<PAGE> 1
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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, 1998
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)
605 EAST FAIRCHILD DRIVE MOUNTAIN VIEW, CA 94043
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(650) 934-5200
(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
At March 31, 1998, 31,721,292 shares of common stock were outstanding.
Exhibit index on page 25.
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<PAGE> 2
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VIVUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1998 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenue
US Product................................................ $24,551 $27,791
International Product..................................... 1,971 --
Milestone................................................. 1,000 5,000
------- -------
Total revenue..................................... 27,522 32,791
Cost of goods sold.......................................... 10,482 8,066
------- -------
Gross margin................................................ 17,040 24,725
------- -------
Operating expenses:
Research and development.................................. 3,880 2,027
Selling, general and administrative....................... 17,058 11,809
------- -------
Total operating expenses.......................... 20,938 13,836
------- -------
Income (loss) from operations............................... (3,898) 10,889
Interest and other income................................... 911 1,121
------- -------
Income (loss) before taxes............................. (2,987) 12,010
Income tax (provision) benefit.............................. 597 (2,456)
------- -------
Net income (loss)................................. $(2,390) $ 9,554
======= =======
Net income (loss) per share:
Basic..................................................... $ (0.07) $ 0.29
Diluted................................................... $ (0.07) $ 0.27
Shares used in the computation of net income (loss) per
share:
Basic..................................................... 32,125 32,700
Diluted................................................... 32,125 35,654
</TABLE>
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VIVUS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash...................................................... $ 3,897 $ 6,161
Available-for-sale securities............................. 9,038 52,955
Accounts receivable....................................... 16,922 11,791
Inventories............................................... 11,675 9,084
Prepaid expenses and other assets......................... 1,971 1,636
-------- --------
Total current assets.............................. 43,503 81,627
Property and equipment...................................... 41,901 36,462
Available-for-sale securities, non-current.................. 31,270 32,580
-------- --------
Total............................................. $116,674 $150,669
======== ========
Current Liabilities:
Accounts payable.......................................... $ 7,609 $ 6,574
Accrued and other liabilities............................. 10,802 20,165
-------- --------
Total current liabilities......................... 18,411 26,739
Stockholders' equity:
Common stock; $.001 par value; shares authorized 200,000;
shares outstanding -- March 31, 1998, 31,721;
December 31, 1997, 33,168.............................. 32 33
Paid in capital........................................... 130,182 153,336
Accumulated other comprehensive income (loss)............. (24) 98
Accumulated deficit....................................... (31,927) (29,537)
-------- --------
Total stockholders' equity........................ 98,263 123,930
-------- --------
Total............................................. $116,674 $150,669
======== ========
</TABLE>
3
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VIVUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1998 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (2,390) $ 9,554
Adjustments to reconcile net income (loss) to net cash
provided by
(used for) operating activities:
Depreciation and amortization.......................... 678 403
Stock compensation costs............................... 152 105
Changes in assets and liabilities:
Accounts receivable.................................... (5,131) (11,538)
Inventories............................................ (2,591) (126)
Prepaid expenses and other assets...................... (335) (512)
Accounts payable....................................... 1,035 (1,174)
Accrued and other liabilities.......................... (9,363) 6,175
-------- --------
Net cash provided by (used for) operating
activities...................................... (17,945) 2,887
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment purchases.......................... (6,116) (1,027)
Investment purchases...................................... (53,461) (56,418)
Proceeds from sale/maturity of securities................. 98,565 58,679
-------- --------
Net cash provided by investing activities......... 38,988 1,234
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of common stock options.......................... 277 1,873
Repurchase of common stock................................ (23,584) --
-------- --------
Net cash provided by (used for) financing
activities...................................... (23,307) 1,873
-------- --------
Net increase (decrease) in cash............................. (2,264) 5,994
CASH:
Beginning of period....................................... 6,161 555
-------- --------
End of period............................................. $ 3,897 $ 6,549
======== ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Unrealized loss on securities............................. $ (24) $ (302)
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Income taxes paid......................................... $ 71 $ --
</TABLE>
4
<PAGE> 5
VIVUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
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 Article
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,
1998 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998. 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, 1997.
2. COMPREHENSIVE INCOME
The Company has adopted the Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income", which establishes standards
for the reporting and display of comprehensive income and its components in
general purpose financial statements for the year ended December 31, 1998. The
table below sets forth "comprehensive income" as defined by SFAS No. 130 for the
three month period ended March 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net income (loss).................................... $(2,390) $9,554
Other comprehensive income:
Unrealized loss on securities...................... (122) (302)
Income tax benefit................................. 24 60
------- ------
(98) (242)
------- ------
Comprehensive income (loss).......................... $(2,488) $9,313
======= ======
</TABLE>
3. NET INCOME (LOSS) PER SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings per Share' which replaced Accounting Principles Board
Opinion No. 15 ("APB 15"). SFAS 128 requires a dual presentation of basic and
diluted earnings per share. Basic earnings per share is based on the weighted
average number of common shares outstanding during the periods. Diluted earnings
per share is based on the weighted average number of common and common
equivalent shares, which represent shares that may be issued in the future upon
the exercise of outstanding stock 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, 1998 because they are antidilutive. Diluted
earnings per share is computed similarly to earnings per share previously
reported pursuant to APB 15 and for the Company, diluted earnings per share
amounts are the same as amounts previously reported under APB 15. Share and per
share amounts have been calculated based on post-split shares resulting from the
two-for-one stock split effective June 23, 1997.
