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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 SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER: 0-23490
VIVUS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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)
(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 SEPTEMBER 30, 1999, 32,156,178 shares of common stock were outstanding.
EXHIBIT INDEX ON PAGE 23
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VIVUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------------------- ------------------------------
SEPTEMBER 30, JUNE 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1999 1998 1999 1998
------------- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenue
US Product $ 5,640 $ 5,239 $ 3,485 $ 15,417 $ 34,178
International Product
1,105 1,572 14,579 4,393 26,391
Milestone 2,000 -- 2,000 6,000 3,000
Returns (2,325) -- -- (2,325) --
--------- --------- --------- --------- ---------
Total revenue 6,420 6,811 20,064 23,485 63,569
Operating Expenses
Cost of goods sold 2,840 3,072 28,297 9,514 49,483
Research and development 1,416 1,762 4,673 4,965 13,912
Selling, general and administrative 1,719 1,554 3,882 4,625 38,516
Settlement of shareholder lawsuits -- 600 -- 600 --
Write-down of property -- -- 32,163 -- 32,163
Other restructuring costs -- -- 5,968 -- 12,490
--------- --------- --------- --------- ---------
Total operating expenses 5,975 6,988 74,983 19,704 146,564
--------- --------- --------- --------- ---------
Income (loss) from operations 445 (177) (54,919) 3,781 (82,995)
Interest and other income 499 484 194 1,462 1,702
--------- --------- --------- --------- ---------
Income (loss) before taxes 944 307 (54,725) 5,243 (81,293)
Income tax provision (47) (15) -- (262) --
--------- --------- --------- --------- ---------
Net income (loss) $ 897 $ 292 $ (54,725) $ 4,981 $ (81,293)
========= ========= ========= ========= =========
Net income (loss) per share:
Basic $ 0.03 $ 0.01 $ (1.72) $ 0.16 $ (2.55)
Diluted $ 0.03 $ 0.01 $ (1.72) $ 0.15 $ (2.55)
Shares used in the computation of
net income (loss) per share:
Basic 32,143 32,066 31,806 32,048 31,893
Diluted 32,546 32,889 31,806 32,585 31,893
</TABLE>
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VIVUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------------------------- -----------------------------
SEPTEMBER 30, JUNE 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1999 1998 1999 1998
------------- -------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net Income (loss) $ 897 $ 292 $(54,725) $ 4,981 $(81,293)
Other comprehensive income:
Unrealized gain (loss) on
securities (309) 231 18 (143) (73)
Income tax benefit (provision) 15 (12) -- 7 --
-------- -------- -------- -------- --------
(294) 219 18 (136) (73)
-------- -------- -------- -------- --------
Comprehensive income (loss) $ 603 $ 511 $(54,707) $ 4,845 $(81,366)
======== ======== ======== ======== ========
</TABLE>
3
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VIVUS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, DECEMBER 31,
1999 1999 1998
------------- --------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Current assets:
Cash $ 5,553 $ 5,152 $ 2,989
Available-for-sale securities 36,723 33,542 20,903
Accounts receivable 2,050 2,518 5,197
Inventories 4,031 4,093 5,272
Prepaid expenses and other assets 1,076 1,155 534
--------- --------- ---------
Total current assets 49,433 46,460 34,895
Property and equipment 16,841 17,633 19,213
--------- --------- ---------
Total assets $ 66,274 $ 64,093 $ 54,108
========= ========= =========
Current Liabilities:
Accounts payable $ 1,721 $ 1,804 $ 3,277
Accrued and other liabilities 31,333 29,295 21,294
--------- --------- ---------
Current liabilities 33,054 31,099 24,571
Accrued and other long-term liabilities 5,636 6,052 7,860
--------- --------- ---------
Total liabilities $ 38,690 $ 37,151 $ 32,431
Stockholders' equity:
Common stock; $.001 par value; shares
authorized 200,000; shares outstanding -
September 30, 1999, 32,156; June 30, 1999, 32,137;
December 31, 1998, 31,890 32 32 32
Paid in capital 132,535 132,481 131,466
Accumulated other comprehensive income (loss) (174) 135 (31)
Accumulated deficit (104,809) (105,706) (109,790)
--------- --------- ---------
Total stockholders' equity 27,584 26,942 21,677
--------- --------- ---------
Total liabilities and stockholders equity $ 66,274 $ 64,093 $ 54,108
========= ========= =========
</TABLE>
4
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VIVUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------- ---------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,981 $ (81,293)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation and amortization 2,483 2,865
Property write-down -- 32,163
Inventory write-down -- 16,083
Stock compensation costs 182 360
Issuance of common stock for lawsuit settlement 600 --
Changes in assets and liabilities:
Accounts receivable 3,147 3,831
Inventories 1,241 (14,784)
Prepaid expenses and other assets (542) 675
Accounts payable (1,556) 6,463
Accrued and other liabilities 7,815 8,734
--------- ---------
Net cash provided by (used for) operating activities 18,350 (24,903)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment purchases (111) (18,603)
Investment purchases (103,509) (134,855)
Proceeds from sale/maturity of securities 87,547 199,499
--------- ---------
Net cash provided by (used for) investing activities (16,073) 46,041
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of common stock options 187 562
Sale of common stock through employee
stock purchase plan 100 413
Repurchase of common stock -- (23,584)
--------- ---------
Net cash provided by (used for) financing activities 287 (22,609)
--------- ---------
NET INCREASE (DECREASE) IN CASH 2,564 (1,471)
CASH:
Beginning of period 2,989 6,161
--------- ---------
End of period $ 5,553 $ 4,690
========= =========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Unrealized loss on securities $ (143) $ (73)
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Income taxes paid $ 36 71
</TABLE>
5
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VIVUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
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 and nine-month periods
ended September 30, 1999 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1999. 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, 1998.
2. RESTRUCTURING RESERVE
During 1998, the Company experienced a significant decline in market demand
as the result of the introduction of a competitor's product. As a result, the
Company took steps to restructure its operations in an attempt to bring the cost
structure in line with current and projected revenues. (See Notes 1 and 6 to the
Consolidated Financial Statements for the year ended December 31, 1998 included
in the Company's Annual Report on Form 10-K). The reserve balance at September
30, 1999 was $9.6 million, a decrease of $481,000 from $10.1 million at June 30,
1999.
