<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 2000
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)
1172 CASTRO STREET
MOUNTAIN VIEW, CA 94040
(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, 2000, 32,246,413 shares of common stock were outstanding.
Exhibit Index on Page 25
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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, MARCH 31,
2000 1999
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenue
US product................................................ $ 5,758 $ 4,538
International product..................................... 2,038 1,716
Milestone................................................. -- 4,000
Returns Allowance......................................... (329) (500)
------- -------
Total revenue..................................... 7,467 9,754
------- -------
Operating Expenses
Cost of goods sold........................................ 2,927 3,603
Research and development.................................. 1,204 1,786
Selling, general and administrative....................... 2,217 1,352
Other restructuring costs................................. -- (500)
------- -------
Total operating expenses.......................... 6,348 6,241
------- -------
Income from operations...................................... 1,119 3,513
Interest and other income................................... 599 479
------- -------
Income before taxes.................................... 1,718 3,992
Income tax provision........................................ (172) (200)
------- -------
Net income............................................. $ 1,546 $ 3,792
======= =======
Net income per share:
Basic................................................ $ 0.05 $ 0.12
Diluted.............................................. $ 0.05 $ 0.12
Shares used in the computation of net income per share:
Basic................................................ 32,223 31,934
Diluted.............................................. 33,556 32,211
</TABLE>
2
<PAGE> 3
VIVUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
MARCH 31, MARCH 31,
2000 1999
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net Income.................................................. $1,546 $3,792
Other comprehensive income:
Unrealized gain (loss) on securities...................... 75 (65)
Income tax benefit (provision)............................ (7) 3
------ ------
68 (62)
------ ------
Comprehensive income........................................ $1,614 $3,730
====== ======
</TABLE>
3
<PAGE> 4
VIVUS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash...................................................... $ 13,207 $ 8,785
Available-for-sale securities............................. 23,671 27,049
Accounts receivable....................................... 2,532 4,432
Inventories............................................... 3,733 3,527
Prepaid expenses and other assets......................... 1,079 4,338
-------- --------
Total current assets.............................. 44,222 48,131
Property and equipment.................................... 15,555 16,071
Available-for-sale securities, non-current................ 5,534 4,558
-------- --------
Total............................................. $ 65,311 $ 68,760
======== ========
Current Liabilities:
Accounts payable.......................................... $ 1,172 $ 2,453
Accrued and other liabilities............................. 15,792 19,062
-------- --------
Current liabilities....................................... 16,964 21,515
Accrued and other long-term liabilities................... 5,125 5,749
-------- --------
Total liabilities................................. 22,089 27,264
-------- --------
Stockholders' equity:
Common stock; $.001 par value; shares authorized 200,000;
shares outstanding -- March 31, 2000, 32,246; December
31, 1999, 32,211;...................................... 32 32
Paid in capital........................................... 132,748 132,643
Accumulated other comprehensive income.................... (115) (190)
Accumulated deficit....................................... (89,443) (90,989)
-------- --------
Total stockholders' equity........................ 43,222 41,496
-------- --------
Total............................................. $ 65,311 $ 68,760
======== ========
</TABLE>
4
<PAGE> 5
VIVUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 1,546 $ 3,792
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Depreciation and amortization.......................... 777 828
Stock compensation costs............................... -- 109
Changes in assets and liabilities:
Accounts receivable.................................... 1,901 1,684
Inventories............................................ (206) 935
Prepaid expenses and other assets...................... 3,259 (139)
Accounts payable....................................... (1,281) (1,083)
Accrued and other liabilities.......................... (3,894) 6,415
-------- --------
Net cash provided by operating activities......... 2,102 12,541
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment purchases.......................... (261) (39)
Investment purchases...................................... (57,534) (24,403)
Proceeds from sale/maturity of securities................. 60,011 13,291
-------- --------
Net cash provided by (used for) investing
activities...................................... 2,216 (11,151)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of common stock options.......................... 104 49
-------- --------
Net cash provided by financing activities......... 104 49
-------- --------
NET INCREASE IN CASH........................................ 4,422 1,439
CASH:
Beginning of period....................................... 8,785 2,989
-------- --------
End of period............................................. $ 13,207 $ 4,428
======== ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Unrealized gain (loss) on securities...................... $ 75 $ (65)
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Income taxes paid......................................... $ 440 36
</TABLE>
5
<PAGE> 6
VIVUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
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,
2000 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2000. 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, 1999.