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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 leader in the development 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 minimally invasive, easy to use
system that delivers pharmacologic agents topically to the urethral lining. In
November 1996, the Company obtained marketing clearance by 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. 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).
The Company commenced commercial sales of ACTIS in the United States through its
direct sales force in July 1997. ACTIS is currently being studied for adjunctive
use with MUSE (alprostadil); however, there can be no assurance that such
studies will be completed and if completed that such studies will demonstrate
that adjunctive use of ACTIS with MUSE (alprostadil) is a safe and effective
treatment for erectile dysfunction.
The Company has entered into international marketing agreements with Astra
AB ("Astra") and Janssen Pharmaceutica International ("Janssen") under which
Astra and Janssen will purchase MUSE (alprostadil) for resale in various
international markets. In November 1997, the Company obtained regulatory
marketing clearance by the Medicines Control Agency ("MCA") to market MUSE
(alprostadil) in the United Kingdom. The Company began selling MUSE
(alprostadil) to Astra in the fourth quarter of 1997. Astra began selling MUSE
(alprostadil) in the United Kingdom in February 1998. In addition, applications
for regulatory approval to market MUSE (alprostadil) have been submitted in
several other countries, including China, Australia, Canada and Mexico. 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.
The Company has limited experience in manufacturing and selling MUSE
(alprostadil) in commercial quantities. Since the commercial launch of MUSE
(alprostadil) in January 1997, the Company has experienced product shortages due
to higher than expected demand and difficulties encountered in scaling up
production of MUSE (alprostadil). The Company leased 90,000 square feet of space
in New Jersey in which it has constructed additional manufacturing and testing
facilities. The Company has filed for regulatory authorization of this facility
with both the FDA and MCA. In March 1998, the MCA authorized the Company to
begin commercial production and shipment of MUSE (alprostadil) from its new
facility. In addition, the Company has negotiated a long-term lease for a site
in Ireland for construction of a European manufacturing operation. Until the
Company receives the required approvals for its new New Jersey facility,
domestic and certain international markets will need to be supplied from its
current facility at Paco Pharmaceutical Services, Inc. ("Paco"). There can be no
assurance that such approvals will be granted in a timely manner, if at all. If
international sales increase as anticipated, product available for the domestic
market will be reduced and gross margins will be adversely impacted. If the
Company encounters further difficulties with its current manufacturing facility
or delays in regulatory approvals of its new manufacturing facility, capacity
constraints could continue for an extended period of time, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
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. VIVUS
currently employs approximately 75 sales representatives who call upon
urologists and other specialists. Effective February 1998, the Company entered
into a Sales Force Services Agreement with Innovex Inc. ("Innovex"). While the
Sales Force Services Agreement allows for approximately 200 contract sales
representatives, the Company has decided to initially add approximately 150
contract sales representatives, the substantial majority of whom will be calling
upon primary care physicians. The Company may decide to increase the contract
sales force to
6
<PAGE> 7
approximately 200 in the future. As a result of this contract, the Company's
ability to increase sales will be highly dependent upon the efforts of Innovex.
There can be no assurance that Innovex's sales efforts will be successful or
that primary care physicians will recommend the use of MUSE (alprostadil).
In the second quarter, the Company anticipates two significant changes in
the erectile dysfunction market. First, the launch of sildenafil, a competitive
oral product, is expected to dramatically increase the number of men seeking
treatment for impotence. Second, indications are that a large number of current
and future impotence patients will want to try this new oral therapy. As a
result of this and other factors, including higher costs of good sold as the
Company ramps up its new manufacturing facility, and higher marketing and sales
costs related to the expansion of the Company's sales force, the Company expects
an operating loss in the second quarter of 1998.
The Company has sought and will continue to seek pharmacologic agents
suitable for transurethral delivery for which significant safety data already
exists. The Company believes that such agents may progress more rapidly through
clinical development and the regulatory process than agents without preexisting
safety data. The Company expects to begin a Phase III multi-center trial in 1998
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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Product revenues for the first quarter ending March 31, 1998 were $24.5
million in the United States and $2.0 million internationally compared to $27.8
million in the Unites States and zero internationally for the same period in
1997. The demand for MUSE (alprostadil) domestically, as measured by retail
prescriptions, remained relatively flat from the fourth quarter 1997 to first
quarter 1998. Total revenues for the first quarter ended March 31, 1998 also
included a $1 million milestone payment from Janssen Pharmaceutica related to
regulatory approval of MUSE (alprostadil) in South Korea, compared to the first
quarter of 1997 which included a $5 million milestone payment related to signing
the initial distribution agreement with Janssen Pharmaceutica.
The gross margin for the first quarter ending March 31, 1998, was 60% of
net product revenues, compared with 71% in the quarter ending March 31, 1997.