<TABLE>
<CAPTION>
SEVERANCE AND INVENTORY PROPERTY
EMPLOYEE AND RELATED AND RELATED MARKETING
COSTS COMMITMENTS COMMITMENTS PROGRAMS OTHER TOTAL
------------- ----------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 .... $ 1,910 $ 5,384 $ 4,664 $ 1,307 $ 1,793 $ 15,058
Incurred in first quarter 1999... (108) (128) (309) (1,076) (500) (2,121)
-------- -------- -------- -------- -------- --------
Balance at March 31, 1999 ....... 1,802 5,256 4,355 231 1,293 12,937
Incurred in second quarter 1999.. (1,502) (48) (158) (131) (1,000) (2,839)
-------- -------- -------- -------- -------- --------
Balance at June 30, 1999 ........ 300 5,208 4,197 100 293 10,098
Incurred in third quarter 1999... -- (30) (158) -- (293) (481)
-------- -------- -------- -------- -------- --------
Balance at September 30, 1999.... $ 300 $ 5,178 $ 4,039 $ 100 $ -- $ 9,617
======== ======== ======== ======== ======== ========
</TABLE>
The Company expects that over the next twelve months, it will make cash
payments of approximately $4.0 million related to the restructuring, with the
remaining $5.6 million to occur after this period.
3. UNEARNED REVENUE
As of September 30, 1999, the Company has recorded unearned revenue of $16.7
million associated with contractual obligations and other payments from
AstraZeneca. In October 1999, the marketing and distribution rights for the
Company's product MUSE were returned to the Company. The Company and AstraZeneca
are currently formalizing such return of rights under the terms of the
agreement. (See Note 8.)
Management believes that the conclusion of contractual obligations will not
have a material adverse effect on the Company's financial condition. There can
be no assurance, however, that the Company and AstraZeneca will reach a
satisfactory agreement on the conclusion of contractual obligations, which could
have a material adverse effect on the financial condition of the Company.
4. ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities as of September 30, 1999, June 30, 1999, and
December 31, 1998 consist of:
6
<PAGE> 7
<TABLE>
<CAPTION>
(in thousands) September 30, Jun 30, December 31,
1999 1999 1998
------------- ------- ------------
<S> <C> <C> <C>
Unearned revenue $16,740 $15,677 $ 5,040
Restructuring 9,617 10,098
15,058
Research and clinical expenses 2,534 2,549
2,337
Income taxes 2,285 2,263
2,082
Royalties 2,293 2,100
2,133
Expired product returns 1,000 -- --
Employee compensation and benefits 972 1,132
902
Manufacturing expenses 710 615
368
Sales and marketing expenses 232 301
664
Other 586 611 570
------- ------- -------
$36,969 $35,347 $29,154
======= ======= =======
</TABLE>
5. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is calculated in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share," which requires a
dual presentation of basic and diluted earnings per share. Basic income (loss)
per share is based on the weighted average number of common shares outstanding
during the periods. Diluted income 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. Certain options and warrants are excluded from the diluted income per
share for income periods presented because they are anti-dilutive. All options
and warrants are excluded from the diluted loss per share for all loss periods
because they are anti-dilutive.
6. SEGMENT INFORMATION
During 1998, the Company adopted Statement of Financial Accounting Statement
SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information." SFAS 131 requires a new basis of determining reportable business
segments, i.e., the management approach. This approach requires business segment
information used by management to assess performance and manage company
resources for information disclosure. On this basis, the Company primarily sells
its product through wholesale channels in the United States. International sales
are made only to the Company's two international partners. All transactions are
denominated in U.S. dollars; therefore, the Company considers the arrangement as
operating in a single segment.
During the first nine months of 1999, five customers accounted for 24%, 19%,
16%, 15%, and 12% of total product revenue, as compared to five customers
accounted for 35%, 13%, 11%, 11% and 10% of total product revenue for fiscal
year 1998.
7. PRODUCT RETURNS
In the third quarter 1999, the Company recorded a $2.3 million charge for
the actual and anticipated return of expired product in the U.S. These returns
are primarily the result of shipments made during the fourth quarter of 1997 and
first quarter of 1998. Demand for MUSE declined following the launch of a
competitive product in April 1998, resulting in excess inventories of
wholesalers and retailers.
8. SUBSEQUENT EVENT
On October 7, 1999, the Company announced that AstraZeneca has returned the
marketing and distribution rights for MUSE to the Company. This decision follows
a change in product strategies due to the recent merger of Astra AB and Zeneca
Group PLC. The Company and AstraZeneca are currently formalizing the return of
rights and a transition plan under the terms of the contract. AstraZeneca will
continue to handle patient and physician inquiries and ensure product supply
while VIVUS pursues strategic alternatives regarding marketing and distribution
of MUSE in Europe, Australia, New Zealand, Central America and South America.
7
<PAGE> 8
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 starting on page
11 of this document.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
VIVUS, Inc. ("VIVUS" or the "Company") is the developer and manufacturer of
MUSE(R) (alprostadil) and ACTIS(TM), two advancements in the treatment of men
with erectile dysfunction ("ED"), also known as impotence. The Company's
objective is to become a global leader in the development and commercialization
of innovative therapies for the treatment of sexual dysfunction and urologic
disorders in men and women. To this end, the Company focuses its R&D activities
on male erectile dysfunction and premature ejaculation, and female sexual
dysfunction using pharmacological agents that have pre-existing data. The
Company believes that such agents present a lower development risk profile and
may progress more rapidly through the clinical development and regulatory
process than agents without pre-existing data.
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, and commercially introduced MUSE in the United States beginning in January
1997. The launch of MUSE went on to become one of the top 25 most successful
drug launches in the U.S., and the Company recorded a net profit of $36.6
million and product revenue of $129.3 million for the year ended December 31,
1997.
During 1998, the Company experienced a significant decline in market demand
for MUSE as the result of the introduction of a competitor's product in April
1998. Since the launch of this competitive product, MUSE prescriptions have
declined approximately 80% in the U.S. During the second and third quarters of
1998, the Company took significant steps to restructure its operations in an
attempt to bring the cost structure in line with current and projected revenues.