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, 1999 included
in the Company's Annual Report on Form 10-K). The restructuring reserve balance
at March 31, 2000 was $7.3 million, a decrease of $887,000 from $8.2 million at
December 31, 1999.
<TABLE>
<CAPTION>
SEVERANCE INVENTORY PROPERTY
AND EMPLOYEE AND RELATED AND RELATED MARKETING
COSTS COMMITMENTS COMMITMENTS COMMITMENTS OTHER TOTAL
(000'S) ------------ ----------- ----------- ----------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Restructuring Provision....... $ 3,069 $ 16,083 $ 34,684 $ 3,191 $ 3,708 $ 60,735
Incurred in 1998.............. (1,159) (10,699) (30,020) (1,884) (1,915) (45,677)
Incurred in 1999.............. (1,610) (1,379) (784) (1,307) (1,793) (6,873)
------- -------- -------- -------- ------- --------
Balance at December 31,
1999........................ 300 4,005 3,880 0 0 8,185
Incurred in first quarter
2000........................ (229) (500) (158) 0 0 (887)
------- -------- -------- -------- ------- --------
Balance at March 31, 2000..... $ 71 $ 3,505 $ 3,722 $ 0 $ 0 $ 7,298
======= ======== ======== ======== ======= ========
</TABLE>
The Company expects that over the next twelve months, it will make cash
payments of approximately $2.2 million related to the restructuring, with the
remaining $5.1 million to occur in later years.
3. ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities as of March 31, 2000 and December 31, 1999
consist of:
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
(000'S) -------------- -----------------
<S> <C> <C>
Restructuring................................. $ 7,298 $ 8,185
Product returns............................... 2,884 4,300
Income taxes.................................. 2,749 3,016
Research and clinical expenses................ 2,423 2,803
Royalties..................................... 2,358 2,312
Unearned revenue.............................. 296 1,930
Employee compensation and benefits............ 1,560 1,287
Other......................................... 1,349 978
------- -------
$20,917 $24,811
======= =======
</TABLE>
6
<PAGE> 7
VIVUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
4. NET INCOME PER SHARE
Net income 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 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. Certain
options are excluded from the diluted income per share for periods presented
because they are anti-dilutive.
5. 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 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 three months of 2000 and 1999, five customers accounted
for the following percentages of revenue:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Customer A.................................................. 27% 30%
Customer B.................................................. 15% 14%
Customer C.................................................. 14% 13%
Customer D.................................................. 14% 16%
Customer E.................................................. 11% 15%
</TABLE>
6. PRODUCT RETURNS
The product returns reserve at March 31, 2000 was $2.9 million, compared to
$4.3 million at December 31, 1999. During the first quarter of 2000, the Company
recorded an allowance of $329 thousand that was more than offset by actual
returns of expired product of $1.7 million.
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 the 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(R), 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. VIVUS has ongoing research and development ("R&D")
programs in male ED, female sexual dysfunction ("FSD"), male premature
ejaculation ("PE"), and it intends to pursue targeted technology acquisitions to
expand its R&D pipeline. The Company intends to market and sell its products
through distribution, co-promotion or license agreements with corporate
partners. In December 1999, the company filed a New Drug Application ("NDA")
with the U.S. Food and Drug Administration ("FDA") for ALIBRA(R), its second-
generation male ED treatment.
In November 1996, the Company obtained marketing clearance by the FDA to
manufacture and market its first product 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 more than 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.
During 1999, the Company streamlined its operations to align it more
closely with the Company's current and expected revenues. The Company achieved
profitability for all quarters in 1999, earning $0.58 per share for the year.
Cash, cash equivalents and available-for-sale securities at December 31, 1999
increased $16.5 million from December 31, 1998 to $40.4 million, while total
liabilities decreased $5.1 million during the same period, resulting in a
stronger balance sheet for operating the business and for investing in the
future. The Company was awarded five patents in the areas of FSD, ED and PE to
further build and strengthen our patent portfolio. The Company submitted an NDA
for ALIBRA, our second-generation treatment for ED, to the FDA in December 1999.
The Company also established a targeted sales force in the U.S. for MUSE during
1999.