The lower margin in 1998 was primarily the result of the lower per unit price on
international shipments due to the revenue sharing arrangements with
international partners, as well as higher cost of goods primarily related to
start up costs associated with the new manufacturing facility. The gross margins
include the effect of reduced cost of sales related to previously expensed
materials of $.8 million and $1.1 million in the first quarter of 1998 and 1997,
respectively. The Company anticipates that the previously expensed raw materials
will be fully utilized late in 1998. The Company also expects international
revenues to continue to increase as a proportion of total revenues. These
factors will have the effect of reducing the gross margin but may be offset in
part by production efficiencies at the new manufacturing facility.
Research and development expenses for the first quarter ended March 31,
1998 were $3.9 million compared to $2.0 million in the first quarter ending
March 31, 1997. The increase was mainly due to new product development.
Selling, general and administrative expenses for the quarter ended March
31, 1998 were $17.1 million, $5.2 million higher than the quarter ending March
31, 1997. The increase was almost entirely due to spending on a
direct-to-consumer advertising campaign and costs associated with the recent
increase in the Company's direct sales force from fifty to approximately
seventy-five sales representatives. At this time, the Company does not plan to
continue its direct-to-consumer advertising to create patient awareness because
the launch of sildenafil, a competitive oral treatment, is expected to
dramatically increase the number of men seeking treatment for impotence. For the
remainder of 1998, the Company expects to increase spending directed
7
<PAGE> 8
primarily at reaching and educating physicians through the expanded sales force,
including the Innovex contract sales force.
Interest and other income for the three months ended March 31, 1998 were
$.9 million compared with $1.1 million for the three months ended March 31,
1997. The decrease was primarily the result of lower average invested cash
balances. The Company expects lower interest income for the remainder of 1998
due to lower average invested cash balances.
Because of the first quarter loss in 1998, the Company recorded a tax
benefit of $.6 million. The Company's effective tax rate was 20 percent of
income before taxes for the three months ended March 31, 1998 and 1997. The
effective tax rate for the year ended December 31, 1997 was 8 percent. The
effective tax rate computation for 1997 was lower as it included the effect of
operating losses carried forward from prior years.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed operations primarily from the
sale of preferred and common stock. Through March 31, 1998, VIVUS has raised
$152.6 million from financing activities. Cash, cash equivalents and
available-for-sale securities totaled $44.2 million at March 31, 1998 compared
with $91.7 million at December 31, 1997. The decrease in cash resulted from
several factors, including the Company's repurchase of its common stock ($23.6
million), capital spending associated with the new manufacturing facility,
payment of the lawsuit settled in the fourth quarter of 1997 and payment of 1997
sales commissions. The stock repurchased during the first quarter completes the
repurchase of a total of two million shares authorized by the Board of
Directors.
Accounts receivable at March 31, 1998 were $16.9 million compared with
$11.8 million at December 31, 1997, an increase of $5.1 million. The increase
was primarily due to the Company shipping approximately $16.5 million of its
first quarter product revenues in the month of March 1998.
Current liabilities were $18.4 million at March 31, 1998 compared with
$26.7 million at December 31, 1997, a reduction of $8.3 million. The reduction
primarily relates to the payment of the lawsuit settled in the fourth quarter
1997 and payment of 1997 sales commissions.
Capital expenditures in the three months ended March 31, 1998 were $6.1
million compared with $1.0 million for the same period in 1997, an increase of
$5.1 million. This increase primarily resulted from additional costs associated
with the Company's new 90,000 square foot production facility in New Jersey and
its new corporate headquarters.
The Company expects to incur substantial additional costs, including
expenses related to its manufacturing facilities in New Jersey and a new
manufacturing facility in Europe, expenses related to marketing and sales of
MUSE (alprostadil), including expenses associated with expanding its sales force
by approximately 150 sales representatives, new product preclinical and clinical
costs, ongoing research and development activities, and general corporate
purposes. The Company anticipates that its existing capital resources may not be
sufficient to support the Company's operations through the commercial
introduction of MUSE (alprostadil) in all international markets or for the
introduction of any additional future products. During 1998, the Company
anticipates using financing sources, such as receivables financing, lease
financing and credit lines, to provide additional capital resources. The Company
may also be required to issue additional equity or debt securities and may use
other financing sources including, but not limited to corporate alliances and
lease financing to fund the future development and possible commercial launch of
its future products. The sale of additional equity securities would result in
additional dilution to the Company's stockholders. 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) results of operations.
8
<PAGE> 9
The Management's Discussion and Analysis of Financial Condition and Results
of Operations section contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, 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.