As a result, the Company incurred a net loss of $80 million and had negative
operating cash flow of $26 million for the year ended 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, 1998.
The Company received approval to market MUSE in Germany and France in the
first quarter 1999 and Spain in the third quarter 1999. To date, MUSE has been
approved by regulatory agencies in 45 countries, including all European Union
countries except Italy.
The Company supports MUSE sales in the U.S. through physician and patient
information/help lines, sales support for major accounts, product education
newsletters and participation in national urologic and sexual dysfunction forums
and conferences, such as the American Urological Association annual and regional
meetings and the International Society for Impotence Research. In addition, the
Company supports ongoing research and clinical investigation of MUSE and the
publication of data in peer-reviewed journals.
Internationally, the Company has entered into a licensing and distribution
agreement with Janssen Pharmaceutical ("Janssen") for certain international
markets, including China, multiple Pacific Rim countries (excluding Japan),
Canada, Mexico and South Africa.
In October 1999, the marketing and distribution rights in Europe,
Australia, New Zealand, Central and South America were returned to the Company
from AstraZeneca. The Company and AstraZeneca are currently formalizing a
transition plan for the return of these rights. During the transition,
AstraZeneca will continue to handle patient and physician inquiries and ensure
product supply in the countries where MUSE has been launched. The Company is
currently evaluating alternate strategic options in these markets, including the
retention of a pharmaceutical partner(s) to market, distribute and sell its
products in these markets.
The Company has completed a Phase III clinical trial for ALIBRA, the
Company's second generation transurethral approach to treat ED. The Company
expects to submit a New Drug Application ("NDA") for ALIBRA in the fourth
quarter of 1999. The Company also began a Phase II proof of concept clinical
study to evaluate compounds for the treatment of premature ejaculation in the
third quarter of 1999. In addition, the Company is developing a product for
female sexual dysfunction and expects to enter clinical testing next year.
In September 1999, the Company terminated its license agreement with Albert
Einstein College of Medicine of Yeshiva University for the development of gene
therapy for the treatment of ED. This was a strategic decision based on the
development risks involved and the amount of funding and time required to
potentially bring a product to market.
During the third quarter of 1999, product shipments in the U.S. increased 8%
over the second quarter and the Company recorded its fourth consecutive
profitable quarter since restructuring its operations in the third quarter of
1998. The Company continues to keep the cost structure of its business in line
with current and projected demand for MUSE.
8
<PAGE> 9
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND JUNE 30, 1999
Product revenues for the quarter ended September 30, 1999 were $5.6 million
in the United States and $1.1 million internationally, compared to $5.2 million
in the United States and $1.6 million internationally for the quarter ended June
30, 1999. U.S. product revenue increased 8% in third quarter 1999 compared to
the second quarter 1999. Product shipments in the U.S. during the third quarter
are more reflective of current demand, as compared to the first six month of
1999 where wholesale inventories were at higher levels. As of September 30,
1999, wholesale inventory levels represent approximately one-half of monthly
sales. International product revenue decreased by $467,000 from second quarter
1999 as a result of the Company's international marketing partners, Janssen and
AstraZeneca, having sufficient inventory for their markets.
Total revenues during the third quarter of 1999 included a $2.0 million
milestone payment from AstraZeneca for the marketing approval of MUSE in Spain
and a $2.3 million charge for the actual and anticipated return of expired
product in the U.S. These returns are primarily the result of shipments made
prior to the decline in demand for MUSE following the launch of a competitive
product in April 1998.
Cost of goods sold was $2.8 million for the third quarter 1999, compared to
$3.1 million for the second quarter 1999. This decrease was primarily the result
of continued cost conservation efforts and lower unit shipments.
Research and development ("R&D") expenses for the third quarter 1999 were
$1.4 million, compared to $1.8 million in the second quarter of 1999. Lower
spending in the third quarter 1999 is attributed to the current phase of
the development process. The Company anticipates that R&D expenses will increase
significantly in the fourth quarter 1999, as compared with previous quarters in
1999, as the Company anticipates filing an NDA for ALIBRA and continues to
progress in the development of its R&D pipeline.
During the second quarter 1999, the Company reached a settlement of the
shareholder class action lawsuits, in which the Company incurred a non-cash
expense of $600,000 for the issuance of 120,000 shares of VIVUS, Inc. common
stock.
The Company recorded a tax provision of $47,000, or five percent of income
before taxes for the third quarter 1999, consistent with previous quarters in
1999, and includes the effect of net operating loss ("NOL") carried forward from
prior periods. The tax rate would have been substantially higher if the NOLs
had not been available to offset current income.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Product revenues for the quarter ended September 30, 1999 were $5.6 million
in the United States and $1.1 million internationally, compared to $3.5 million
in the Unites States and $14.6 million internationally for the quarter ended
September 30, 1998. Product revenues for the nine months ended September 30,
1999 were $15.4 million in the U.S. and $4.4 million internationally, compared
to $34.2 million in the U.S. and $26.4 million internationally for the same
periods in 1998. Higher product revenue in the U.S. during the third quarter
1999 compared to third quarter 1998 was the result of balancing of inventory
levels in the wholesale channel in 1998. Underlying demand for MUSE
domestically, as measured by retail prescriptions, has declined approximately
80% since the commercial launch of a competitive product in April 1998, which is
the primary reason for lower revenues domestically for the first nine months in
1999. Internationally, the decrease in product revenue for the three and nine
month periods in 1999 is attributed to the Company's partners, Janssen and
AstraZeneca, having accumulated sufficient inventory in 1998 for their
respective markets.
Total revenues for the nine months ended September 30, 1999 include
milestone payments of $6.0 million related to regulatory approval of MUSE in
Germany, France and Spain ($2.0 million for each country), and a charge of $2.3
million for the actual and anticipated return of expired product returns. For
the nine months ended September 30, 1998, total revenues included $1.0 million
and $2.0 million milestone payments related to regulatory approval of MUSE in
South Korea and Canada, respectively.