FISCAL 2000
In the first quarter of 2000, the Company reported net income of $1.5
million, for $0.05 net income per diluted share. The Company continues to
strengthen its balance sheet, increasing cash by $2 million to $42.4 million
while reducing total liabilities by $5.2 million. The Company further solidified
its FSD intellectual property position through an exclusive agreement with
AndroSolutions, Inc. In addition, two new patents were awarded, one for local
administration of PDE5 inhibitors in treating erectile dysfunction and a second
patent covering oral and other administration routes of serotonin antagonists
for the treatment of premature ejaculation.
8
<PAGE> 9
RESULTS OF OPERATIONS
Three Months Ended March 31, 2000 and 1999
Product revenues for the quarter ended March 31, 2000 were $5.8 million in
the United States and $2.0 million internationally, compared to $4.5 million in
the United States and $1.7 million internationally for the quarter ended March
31, 1999. U.S. product revenue increased 27% in first quarter of 2000, compared
to the first quarter of 1999. Product shipments in the U.S. during the first
quarter are more reflective of current demand, as compared to the first quarter
of 1999 where wholesale inventory levels were much higher. As of March 31, 2000,
wholesale inventory levels, represent approximately one-half of one month's
supply. International product revenue of $2.0 million in the first quarter of
2000 include $1.7 million of product manufactured in the fourth quarter of 1999
and shipped to AstraZeneca in first quarter of 2000 to support MUSE sales during
the transition of marketing rights back to the Company. This compares with $1.7
million in international product sales for the first quarter of 1999.
International product sales are expected to decrease from current levels until
an international marketing partner for the AstraZeneca territories is engaged.
Total revenues in the first quarter of 1999 included a $4.0 million
milestone payment from AstraZeneca for the marketing approval of MUSE in Germany
and France. Total revenues in the first quarter of 1999 were reduced by the
returns allowance of $500 thousand, compared to $329 thousand in the first
quarter 2000.
Cost of goods sold was $2.9 million for the first quarter of 2000, compared
to $3.6 million for the first quarter 1999. This decrease was primarily the
result of production efficiencies and continued cost conservation efforts.
Research and development ("R&D") expenses for the first quarter of 2000
were $1.2 million, compared to $1.8 million in the first quarter of 1999. Lower
spending in the first quarter of 2000 is primarily attributed to timing of R&D
Projects in the development process. The Company anticipates that R&D expenses
will increase over current levels in the second half of 2000, as the Company
continues to progress in the development of its R&D pipeline.
Selling, general and administrative expense was $2.2 million for the first
quarter 2000, compared to $1.4 million in the first quarter of 1999. Higher
selling, general and administrative expense is mainly attributed to increased
investments in U.S. sales and marketing efforts.
The Company recorded a tax provision of ten percent (10%) of income before
taxes for the first quarter of 2000, compared with five percent (5%) recorded in
the same period of 1999. Both periods include 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.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed operations primarily from the
sale of preferred and common stock. Through March 31, 2000, VIVUS has raised
$153.9 million from financing activities and has an accumulated deficit of $89.4
million at March 31, 2000.
Cash, cash equivalents and available-for-sale securities totaled $42.4
million at March 31, 2000, compared with $40.4 million at December 31, 1999. The
$2.0 million increase in cash from December 31, 1999 primarily resulted in
payments received from AstraZeneca for other income ($3.3 million) and milestone
revenue ($2.0 million) recorded in the fourth quarter of 1999 and net income of
$1.5 million for the quarter. These increases were partially offset by the $5.2
million reduction in total liabilities.
Accounts receivable at March 31, 2000 were $2.5 million, compared with $4.4
million at December 31, 1999, a decrease of $1.9 million due primarily to
payment received from AstraZeneca for the milestone of $2 million related to the
marketing approval of MUSE in Italy.
Total liabilities were $22.1 million at March 31, 2000, compared with $27.3
million at December 31, 1999, a decrease of $5.2 million. The decrease primarily
relates to lower unearned revenue of $1.7 million
9
<PAGE> 10
associated with product shipments to AstraZeneca, net returns of expired product
of $1.4 million and lower accounts payable by $1.3 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 standby letter of credit in the
amount of $3.3 million for such security deposit.
10
<PAGE> 11
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.