9
<PAGE> 10
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; CAPACITY CONSTRAINTS
The Company has limited experience in manufacturing MUSE (alprostadil) in
commercial quantities. Since the commercial launch of MUSE (alprostadil) in
January 1997, the Company has experienced product shortages due to higher than
expected demand and difficulties encountered in scaling up production of MUSE
(alprostadil). The Company leased 90,000 square feet of space in New Jersey in
which it has constructed additional manufacturing and testing facilities. The
Company has filed for regulatory authorization of this facility with both the
FDA and MCA. In March 1998, the MCA authorized the Company to begin commercial
production and shipment of MUSE (alprostadil) from its new facility. Before the
new facility in New Jersey can produce commercial product for the United States
and certain other markets, the Company must obtain FDA approval. There is no
assurance FDA approval will be completed and obtained in a timely manner, if at
all. Until the Company receives the required approval for its new New Jersey
facility, domestic and certain international markets will need to be supplied
from its current facility at Paco Pharmaceutical Services, Inc. ("Paco"). If
international sales increase as anticipated, product available for the domestic
market will be reduced and gross margins will be adversely impacted. If the
Company encounters further difficulties with its current manufacturing facility
or delays in regulatory approval of its new manufacturing facility, capacity
constraints could continue for an extended period of time. Such extended
capacity constraints could strain relationships with distribution partners due
to the need to allocate product between domestic and international markets, and
possibly cause patients to seek alternative therapies. Such events could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The formulation, filling and packaging of MUSE (alprostadil) is performed
at 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 of dedicated 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, in
which it has constructed additional manufacturing and testing facilities. Until
the Company further develops its in-house manufacturing capability, it will be
substantially 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 receive FDA approval for or be able to ramp-up
its second manufacturing facility in a timely manner, if at all. Interruptions
in the availability of products could delay or prevent the further 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 certain of its suppliers and service providers are subject
to routine periodic inspections by the FDA and certain state and foreign
regulatory agencies for compliance with current Good Manufacturing Practices
(cGMP) and other applicable regulations. Certain of the Company's suppliers were
inspected for compliance with cGMP requirements as part of the approval process.
However, upon routine re-inspection of these facilities, there can be no
assurance that the FDA will find the manufacturing process or facilities to be
in compliance with cGMP and other regulations. A routine re-inspection of
Chinoin, one of the Company's two sources of alprostadil, resulted in the
issuance of an FDA Form 483 which set forth areas where Chinoin was not in
compliance with cGMP requirements. 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.
In connection with post-approval inspections of the Company's New Jersey
manufacturing facility at Paco, the FDA issued the Company FDA Form 483s and a
Warning Letter, which detailed specific areas
10
<PAGE> 11
where the FDA observed that the Company's operations were not in full compliance
with some areas of cGMP requirements. On November 19, 1997, after taking
corrective action and providing the FDA a written response to the FDA
observations, the Company received a letter from the FDA affirming that the
Company's facility at Paco is in substantial compliance with cGMP requirements.
Failure to maintain satisfactory cGMP compliance could 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
additional Warning Letters, seizure or recall of products, civil fines or
closure of the Company's 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. VIVUS
currently employs approximately 75 sales representatives who call upon
urologists and other specialists. Effective February 1998, the Company entered
into a Sales Force Services Agreement with Innovex Inc. ("Innovex"). While the
Sales Force Services Agreement allows for approximately 200 contract sales
representatives, the Company has decided to initially add approximately 150
contract sales representatives, the substantial majority of whom will be calling
upon primary care physicians. The Company may decide to increase the contract
sales force to approximately 200 in the future. As a result of this contract,
the Company's ability to increase sales will be highly dependent upon the
efforts of Innovex. There can be no assurance that Innovex's sales efforts will
be successful or that primary care physicians will recommend the use of MUSE
(alprostadil).
The Company launched its first domestic direct-to-consumer advertising
campaign in January 1998 to increase patient awareness of erectile dysfunction
and MUSE (alprostadil). This campaign included major television, newspaper and
magazine placements. In February 1998, the FDA notified the Company that it
objected to, among other things, the prominence and balance of side effect
information relative to efficacy information in certain written materials and
the Company's television advertisements. The Company is no longer utilizing the
prior written materials and has ceased running its television advertisements. In
addition, the Company has modified its written materials in response to the
FDA's comments and has held discussions with the FDA to reach agreement on these
modifications as well as necessary changes to the Company's television
advertisements. If the FDA does not believe the modified written materials
respond to its concerns then further modifications would be required resulting
in additional cost. If the Company and the FDA cannot reach a resolution
regarding the necessary changes to the Company's television advertisements, this
could result in additional cost and may prevent broadcast advertising on major
networks. At this time, the Company does not plan to continue its
direct-to-consumer advertising to create patient awareness because the launch of
sildenafil, a competitive oral treatment, is expected to dramatically increase
the number of men seeking treatment for impotence. Should the Company decide to
resume its direct-to-consumer advertising, however, cost and delay associated
with the FDA's objections to the Company's direct-to-consumer advertising
materials could have a negative effect upon the Company's domestic sales and
marketing efforts. There can be no assurance that the Company's domestic sales
and marketing efforts will be successful at increasing the demand for MUSE
(alprostadil). In addition, there can be no assurance that the Company's
capacity constraints will not prevent the Company from supplying any increased
demand.
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. The Company also has access to CORD's information
systems that support these functions. 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
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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, and, in December 1997, received a $2
million milestone payment upon receiving approval of this application by the
MCA. The Company will be paid up to an additional $8 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. 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. In October 1997, the Company signed an international marketing
agreement, amending the earlier agreement with Janssen, that expanded Janssen's
territories to include the Middle East, Russia, the Indian sub-continent, and
Africa. As consideration for execution of the expanded international territory
marketing agreement, Janssen paid the Company $2 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 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.