Cost of goods sold was $2.8 million for the third quarter 1999, compared to
$28.3 million for the third quarter 1998. For the nine months ended September
30, 1999, cost of goods sold was $9.5 million, compared to $49.5 million for the
first nine months of 1998. Cost of goods sold for three and nine months ended
September 30, 1998 include a $16.0 million write-down for excess inventory and
future inventory purchase commitments. The Company has made significant progress
in manufacturing projects improving yields and continued cost conservation in
the first nine months of 1999. As a result, the higher unit cost caused by lower
economies of scale has been partially offset by the ongoing improvements.
9
<PAGE> 10
Research and development expenses for the third quarter 1999 were $1.4
million, compared to $4.7 million in the third quarter 1998. For the nine months
ended September 30, 1999 and 1998, research and development expenses were $5.0
million and $13.9 million, respectively. Lower spending for the three and
nine-month periods ended September 30, 1999 were primarily the result of the
Company's efforts to bring its cost structure in line with current and projected
revenues. Higher spending in 1998 was mainly associated with a significantly
larger R&D organization.
Selling, general and administrative expenses for the third quarter 1999 were
$1.7 million, compared to $3.9 million in the third quarter 1998. For the nine
months ended September 30, 1999, expenses were $4.6 million, compared to $38.5
million for the same period in 1998. The lower expenses in the three and
nine-month periods ended September 30, 1999 were primarily the result of the
Company's effort to bring overall cost levels in line with the Company's current
and projected future demand for MUSE. Included in the three and nine-month
periods ended September 30, 1998 were significant expenses for a
direct-to-consumer advertising campaign as well as a significantly larger direct
sales force.
Included in the nine-month period ended September 30, 1999 is a settlement
of shareholders class action lawsuits, in which the Company recorded a non-cash
expense of $600,000 for the issuance of 120,000 shares of VIVUS, Inc. common
stock. Included in the nine-month period ended September 30, 1998 is a
restructuring charge of $12.5 million, primarily associated with the Company's
agreement to facilitate the transition of its direct U.S. sales force to ALZA
Corporation, as well as terminating the contract sales agreement with Innovex,
and personnel reductions; and $32.2 million write-down of property and
equipment. The write-down was calculated in accordance with the provisions of
SFAS No. 121 and represents the excess of the carrying values of property and
equipment over the projected future discounted cash flows for the Company.
Interest and other income for the three and nine-month periods ended
September 30, 1999 were $499,000 and $1.5 million, respectively, compared with
$194,000 and $1.7 million in the three and nine-month periods ended September
30, 1998. The increased interest in the three-month period ended September 30,
1999 was due to higher average invested balance during that period, whereas the
lower interest in the nine-month period ended September 30, 1999 was primarily
the result of lower average invested cash balances in the first six months of
1999, as compared with the first six months of 1998.
The Company recorded a tax provision of five percent of net income before
taxes for the nine months ended September 30, 1999. This compares to no tax
provision recorded for the nine months ended September 30, 1998, as the Company
expected a loss for the fiscal year ended December 31, 1998. The 1999 effective
tax rate calculation includes the effect of NOLs carried forward from prior
periods. The tax rate would have been substantially higher if the NOLs were not
available to offset current income.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed operations primarily from the sale
of preferred and common stock. Through September 30, 1999, VIVUS has raised
$153.7 million from financing activities and has an accumulated deficit of
$104.8 million at September 30, 1999.
Cash, cash equivalents and available-for-sale securities totaled $42.3
million at September 30, 1999, compared with $38.7 million at June 30, 1999 and
$23.9 million at December 31, 1998. The $18.4 million increase in cash from
December 31, 1998 primarily resulted from an increase in unearned revenue ($11.7
million), net income ($5.0 million), milestone payments ($6.0 million), and
collection of accounts receivable ($3.1 million). These increases were partially
offset by payments made related to the restructuring reserve established in 1998
of $5.5 million.
Accounts receivable at September 30, 1999 were $2.1 million, compared with
$5.2 million at December 31, 1998, a decrease of $3.1 million due primarily to
lower sales and improved collection of accounts receivable.
Total liabilities were $38.7 million at September 30, 1999, compared with
$32.4 million at December 31, 1998, an increase of $6.3 million. The increase
primarily relates to the increase in unearned revenue of $11.7 million
associated with contractual obligations and other payments from AstraZeneca,
which is partially offset by payments made related to the restructuring reserve
established in 1998 of $5.5 million.
On October 5, 1998, the Company was named in a civil action filed in the
Superior Court of New Jersey. This complaint seeks specific performance and
other relief in connection with the Company's leased manufacturing facilities,
located in Lakewood, New Jersey. The Company's lease agreement requires that the
Company provide a removal security deposit in the form of cash or a letter of
credit. The Company and lessor ("plaintiff") have reached a tentative agreement
whereby the Company will provide an irrevocable letter of credit in the amount
of $3.3 million for such security deposit in the fourth quarter.
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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 the Risk Factors section.
RISK FACTORS
LIMITED SALES AND MARKETING EXPERIENCE
The Company supports MUSE sales in the U.S. through physician and patient
information/help lines, sales support for major accounts, product education
newsletters and participation in national urologic and sexual dysfunction forums
and conferences, such as the American Urological Association annual and regional
meetings and the International Society for Impotence Research. In addition, the
Company supports ongoing research and clinical investigation of MUSE and the
publication of data in peer-reviewed journals. The Company is currently
evaluating alternative strategic options regarding the U.S. market. There can be
no assurance that the options are viable, or that the Company will be able to
successfully implement those options.
In 1997, the Company entered into an international marketing agreement with
Janssen to purchase the Company's products for resale in China, multiple Pacific
Rim countries (excluding Japan), Canada, Mexico, South Africa, the Middle East,
Russia, the Indian sub-continent, and Africa. The marketing agreement does not
have minimum purchase commitments and the Company is dependent on Janssen's
efforts to distribute and sell the Company's products effectively in the
above-mentioned markets. Janssen may take up to twelve months to introduce a
product in a given country following regulatory approval in such country. There
can be no assurance that such efforts will be successful or that Janssen will
continue to support the product.
In October 1999, the marketing and distribution rights in Europe,
Australia, New Zealand, Central and South America were returned to the Company
from AstraZeneca. The Company is currently evaluating alternative strategic
options regarding these countries. There can be no assurance that the Company's
options are viable, or that the Company will be able to successfully implement
those options.
FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FINANCING
Cash, cash equivalents and available-for-sale securities totaled $42.3
million and current liabilities totaled $33.1 million at September 30, 1999.