The Company entered into an international marketing agreement with Janssen
to purchase the Company's products for resale in 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 addition, the Company filed a demand for arbitration against
Janssen pursuant to the terms of the Distribution Agreement seeking an award of
$3.9 million plus costs and interest in November 1999. There can be no assurance
that the filing of this demand will not have a negative impact on the Company's
relationship under this Agreement.
The Company entered into an international marketing agreement with ASTRA AB
(now "AstraZeneca") to purchase the Company's products for resale in Europe,
South America, Central America, Australia and New Zealand. In October 1999, the
marketing and distribution rights in these countries were returned to the
Company by AstraZeneca. The Company is currently evaluating alternative
strategic options regarding distribution of its products in 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.
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 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.
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
11
<PAGE> 12
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.
DEPENDENCE ON SINGLE SOURCE OF SUPPLY
The Company relies on a single injection molding company, The Kipp Group,
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., for sterilization of its product. There can be no assurance that
the Company will be able to identify and qualify additional sources of 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 plastic components or an additional
sterilization facility, it will be entirely dependent upon the existing supplier
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 and other potential products could
be delayed or prevented. An interruption in sterilization services or the
Company's supply of plastic components would have a material adverse effect on
the Company's business, financial condition and results of operations.
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.
In December 1999, the Company submitted an NDA for ALIBRA to the FDA. The
FDA may take up to 12 months to review the Company's submission, and may (1) ask
the Company to provide more data; (2) ask the Company to perform additional
clinical trials; or (3) not grant approval of the application. Even if ALIBRA is
approved, there can be no assurances that there will be a market for this
transurethral system to treat ED.
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. 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.
12
<PAGE> 13
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 the Company.
WRB maintains a staff of healthcare professionals to handle questions and
inquiries 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.
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.
FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FINANCING
The Company anticipates that its existing capital resources combined with
anticipated future revenues may not be sufficient to support the commercial
introduction of any new products and as such, it continually evaluates
alternative financing opportunities that may include joint ventures,
co-development, or licensing agreements 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.
HISTORY OF LOSSES AND LIMITED OPERATING HISTORY
The Company has generated a cumulative net loss of $89.4 million for the
period from its inception through March 31, 2000. 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. 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.
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.
13
<PAGE> 14
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 the restructuring measures taken 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.
LIMITED MANUFACTURING EXPERIENCE
The Company has limited experience in manufacturing and selling MUSE in
commercial quantities. The Company leases 90,000 square feet of space in New
Jersey in which it 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's drug products developed to treat ED, MUSE and ALIBRA, rely on
a single therapeutic approach, its transurethral system for erection. Failure to
successfully commercialize these products will have a material adverse effect on
the Company's business. The existence of side effects or dissatisfaction with
these products may impact a patient's decision to use or continue to use or a
physician's decision to recommend this therapeutic approach as a therapy for the
treatment of ED, thereby affecting the commercial viability of MUSE and ALIBRA.
In addition, technological changes or medical advancements could diminish
or eliminate the commercial viability of the Company's products.
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 FDA and equivalent foreign
regulatory agencies. The Company's product MUSE has received marketing clearance
in 49 countries to date.
The Company has submitted a New Drug Application ("NDA") for ALIBRA to FDA
and is applying for marketing authorization in the European countries via the
centralized procedure. There is no guarantee,
14
<PAGE> 15
however, that these applications will be approved. Failure to gain regulatory
approval for ALIBRA will prevent this product from being commercialized and will
have an adverse effect on the Company's business.
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'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.
In connection with routine inspection of the Company's New Jersey
manufacturing facility at 745 Airport Road, the FDA issued to the Company an FDA
Form 483 containing two observations. The observations identified specific areas
where the FDA viewed the Company's operations not to be in complete compliance
with current Good Manufacturing Practices ("cGMP") requirements. A detailed
response to the observations was submitted to the FDA on November 24, 1999.
Subsequently, the FDA indicated that the response submitted adequately addressed
the observations identified and no further action is required.
Failure to maintain satisfactory cGMP compliance would have a material
adverse effect on the Company's ability to continue to market and distribute its
products and, in the most serious cases, could result in the issuance of
additional Warning Letters, seizure or recall of products, civil fines or
closure of the Company's manufacturing facility until such cGMP compliance is
achieved.
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 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 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.
