lease agreement by and between 605 East Fairchild Associates, L.P. and
Registrant dated as of March 5, 1997
27.1 Financial Data Schedule
</TABLE>
- ---------------
* Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Registration Statement on Form S-1 No. 33-75698.
** Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Registration Statement on Form S-1 No. 33-90390, as amended.
*** Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Form 8-B filed with the Commission on June 24, 1996.
21
<PAGE> 22
**** Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31,
1996, as amended.
***** Incorporated by reference to the same numbered exhibit filed with the
Registrant's Current Report on Form 8-K/A filed with the Commission on
June 21, 1996.
# Incorporated by reference to exhibit 99.1 filed with Registrant's
Amendment Number 2 to the Registration Statement of Form 8-A (File No.
0-23490) filed with the Commission on April 23, 1997.
## Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996.
### Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1996, as amended.
+ Confidential treatment granted.
++ Confidential treatment requested.
(b) Reports on Form 8-K
None.
22
<PAGE> 23
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.
VIVUS, Inc.
Date: May , 1997 /s/ DAVID C. YNTEMA
--------------------------------------
David C. Yntema
Chief Financial Officer
/s/ LELAND F. WILSON
--------------------------------------
Leland F. Wilson
President and Chief Executive Officer
23
<PAGE> 24
VIVUS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -------------------------------------------------------------------------------------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
24
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 6,549
<SECURITIES> 57,278
<RECEIVABLES> 13,992
<ALLOWANCES> 1,212
<INVENTORY> 4,666
<CURRENT-ASSETS> 81,878
<PP&E> 9,738
<DEPRECIATION> 2,782
<TOTAL-ASSETS> 112,763
<CURRENT-LIABILITIES> 11,753
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 100,994
<TOTAL-LIABILITY-AND-EQUITY> 112,763
<SALES> 27,791
<TOTAL-REVENUES> 32,791
<CGS> 8,066
<TOTAL-COSTS> 8,066
<OTHER-EXPENSES> 13,836
<LOSS-PROVISION> 1,092
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 12,010
<INCOME-TAX> 2,456
<INCOME-CONTINUING> 9,554
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,554
<EPS-PRIMARY> 0.54
<EPS-DILUTED> 0.54
</TABLE>