Included in current liabilities is unearned revenue of $16.7 million associated
with contractual obligations and other payments from AstraZeneca. The Company
and AstraZeneca are currently formalizing the transition of marketing and
distribution rights back to VIVUS, including contractual obligations under the
terms of the agreement.
Management believes that the conclusion of contractual obligations will not
have a material adverse effect on the Company's financial condition. There can
be no assurance, however, that the Company and AstraZeneca will reach a
satisfactory agreement on the conclusion of contractual obligations, which could
have a material adverse effect on the financial condition of the Company.
On October 5, 1998, the Company's lessor ("plaintiff") named the Company in
a civil action in connection with the Company's leased manufacturing facilities,
located in Lakewood, New Jersey. The Company's lease requires that the Company
provide a removal security deposit in the form of cash or letter of credit. The
Company and lessor ("plaintiff") have reached a tentative agreement whereby the
Company will provide an irrevocable letter of credit in the amount of $3.3
million for such security deposit in the fourth quarter of 1999.
The Company anticipates that its existing capital resources combined with
anticipated future revenues may not be sufficient to support the commercial
introduction of any additional future products. The Company is currently seeking
other sources of financing to support the development of its R&D pipeline.
The Company expects that it will be required to issue additional equity or
debt securities or use other financing sources including, but not limited to
corporate alliances to fund the 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) results of operations; (ii) demand for MUSE; (iii) the activities
of competitors; (iv) the progress of the Company's research and development
programs; (v) the timing and results of pre-clinical testing and clinical
trials; (vi) technological advances; and (vii) the level of resources that the
Company devotes to sales and marketing capabilities.
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 ED exist, such as oral medications, needle
injection therapy, vacuum constriction
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devices and penile implants, and the manufacturers of these products will
continue to improve these therapies. The most significant competitive therapy is
sildenafil, an oral medication marketed by Pfizer, which received regulatory
approvals in the U.S. in March 1998 and in the European Union in September 1998.
The commercial launch of sildenafil in the U.S. in April 1998 dramatically
increased the number of men seeking treatment for impotence and significantly
decreased demand for MUSE. Since the launch of sildenafil, MUSE prescriptions
have declined approximately 80% in the U.S.
Additional competitive products in the erectile dysfunction market include
needle injection therapy products from Pharmacia Upjohn and Schwartz Pharma,
which were approved by the FDA in July 1995 and June 1997, respectively. Other
large pharmaceutical companies are also actively engaged in the development of
therapies for the treatment of ED. These companies have substantially greater
research and development capabilities as well as substantially greater
marketing, financial and human resources than the Company. In addition, many of
these companies have significantly greater experience than the Company in
undertaking pre-clinical 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 ED. For instance, Zonagen, Inc. has filed for FDA
approval of its oral treatment and has received approval in Mexico; TAP
Pharmaceuticals, Inc. has submitted an application to the FDA for approval of
its sub-lingual treatment; ICOS Corporation has an oral medication in clinical
testing; and Senetek has a needle injection therapy product approved recently in
Denmark and has filed for approval in other countries. 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; and ICOS Corporation formed a joint venture
with Eli Lilly in October 1998 to jointly develop and market its oral treatment.
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.
NEW PRODUCT DEVELOPMENT
The Company's future operating results may be adversely affected if the
Company is unable to continue to develop, manufacture and bring to market
pharmacological products rapidly. The process of developing new drugs and/or
therapeutic solutions is inherently complex and uncertain. The Company must
make long-term investments and commit significant resources before knowing
whether its predictions will eventually result in products that will receive
FDA approval and achieve market acceptance. After the FDA approves a product,
the Company must quickly manufacture sufficient volumes to meet market demand.
This is a process that requires accurate forecasting of market demand. Given
the alternative treatments and the number of products introduced in the market
each year, the drug development process becomes increasingly difficult and
risky.
DEPENDENCE ON THIRD PARTIES
In 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 for U.S.
distribution, 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 in the U.S.
There can be no assurance that such efforts will be successful.
In 1996, the Company entered into a distribution agreement with Integrated
Commercialization Services ("ICS"), a subsidiary of Bergen Brunswig Corporation.
ICS provides "direct-to-physician" distribution capabilities in support of U.S.
marketing and sales efforts. ICS also stores and ships various promotional
materials to sales personnel, including MUSE patient and in-office instructional
videos and brochures. As a result of this distribution agreement with ICS, the
Company is dependent on ICS's efforts to distribute product samples effectively.
There can be no assurance that such efforts will be successful.
In 1996, the Company entered into an agreement with WRB Communications
("WRB") to handle patient and healthcare professional hotlines for VIVUS. WRB
maintains a staff of healthcare professionals to handle questions and inquires
about MUSE and ACTIS. These calls may include complaints about the Company's
product due to efficacy or quality, as well as reporting of adverse events. As a
result of this agreement, the Company is dependent on WRB to effectively handle
these hotline calls. There can be no assurance that such effort will be
successful.
HISTORY OF LOSSES AND LIMITED OPERATING HISTORY
The Company has generated a cumulative net loss of $104.8 million for the
period from its inception through September 30, 1999. In order to sustain
profitable operations, the Company must successfully manufacture and market MUSE
and keep its expenditures in line with lower product revenues. The Company is
subject to a number of risks including its ability to successfully market,
distribute and sell its product, intense competition, and its reliance on a
single therapeutic approach to erectile dysfunction and its ability to secure
additional operating capital. There can be no assurance that the Company will be
able to continue to achieve profitability on a sustained basis.
Accordingly, there can be no assurance of the Company's future success.
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During 1998, the Company took significant steps to restructure its
operations in an attempt to bring the cost structure of the business in line
with current demand for MUSE. These steps included significant reductions in
personnel, closing the contract-manufacturing site located in PACO
Pharmaceutical Services, Inc., the termination of the lease for the Company's
leased corporate offices, and recorded significant write-down of property,
equipment and inventory. As a result of these and other factors, the Company
experienced an operating loss of $80.3 million, or $2.52 per share, in the year
ended December 31, 1998.