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. In June 1997, Schwartz Pharma announced the FDA approval of their
needle injection treatment for erectile dysfunction. The most significant
competitive therapy is sildenafil, an oral medication by Pfizer Inc., for which
it received regulatory approval in the United States in March 1998 and has filed
for regulatory approval in Europe. Commercial introduction of Pfizer Inc.'s oral
medication could have a material adverse affect on the Company's business,
financial condition and results of operations. As a result of the launch of
sildenafil in the second quarter, the Company anticipates two significant
changes in the erectile dysfunction market. First, the launch of sildenafil is
expected to dramatically increase the number of men seeking treatment for
impotence. Second, indications are that a large number of current and future
impotence patients will want to try this new oral therapy. As a result of this
and other factors, including higher costs of good sold as the Company ramps up
its new
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manufacturing facility, and higher marketing and sales costs related to the
expansion of the Company's sales force, the Company expects an operating loss in
the second quarter of 1998.
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 in Phase III
clinical trials. These entities may market commercial products either on their
own or through collaborative efforts. For example, Zonagen, Inc. announced a
worldwide marketing agreement with Schering-Plough in November 1997. The
Company's competitors may develop technologies and products that are more
effective than those currently marketed or being developed by the Company. Such
developments would render the Company's products less competitive or possibly
obsolete. The Company is also competing with respect to marketing capabilities
and manufacturing efficiency, areas in which it has limited experience.
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). Mild to
moderate transient penile/perineal pain was experienced by 21 percent to 42
percent of patients (depending on dosage) treated with MUSE (alprostadil) in the
Company's Phase II/III Dose Ranging study. Moderate to severe decreases in blood
pressure were experienced by 1 percent to 4 percent of patients (depending on
dosage) treated with MUSE (alprostadil) in such study, and rarely (0.4 percent)
patients experienced syncope (fainting). During 1997, the first year of
commercial use of MUSE (alprostadil), the incidence of adverse side effects was
consistent with that experienced in clinical trials.
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 November 1997,
the Company obtained regulatory marketing clearance by the MCA to market MUSE
(alprostadil) in the United Kingdom.
After regulatory approval is obtained, the Company's products are subject
to continual review. Manufacturing, labeling and promotional activities are
continually regulated by the FDA, and the Company must also report certain
adverse events involving its drugs to the Agency under regulations issued by the
FDA. Additionally, previously unidentified adverse events or an increased
frequency of adverse events that occur post-approval could result in labeling
modifications of approved products, which could adversely effect future
marketing of a drug. Finally, approvals may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following initial
marketing. The restriction, suspension or revocation of
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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 has submitted applications for approval of MUSE (alprostadil)
in several other countries, including China, Australia, Canada and Mexico. 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 condition 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 generate 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) as well as certain services, such as testing
and sterilization, from third parties. The Company currently contracts with
suppliers and service providers, including foreign manufacturers, that are
required to comply with strict standards established by the Company. Certain
suppliers and service providers are required by the Federal Food, Drug, and
Cosmetic Act, as amended, and by FDA regulations to follow cGMP requirements and
are subject to routine periodic inspections by the FDA and certain state and
foreign regulatory agencies for compliance with cGMP and other applicable
regulations. Certain of the Company's suppliers were inspected for cGMP
compliance as part of the approval process. However, upon routine re-inspection
of these facilities, there can be no assurance that the FDA will find the
manufacturing process or facilities to be in compliance with cGMP and other
regulations. A routine re-inspection of Chinoin, one of the Company's two
sources of alprostadil, resulted in the issuance of an FDA Form 483 which set
forth areas where Chinoin was not in compliance with cGMP requirements. Failure
to achieve satisfactory cGMP compliance as confirmed by routine inspections
could have a material 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.
In connection with post-approval inspections of the Company's New Jersey
manufacturing facility at Paco, the FDA issued the Company FDA Form 483s and a
Warning Letter, which detailed specific areas where the FDA observed that the
Company's operations were not in full compliance with some areas of cGMP
requirements. On November 19, 1997, after taking corrective action and providing
the FDA a written response to the FDA observations, the Company received a
letter from the FDA affirming that the Company's facility at Paco is in
substantial compliance with cGMP requirements. Failure to maintain satisfactory
cGMP compliance could 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 additional Warning Letters, seizure or recall of
products, civil fines or closure of the Company's manufacturing facility until
cGMP compliance is achieved.
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PROPRIETARY RIGHTS AND RISK OF PATENT 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 and
Trademark 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 presently involved in an opposition proceeding that was
instigated by the Pharmedic Company against a European patent that is
exclusively licensed to VIVUS. As a result of the opposition proceeding, certain
claims in the European patent were held to be unpatentable by the Opposition
Division of the European Patent Office ("EPO"). These claims all related to
pharmaceutical compositions that include prostaglandin E1. The patentability of
all other claims in the patent was confirmed (i.e., claims directed to the use
of active agents in the treatment of erectile dysfunction by administration via
the urethra to the corpora cavernosa, and a pharmaceutical composition claim for
prazosin). The Company appealed the EPO's decision with respect to the
pharmaceutical composition claims that were held unpatentable. The Pharmedic
Company appealed the EPO's decision with respect to the claims that were held
patentable, but has since withdrawn. Despite the withdrawal of the Pharmedic
Company from the appeal process, the Company has continued with its own appeal
in an attempt to reinstate the composition claims. The EPO Appeals Board must
make its own finding whether the claims that were deemed unpatentable by the
Opposition Division are indeed patentable before it can reverse the Opposition
Division's decision. There can be no assurance that the appeal will be
successful or that further challenges to the Company's European patent will not
occur should the Company try to enforce the patent in the various European
courts.