15
<PAGE> 16
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 one continuation application 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, the Netherlands, Spain, Sweden and Switzerland), New Zealand, South
Africa and South Korea, and foreign applications are pending in Canada, 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 ten issued United States patents, six pending
United States patent applications, one Patent Cooperation Treaty ("PCT")
applications, two granted foreign patents, and fourteen 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.
The Company has entered into an agreement with AndroSolutions, Inc., a
privately held biomedical corporation based in Knoxville, Tennessee, that holds
patents and applications complementary to the Company's patents and applications
directed to the treatment of FSD. Both the Company and AndroSolutions have
contributed their FSD patents and applications into a jointly formed limited
liability company, ASIVI, LLC, which exclusively licenses to VIVUS worldwide
rights to the common patents and applications, and will work to further develop
FSD products of interest to the Company.
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. The claims of a U.S.
or foreign patent application may be denied or
16
<PAGE> 17
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 a large
percentage 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.
17
<PAGE> 18
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.
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
18
<PAGE> 19
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.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the first quarter of 2000, the Company reached agreement with Oxford
Asymmetry International, plc. ("Oxford") to terminate a long-term supply
agreement for prostaglandin E1 ("alprostadil") that was executed on August 29,
1997, following the receipt of a notice of demand for arbitration from Oxford.
As a part of this agreement, the Company paid $500 thousand for a non-exclusive
license to use analytical and stability data related to alprostadil that was
provided by Oxford to the Company. The payment to Oxford did not impact the
Company's earnings for the quarter, as this amount was fully reserved for by the
Company as part of its 1998 restructuring.
On November 3, 1999, the Company filed a demand for arbitration against
Janssen with the American Arbitration Association pursuant to the terms of the
Distribution Agreement entered into on January 22, 1997. The Company seeks
compensation for inventory manufactured in 1998 in reliance on contractual
forecasts and orders submitted by Janssen. The Company also seeks compensation
for forecasts and order shortfalls attributed to Janssen in 1998, pursuant to
the terms of the Distribution Agreement. The Company seeks an award of $3.9
million plus costs and interest. On December 3, 1999, Janssen submitted its
response to the Company's arbitration demand denying liability. On January 3,
2000, each party designated an independent arbitrator. The designated
arbitrators will select a third neutral arbitrator, and a hearing is expected to
occur later this year.
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 standby letter of credit in the
amount of $3.3 million for such security deposit.
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
19
<PAGE> 20
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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS (IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K)
<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
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------------ -----------
<S> <C>
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
10.24A(14)++ Amended Distribution Agreement dated December 22, 1999
between AstraZeneca and the Registrant
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
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
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------------ -----------
<S> <C>
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.
10.38(14)++ License Agreement by and between ASIVI, LLC, AndroSolutions,
Inc., and the Registrant dated February 29, 2000
10.38A(14)++ Operating Agreement of ASIVI, LLC, between AndroSolutions,
Inc. and the Registrant dated February 29, 2000
10.39(14) Sublease agreement between KVO Public Relations, Inc. and
the Registrant dated December 21, 1999
27.1 Financial Data Schedule
</TABLE>
- ---------------
+ Confidential treatment granted.
++ Confidential treatment requested.
(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.
22
<PAGE> 23
(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.
(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.
(14) 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,
1999.
(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.
Date: May 12, 2000 VIVUS, Inc.
/s/ RICHARD WALLISER
--------------------------------------
Richard Walliser
Vice President and Chief Financial
Officer
/s/ LELAND F. WILSON
--------------------------------------
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.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 13,207
<SECURITIES> 29,205
<RECEIVABLES> 2,613
<ALLOWANCES> (81)
<INVENTORY> 3,733
<CURRENT-ASSETS> 44,222
<PP&E> 27,852
<DEPRECIATION> (12,297)
<TOTAL-ASSETS> 65,311
<CURRENT-LIABILITIES> 16,964
<BONDS> 0
0
0
<COMMON> 32
<OTHER-SE> 43,222
<TOTAL-LIABILITY-AND-EQUITY> 65,311
<SALES> 6,745
<TOTAL-REVENUES> 7,467
<CGS> 2,927
<TOTAL-COSTS> 6,348
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,718
<INCOME-TAX> (172)
<INCOME-CONTINUING> 1,546
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,546
<EPS-BASIC> 0.05<F1>
<EPS-DILUTED> 0.05
<FN>
<F1>For Purposes of this Exhibit, Primary Means Basic
</FN>
</TABLE>