In September 1998, the Company significantly scaled back its manufacturing
operations as a result of lower demand domestically and internationally for
MUSE. Current production is significantly below capacity for the plant resulting
in a higher unit cost, and the Company expects that the gross margin from the
sale of MUSE will be less predictable in future periods, which may cause greater
volatility in the Company's results of operations and financial condition.
Management believes that these restructuring measures were adequate in
bringing the cost structure in line with current and projected revenues;
however, there can be no assurance that product demand will not weaken further
or that these measures will result in sustained profitability in future periods.
DEPENDENCE ON KEY PERSONNEL
The Company's success is highly dependent upon the skills of a limited
number of key management personnel. To reach its business objectives, the
Company will need to retain and hire qualified personnel in the areas of
manufacturing, research and development, clinical trial management and
pre-clinical testing. There can be no assurance that the Company will be able to
retain or 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.
DEPENDENCE ON SINGLE SOURCE OF SUPPLY
The Company relies on a single source, E-Beam Services, Inc., for
sterilization of its product. There can be no assurance that the Company will be
able to identify and qualify additional sterilization sources. The Company is
required to receive FDA approval for suppliers. The FDA may require additional
clinical studies or other testing prior to accepting a new supplier. Unless the
Company secures and qualifies additional sources of sterilization facilities, it
will be entirely dependent on E-Beam. If interruption in this service were to
occur for any reason, including a decision by E-Beam to discontinue service,
political unrest, labor disputes or a failure of E-Beam to follow regulatory
guidelines, the development and commercial marketing of MUSE and other potential
products could be delayed or prevented. An interruption in sterilization
services would have a material adverse effect on the Company's business,
financial condition and results of operations.
LIMITED MANUFACTURING EXPERIENCE
The Company has limited experience in manufacturing and selling MUSE in
commercial quantities. The Company initially experienced product shortages due
to higher than expected demand and difficulties encountered in scaling up
production of MUSE. The Company leased 90,000 square feet of space in New Jersey
in which it has constructed manufacturing and testing facilities. The FDA and
European Medicine Controls Agency ("MCA") authorized the Company to begin
commercial production and shipment of MUSE from its new facility in June and
March 1998, respectively. In September 1998, the Company closed its contract
manufacturing site within PACO Pharmaceutical Services, Inc. and significantly
scaled back its manufacturing operations in the New Jersey facility, as a result
of lower domestic and international demand for MUSE. Production is currently
significantly below capacity for the plant.
DEPENDENCE ON THE COMPANY'S TRANSURETHRAL SYSTEM FOR ERECTION
The Company currently relies on a single therapeutic approach to treat ED,
its transurethral system for erection. Certain side effects have been found to
occur with the use of MUSE. MUSE is applied into the urinary opening and is not
for men with sickle cell trait, disease, or other blood disorders. One third of
men reported genital pain, causing some to stop use. A few men reported
dizziness and, less commonly, fainting. To date, the incidence of post-launch
adverse side effects is consistent with that experienced in clinical trials. As
a result of the Company's single therapeutic approach, the failure to
successfully commercialize the product will have a material adverse effect to
the Company's business.
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 as a therapy for the treatment of ED, thereby affecting the
commercial viability of MUSE.
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In addition, technological changes or medical advancements could diminish or
eliminate the commercial viability of the Company's product.
RISKS RELATING TO INTERNATIONAL OPERATIONS
The Company's product is currently marketed 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
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 where the Company's product is
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.
GOVERNMENT REGULATION AND UNCERTAINTY OF PRODUCT APPROVALS
The Company's research, pre-clinical development, clinical studies,
manufacturing and marketing of its products are subject to extensive regulation,
rigorous testing and approval processes of the Food and Drug Administration
("FDA") and equivalent foreign regulatory agencies. In November 1996, the
Company received final marketing clearance from the FDA for MUSE. In November
1997, the Company obtained regulatory marketing clearance by MCA to market MUSE
in the United Kingdom. To date, MUSE has been approved in 45 countries.
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 equivalent foreign regulatory agencies, and
the Company must also report certain adverse events involving its drugs to these
agencies. 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 affect 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 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 in several other
countries. These applications will be subject to rigorous approval processes.
There can be no assurance that approval in these or other countries will be
granted or that these approvals, if granted, 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 studies 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 studies related to future products
would be completed successfully within any specified time period, if at all.
Furthermore, the FDA could suspend clinical studies at any time if it is
believed that the subjects participating in such studies are being exposed to
unacceptable health risks.
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 and other regulatory review, and later discovery of previously unknown
problems with a product, manufacturer or facility may result in the FDA and
other regulatory agencies 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 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 current good
manufacturing practice ("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
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compliance as part of the approval process. However, upon routine re-inspection
of these facilities, there can be no assurance that the FDA and other regulatory
agencies will find the manufacturing process or facilities to be in compliance
with cGMP and other regulations. 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 or closure of the
Company's manufacturing facility until cGMP compliance is achieved.
PATENTS AND PROPRIETARY RIGHTS
The Company's policy is to aggressively maintain its patent position and to
enforce all of its intellectual property rights.
The Company is the exclusive licensee of United States and Canadian patents
originally filed in the name of Dr. Gene Voss. These patents claim methods of
treating ED with a vasodilator-containing ointment that is administered either
topically or transurethrally.
The Company is also the exclusive licensee of patents and patent
applications filed in the name of Dr. Nils G. Kock, in numerous countries. Four
United States patents have issued directed to methods and compositions for
treating ED by transurethrally administering an active agent. Patents have also
been granted in Australia, Austria, Belgium, Canada, Finland, France, Germany,
Great Britain, Greece, Ireland, Italy, Japan, Luxembourg, the Netherlands, New
Zealand, Norway, Spain, Sweden and South Africa. Patent applications are pending
in Denmark and Romania. The foreign patents and applications, like the U.S.
patents and applications, are directed to the treatment of ED by transurethral
administration of certain active substances including alpha-receptor blockers,
vasoactive polypeptides, prostaglandins or nitroglycerin dispersed in a
hydrophilic vehicle.
The Company is the sole assignee of three United States patents, one
divisional patent application and two continuation applications all deriving
from patent applications originally filed by Alza, covering inventions of Dr.