There can be no assurance that the Company's products do not or will not
infringe on the patent or proprietary rights of others. 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 had claimed that he was the inventor of
certain technology disclosed in two of the Company's patents. The former
consultant further claimed that the Company and certain of its officers and
directors 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. In May 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 sought a
declaration from the court that the former consultant was not an inventor of any
of the technology. In September 1996, the consultant filed his counterclaim. In
December 1997, the Company reached a settlement with the former consultant
whereby the former consultant dismissed his claims against the Company and the
Company's officers and directors involved in the lawsuit. In return, the Company
paid the consultant $5.1 million.
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
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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 AND SINGLE SOURCE OF SUPPLY
The Company obtains its supply of alprostadil from two sources. The first
is Spolana Chemical Works a.s. in Neratovice, Czech Republic ("Spolana")
pursuant to a supply agreement that was executed in May 1997. In January 1996,
the Company entered into an alprostadil supply agreement with CHINOIN
Pharmaceutical and Chemical Works Co., Ltd. ("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. The Company is seeking additional
sources of alprostadil. In addition, the Company relies on a single injection
molding company, The Kipp Group ("Kipp"), for its supply of plastic applicator
components. In turn, Kipp obtains its supply of resin, a key ingredient of the
applicator, from a single source, Huntsman Corporation. The Company also relies
on a single source, E-Beam Services, Inc. ("E-Beam"), for sterilization of its
product. There can be no assurance that the Company will be able to identify and
qualify additional sources of alprostadil and plastic components and an
additional sterilization facility. The Company is required to receive FDA
approval for suppliers. 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 and plastic components and an
additional sterilization facility, it will be entirely dependent upon the
existing suppliers and E-Beam. If interruptions in these supplies or services
were to occur for any reason, including a decision by existing suppliers and/or
E-Beam to discontinue manufacturing or services, political unrest, labor
disputes or a failure of the existing suppliers and/or E-Beam to follow
regulatory guidelines, the development and commercial marketing of MUSE
(alprostadil) and other potential products could be delayed or prevented. An
interruption in sterilization services or the Company's supply of alprostadil or
plastic components 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 $31.9 million for the
period from its inception through March 31, 1998. 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. In the second quarter, the Company anticipates two significant changes
in the erectile dysfunction market. First, the launch of sildenafil, a
competitive oral product, is expected to dramatically increase the number of men
seeking treatment for impotence. Second, indications are that a large number of
current and future impotence patients will want to try this new oral therapy. As
a result of this and other factors, including higher costs of goods sold as the
Company ramps up its new manufacturing facility, and higher marketing and sales
costs related to the expansion of the Company's sales force, the Company expects
an operating loss in the second quarter of 1998.
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. Until the Company receives FDA approval
for its new New Jersey manufacturing facility, domestic and certain
international markets will need to be supplied from its current facility at
Paco. There can be no assurance such approval will be granted in a timely
manner, if at all. If international sales increase as anticipated, product
available for the domestic market will be reduced and gross margins will be
adversely impacted. If the Company encounters further difficulties with its
current manufacturing facility or delays in regulatory approval of its new
manufacturing facility, capacity constraints could continue for an extended
period of time. Such extended capacity constraints could strain relationships
with distribution partners due to the need to allocate product between domestic
and international markets, and possibly cause patients to seek alternative
therapies. Such
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events could have a material adverse effect on the Company's business, financial
condition and results of operations. 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 its manufacturing facilities in New Jersey and a new
manufacturing facility in Europe, expenses related to marketing and sales of
MUSE (alprostadil), including expenses associated with expanding its sales force
by approximately 150 sales representatives, new product preclinical and clinical
costs, ongoing research and development activities, and general corporate
purposes. The Company anticipates that its existing capital resources may not be
sufficient to support the Company's operations through the commercial
introduction of MUSE (alprostadil) in all international markets or for the
introduction of any additional future products. During 1998, the Company
anticipates using financing sources, such as receivables financing, lease
financing and credit lines, to provide additional capital resources. The Company
may also be required to issue additional equity or debt securities and may use
other financing sources including, but not limited to corporate alliances and
lease financing to fund the future development and possible commercial launch of
its future products. The sale of additional equity securities would result in
additional dilution to the Company's stockholders. 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) results of operations.
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 and retain numerous 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 and retain 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
As the Company receives necessary foreign regulatory approvals, the Company
will 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 commercial launch of MUSE (alprostadil) exposes the Company to a
significant risk of product liability claims due to its availability to a large
population of patients. In addition, pharmaceutical products are subject to
heightened risk for product liability claims due to inherent side effects. The
Company details
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potential side effects in the patient package insert and the physician package
insert, both of which are included with MUSE (alprostadil), and the Company
maintains product liability insurance coverage. However, the Company's product
liability coverage is limited and may not be adequate to cover potential product
liability exposure. Product liability insurance is expensive, difficult to
maintain and current or increased coverage may not be available on acceptable
terms, if at all. Product liability claims brought against the Company in excess
of its insurance coverage, if any, could have a material adverse effect upon the
Company's business, financial condition and results of operations.