Virgil Place made while he was an employee of Alza. The patents and patent
applications are directed to dosage forms for administering a therapeutic agent
to the urethra, methods for treating erectile dysfunction and specific drug
formulations that can be delivered transurethrally for the treatment of erectile
dysfunction. The divisional and continuation applications were filed in the
United States on June 7, 1995. All patents issuing on applications filed before
June 8, 1995 will automatically have a term that is the greater of twenty years
from the patent's effective filing date or seventeen years from the date of
patent grant. Foreign patents have been granted in Australia, Europe (including
Austria, Belgium, Denmark, France, Germany, Great Britain, Greece, Italy,
Luxembourg, Norway, the Netherlands, Portugal, Spain, Sweden and Switzerland),
New Zealand, South Africa and South Korea, and foreign applications are pending
in Canada, Finland, Ireland, Mexico, and Japan.
The Company's license and assignment agreements for these patents and patent
applications are royalty bearing and do not expire until the licensed patents
expire. These license and assignment agreements provide that the Company may
assume responsibility for the maintenance and prosecution of the patents and
bring infringement actions.
In addition to the Voss, Kock, and Place patents and applications identified
above, the Company has nine issued United States patents, seven pending United
States patent applications, three Patent Cooperation Treaty ("PCT")
applications, two granted foreign patents, and ten pending foreign patent
applications. Several of these patents and applications further address the
prevention, treatment and diagnosis of ED, while others are directed to
prevention and/or treatment of other types of sexual dysfunction, including
premature ejaculation in men, and female sexual dysfunction. One of the
Company's issued patents covers the Company's ACTIS(R) venous flow control
device. Other issued patents and pending patent applications focus on prevention
and/or treatment of conditions other than sexual dysfunction, including vascular
disorders such as peripheral vascular disease ("PVD"), hormone replacement
therapy, and contraception.
One of the Company's issued United States patents is directed to a method
for treating female sexual dysfunction with a topical or intravaginal
formulation containing a vasoactive prostaglandin. Since issuance of that
patent, another U.S. patent has been issued that claims a similar method wherein
an "E-series" prostaglandin is administered topically. That patent, U.S. Patent
No. 5,891,915 to Wysor et al., derives from a U.S. patent application that was
filed after the Company's patent application was filed. The Company believes
that its patent is dominant, and that the Wysor et al. patent will not have an
impact on the Company's plans to develop and market a prostaglandin formulation
for treating female sexual dysfunction. At this time, however, the issue has not
been determined with certainty, and there can be no assurance that the Company's
patent is in fact dominant.
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
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other pharmaceutical companies, is highly uncertain and involves complex legal
and factual questions. The claims of a U.S. or foreign patent application may be
denied or significantly narrowed, and patents that ultimately issue 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, inventors Nils G.
Kock et al., that is exclusively licensed to VIVUS. As a result of the
opposition proceeding, certain pharmaceutical composition claims in the European
patent were held unpatentable by the Opposition Division of the EPO. The
patentability of all other claims in the patent was confirmed, i.e., those
claims directed to the use of active agents in the treatment of ED, and to 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 the appeal.
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.
The Company was also the first to file a Notice of Opposition to Pfizer's
European patent application claiming the use of phosphodiesterase inhibitors to
treat erectile dysfunction. Numerous other companies have also opposed the
patent, and the Company will support these other entities in their oppositions
as necessary.
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.
In addition to its patent portfolio, 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 the agreements
will not be breached or 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.
UNCERTAINTY OF PHARMACEUTICAL PRICING AND REIMBURSEMENT
In the U.S. and elsewhere, sales of pharmaceutical products 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.
With the introduction of sildenafil, third party payors have begun to restrict
or eliminate reimbursement for erectile dysfunction treatments. While more than
70 percent of prescriptions in the U.S. for MUSE have been reimbursed by third
party payors since its commercial launch in January 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 healthcare providers are moving towards a managed care
system in which such providers contract to provide comprehensive healthcare
services, including prescription drugs, for a fixed cost per person. The Company
hopes to further qualify MUSE for reimbursement in the managed care environment.
However, the Company is unable to predict the reimbursement policies employed by
third party healthcare payors. Furthermore, reimbursement for MUSE could be
adversely affected by changes in reimbursement policies of governmental or
private healthcare payors.
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PRODUCT LIABILITY AND AVAILABILITY OF INSURANCE
The commercial launch of MUSE 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
potential side effects in the patient package insert and the physician package
insert, both of which are distributed with MUSE, 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 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 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 the Company's ability to increase
demand for its product in the U.S., the Company's ability to successfully sell
its product in the U.S. and internationally, variations in the Company's
financial results and its ability to obtain needed financing, announcements of
technological innovations or new products by the Company or its competition,
comments by security analysts, adverse regulatory actions or decisions, 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.
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 became 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
17
<PAGE> 18
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.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 5, 1998, the Company was named in a civil action filed in the
Superior Court of New Jersey. This complaint seeks specific performance and
other relief in connection with the Company's leased manufacturing facilities,
located in Lakewood, New Jersey. The Company's lease agreement requires that the
Company provide a removal security deposit in the form of cash or a letter of
credit. The Company and lessor ("plaintiff") have reached a tentative agreement
whereby the Company will provide an irrevocable letter of credit in the amount
of $3.3 million for such security deposit in the fourth quarter.
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, 1997 and December
9, 1997. The complaints alleged 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. 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. Five additional
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, 1997 and December 9, 1997. The federal complaints asserted the same
factual allegations as the state court complaints, but asserted legal claims
under the Federal Securities Laws. The federal court cases were consolidated,
and a lead plaintiff has been appointed and the plaintiff filed a consolidated
and amended complaint in 1998.
On May 4, 1999 the Company reached a settlement with plaintiffs of the
shareholder class action lawsuits described above. The aggregate settlement
amount is $6 million. The settlement is funded by insurance proceeds of $5.4
million and by the Company contributing 120,000 shares of VIVUS Common Stock to
the settlement fund.
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 AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. OTHER INFORMATION
None
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS (in accordance with Item 601 of Regulation S-K)
18
<PAGE> 19
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.2(7) Amended and Restated Certificate of Incorporation of the Company
3.3(4) Bylaws of the Registrant, as amended
3.4(8) Certificate of Designations of Rights, Preferences and Privileges
of Series A Participating Preferred Stock
4.1(7) Specimen Common Stock Certificate of the Registrant
4.2(7) Registration Rights, as amended
4.4(1) 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(8) 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
10.1(1)+ Assignment Agreement by and between Alza Corporation and the
Registrant dated December 31, 1993
10.2(1)+ Memorandum of Understanding by and between Ortho Pharmaceutical
Corporation and the Registrant dated February 25, 1992
10.3(1)+ Assignment Agreement by and between Ortho Pharmaceutical
Corporation and the Registrant dated June 9, 1992
10.4(1)+ License Agreement by and between Gene A. Voss, MD, Allen C.
Eichler, MD, and the Registrant dated December 28, 1992
10.5A(1)+ License Agreement by and between Ortho Pharmaceutical Corporation
and Kjell Holmquist AB dated June 23, 1989
10.5B(1)+ Amendment by and between Kjell Holmquist AB and the Registrant
dated July 3, 1992
10.5C(1) Amendment by and between Kjell Holmquist AB and the Registrant
dated April 22, 1992
10.5D(1)+ Stock Purchase Agreement by and between Kjell Holmquist AB and
the Registrant dated April 22, 1992
10.6A(1)+ License Agreement by and between Amsu, Ltd., and Ortho
Pharmaceutical Corporation dated June 23, 1989
10.6B(1)+ Amendment by and between Amsu, Ltd., and the Registrant dated
July 3, 1992
10.6C(1) Amendment by and between Amsu, Ltd., and the Registrant dated
April 22, 1992
10.6D(1)+ Stock Purchase Agreement by and between Amsu, Ltd., and the
Registrant dated July 10, 1992
10.11(4) Form of Indemnification Agreements by and among the Registrant
and the Directors and Officers of the Registrant
10.12(2) 1991 Incentive Stock Plan and Form of Agreement, as amended
10.13(1) 1994 Director Option Plan and Form of Agreement
10.14(1) Form of 1994 Employee Stock Purchase Plan and Form of
Subscription Agreement
10.17(1) Letter Agreement between the Registrant and Leland F. Wilson
dated June 14, 1991 concerning severance pay
10.21(3)+ Distribution Services Agreement between the Registrant and
Synergy Logistics, Inc. (a wholly-owned subsidiary of Cardinal
Health, Inc.)+ dated February 9, 1996
10.22(3)+ Manufacturing Agreement between the Registrant and CHINOIN
Pharmaceutical and Chemical Works Co., Ltd. dated December 20,
1995
10.22A(11)+ 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
10.23(6)+ Distribution and Services Agreement between the Registrant and
Alternate Site Distributors, Inc. dated July 17, 1996
10.24(5)+ Distribution Agreement made as of May 29, 1996 between the
Registrant and ASTRAZ AB
10.27(11)+ Distribution Agreement made as of January 22, 1997 between the
Registrant and Janssen Pharmaceutica International, a division of
Cilag AG International
10.27A(11)+ Amended and Restated Addendum 1091, dated as of October 29, 1997,
between VIVUS International Limited and Janssen Pharmaceutica
International
10.28(7) Lease Agreement made as of January 1, 1997 between the Registrant
and Airport Associates
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.29(7) Lease Amendment No. 1 as of February 15, 1997 between Registrant
and Airport Associates
10.29A(10) Lease Amendment No. 2 dated July 24, 1997 by and between the
Registrant and Airport Associates
10.29B(10) Lease Amendment No. 3 dated July 24, 1997 by and between the
Registrant and Airport Associates
10.31(9)+ Manufacture and Supply Agreement between Registrant and Spolana
Chemical Works, A.S. dated May 30, 1997
10.32A(11) Agreement between ADP Marshall, Inc. and the Registrant dated
December 19, 1997
10.32B(11) General Conditions of the Contract for Construction
10.32C(11) Addendum to General Conditions of the Contract for Construction
10.34(12)+ Agreement dated as of June 30, 1998 between Registrant and Alza
Corporation
10.35(12)+ Sales Force Transition Agreement dated July 6, 1998 between
Registrant and Alza Corporation
10.36(13) Form of, "Change of Control Agreements," dated July 8, 1998 by
and between the Registrant and certain Executive Officers of the
Company.
10.30A(13) Amendment of lease agreement made as of October 19, 1998 by and
between Registrant and 605 East Fairchild Associates, L.P.
10.37(13) Sublease agreement made as of November 17, 1998 between Caliper
Technologies, Inc. and Registrant.
10.22B(13)+ Amendment Two, dated as of December 18, 1998 by and between
VIVUS, Inc. and CHINOIN Pharmaceutical and Chemical Works Co.
10.31A(13)+ Amendment One, dated as of December 12, 1998 by and between
VIVUS, Inc. and Spolana Chemical Works, A.S.
27.1 Financial Data Schedule
</TABLE>
- ----------
+ Confidential treatment granted.
(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.
(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.
20
<PAGE> 21
(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.
(12) 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,
1998.
(13) 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,
1998.
(b) REPORTS ON FORM 8-K
(c) None.
21
<PAGE> 22
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:
November 12, 1999 /s/ RICHARD WALLISER
--------------------------------------------
Richard Walliser
Vice President and Chief Financial Officer
/s/ LELAND F. WILSON
--------------------------------------------
Leland F. Wilson
President and Chief Executive Officer
22
<PAGE> 23
VIVUS, INC.
INDEX TO EXHIBITS*
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
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.
23
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,553
<SECURITIES> 36,723
<RECEIVABLES> 2,216
<ALLOWANCES> (166)
<INVENTORY> 4,031
<CURRENT-ASSETS> 49,433
<PP&E> 36,567
<DEPRECIATION> (19,726)
<TOTAL-ASSETS> 66,274
<CURRENT-LIABILITIES> 33,054
<BONDS> 0
0
0
<COMMON> 32
<OTHER-SE> 27,552
<TOTAL-LIABILITY-AND-EQUITY> 66,274
<SALES> 6,745
<TOTAL-REVENUES> 6,420
<CGS> 2,840
<TOTAL-COSTS> 5,975
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 944
<INCOME-TAX> (47)
<INCOME-CONTINUING> 897
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 897
<EPS-BASIC> 0.03
<EPS-DILUTED> 0.03
</TABLE>