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. While more than 70 percent of prescriptions for
MUSE (alprostadil) were reimbursed by third party payors in 1997, there can be
no assurance that the Company's products will be considered cost effective and
that reimbursement to the consumer will continue to 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.
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, announcements of technological innovations or new
products by the Company or its competition, comments by security analysts, the
Company's ability to scale up its manufacturing capability to commercial levels,
adverse regulatory actions or decisions, the Company's ability to increase
demand for its product in the United States, 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, 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.
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ANTI-TAKEOVER EFFECT OF PREFERRED SHARES RIGHTS PLAN AND CERTAIN CHARTER AND
BYLAW PROVISIONS
In February 1996, the Company's Board of Directors authorized its
reincorporation in the State of Delaware (the "Reincorporation") and adopted a
Preferred Shares Rights Plan. The Company's reincorporation into the State of
Delaware was approved by its stockholders and effective in May 1996. The
Preferred Shares Rights Plan provides for a dividend distribution of one
Preferred Shares Purchase Right (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 percent 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
percent 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 percent or more of the
Company's Common Stock.
The Preferred Shares 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 Preferred Shares 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.
19
<PAGE> 20
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 18, 1998, a purported shareholder class action entitled Crain
et al. v Vivus, Inc. et al., was filed in Superior Court of the State of
California for the County of San Mateo. Five identical complaints were
subsequently filed in the same court. These complaints were filed on behalf of a
purported class of persons who purchased stock between May 15 and December 9,
1997. The complaints allege that the Company and certain current and former
officers or directors artificially inflated the Company's stock price by issuing
false and misleading statements concerning the Company's prospects and issuing
false financial statements. The complaints do not specify the damages resulting
from the alleged conduct. On March 16, 1998, a purported shareholder class
action entitled Cramblit et al. v. Vivus, Inc. et al. was filed in the United
States District Court for the Northern District of California. Two identical
complaints were subsequently filed in the same court. The federal complaints
were filed on behalf of a purported class of persons who purchased stock between
May 2 and December 9, 1997. The federal complaints assert the same factual
allegations as the state court complaints, but asserts legal claims under the
Federal Securities Laws. The Company believes the complaints lack merit and the
Company will vigorously defend itself in the pending actions.
A former consultant to the Company had claimed that he was the inventor of
certain technology disclosed in two of the Company's patents. The former
consultant further claimed that the Company and certain of its officers and
directors 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. In May 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 sought a
declaration from the court that the former consultant was not an inventor of any
of the technology. In September 1996, the consultant filed his counterclaim. In
December 1997, the Company reached a settlement with the former consultant
whereby the former consultant dismissed his claims against the Company and the
Company's officers and directors involved in the lawsuit. In return, the Company
paid the consultant $5.1 million. The Company recorded the settlement on its
books in the fourth quarter of 1997 and paid the settlement on January 5, 1998.
In the normal course of business, the Company receives and makes inquiries
regarding patent infringement and other legal matters. The Company believes that
it has meritorious claims and defenses and intends to pursue any such matters
vigorously. The Company is not aware of any asserted or unasserted claims
against it where the resolution would have an adverse material impact on the
operations or financial position of the Company.
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.
20
<PAGE> 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS (in accordance with Item 601 of Regulation S-K)
<TABLE>
<C> <S>
(7)3.2 Amended and Restated Certificate of Incorporation of the
Company
(4)3.3 Bylaws of the Registrant, as amended
(8)3.4 Certificate of Designations of Rights, Preferences and
Privileges of Series A Participating Preferred Stock
(7)4.1 Specimen Common Stock Certificate of the Registrant
(1)4.2 Registration Rights, as amended
(1)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
(8)4.5 Second Amended and Restated Preferred Shares Rights
Agreement, dated as of April 15, 1997 by and between the
Registrant 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
(1)+10.1 Assignment Agreement by and between Alza Corporation and the
Registrant dated December 31, 1993
(1)+10.2 Memorandum of Understanding by and between Ortho
Pharmaceutical Corporation and the Registrant dated February
25, 1992
(1)10.3 Assignment Agreement by and between Ortho Pharmaceutical
Corporation and the Registrant dated June 9, 1992
(1)+10.4 License Agreement by and between Gene A. Voss, M.D., Allen
C. Eichler, M.D., and the Registrant dated December 28, 1992
(1)+10.5A License Agreement by and between Ortho Pharmaceutical
Corporation and Kjell Holmquist AB dated June 23, 1989
(1)+10.5B Amendment by and between Kjell Holmquist AB and the
Registrant dated July 3, 1992
(1)10.5C Amendment by and between Kjell Holmquist AB and the
Registrant dated April 22, 1992
(1)+10.5D Stock Purchase Agreement by and between Kjell Holmquist AB
and the Registrant dated April 22, 1992
(1)+10.6A License Agreement by and between Amsu, Ltd., and Ortho
Pharmaceutical Corporation dated June 23, 1989
(1)+10.6B Amendment by and between Amsu, Ltd., and the Registrant
dated July 3, 1992
(1)10.6C Amendment by and between Amsu, Ltd., and the Registrant
dated April 22, 1992
(1)+10.6D Stock Purchase Agreement by and between Amsu, Ltd., and the
Registrant dated July 10, 1992
(1)10.7 Supply Agreement by and between Paco Pharmaceutical
Services, Inc., and the Registrant dated November 10, 1993
(1)10.10 Lease by and between McCandless-Triad and the Registrant
dated November 23, 1992, as amended
(4)10.11 Form of Indemnification Agreements by and among the
Registrant and the Directors and Officers of the Registrant
(2)10.12 1991 Incentive Stock Plan and Form of Agreement, as amended
(1)10.13 1994 Director Option Plan and Form of Agreement
</TABLE>
21
<PAGE> 22
<TABLE>
<C> <S>
(1)10.14 Form of 1994 Employee Stock Purchase Plan and Form of
Subscription Agreement
(1)10.17 Letter Agreement between the Registrant and Leland F. Wilson
dated June 14, 1991 concerning severance pay
(3)+10.21 Distribution Services Agreement between the Registrant and
Synergy Logistics, Inc. (a wholly-owned subsidiary of
Cardinal Health, Inc.) dated February 9, 1996
(3)+10.22 Manufacturing Agreement between the Registrant and CHINOIN
Pharmaceutical and Chemical Works Co., Ltd. dated December
20, 1995
(11)++10.22A Amendment One, dated as of December 11, 1997, to the
Manufacturing Agreement by and between VIVUS and CHINOIN
Pharmaceutical and Chemical Works Co., Ltd. dated December
20, 1995
(6)+10.23 Distribution and Services Agreement between the Registrant
and Alternate Site Distributors, Inc. dated July 17, 1996
(5)+10.24 Distribution Agreement made as of May 29, 1996 between the
Registrant and Astra AB
(7)+10.27 Distribution Agreement made as of January 22, 1997 between
the Registrant and Janssen Pharmaceutica International, a
division of Cilag AG International
(11)++10.27A Amended and Restated Addendum 1091, dated as of October 29,
1997, between VIVUS International Limited and Janssen
Pharmaceutica International
(7)10.28 Lease Agreement made as of January 1, 1997 between the
Registrant and Airport Associates
(7)10.29 Lease Amendment No. 1 as of February 15, 1997 between
Registrant and Airport Associates
(10)10.29A Lease Amendment No. 2 dated July 24, 1997 by and between the
Registrant and Airport Associates
(10)10.29B Lease Amendment No. 3 dated July 24, 1997 by and between the
Registrant and Airport Associates
(7)10.30 Lease agreement by and between 605 East Fairchild
Associates, L.P. and Registrant dated as of March 5, 1997
(9)++10.31 Manufacture and Supply Agreement between Registrant and
Spolana Chemical Works, A.S. dated May 30, 1997
(11) 10.32A Agreement between ADP Marshall, Inc. and the Registrant
dated December 19, 1997
(11) 10.32B General Conditions of the Contract for Construction
(11) 10.32C Addendum to General Conditions of the Contract for
Construction
(11)++10.33 Sales Force Services Agreement dated as of February 1, 1998
between the Registrant and Innovex, Inc.
27.1 Financial Data Schedule
</TABLE>
- ---------------
(1) Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Registration Statement on Form S-1 No. 33-75698, as amended.
(2) Incorporated by reference to the same numbered exhibit filed with the
Registrant's Registration Statement on Form S-1 No. 33-90390, as amended.
(3) 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,
1995, as amended.
22
<PAGE> 23
(4) Incorporated by reference to the same numbered exhibit filed with the
Registrant's Form 8-B filed with the Commission on June 24, 1996.
(5) 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.
(6) 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.
(7) 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.
(8) 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.
(9) Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30,1997.
(10) 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, 1997.
(11) 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,
1997.
+ Confidential treatment granted.
++ Confidential treatment requested.
(B) REPORTS ON FORM 8-K
None.
23
<PAGE> 24
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: April 24, 1998
--------------------------------------
David C. Yntema
Chief Financial Officer
--------------------------------------
Leland F. Wilson
President and Chief
Executive Officer
24
<PAGE> 25
VIVUS, INC.
INDEX TO EXHIBITS*
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
- ---------------
* Only exhibits actually filed are listed. Exhibits incorporated by reference
are set forth in the exhibit listing included in Item 6 of the Quarterly
Report on Form 10-Q.
25
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,897
<SECURITIES> 9,038
<RECEIVABLES> 17,091
<ALLOWANCES> 169
<INVENTORY> 11,675
<CURRENT-ASSETS> 43,503
<PP&E> 47,095
<DEPRECIATION> (5,194)
<TOTAL-ASSETS> 116,674
<CURRENT-LIABILITIES> 18,411
<BONDS> 0
0
0
<COMMON> 32
<OTHER-SE> 98,231
<TOTAL-LIABILITY-AND-EQUITY> 116,674
<SALES> 26,522
<TOTAL-REVENUES> 27,522
<CGS> 10,482
<TOTAL-COSTS> 10,482
<OTHER-EXPENSES> 20,938
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,987)
<INCOME-TAX> (597)
<INCOME-CONTINUING> (2,390)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,390)
<EPS-PRIMARY> (0.07)<F1>
<EPS-DILUTED> (0.07)
<FN>
<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
</FN>
</TABLE>
