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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 JUNE 30, 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)
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)
(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 June 30, 2000, 32,338,821 shares of common stock were outstanding.
Exhibit Index on Page XX
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<PAGE> 2
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VIVUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
----------- ---------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue
US product $ 5,945 $ 5,239 $ 11,703 $ 9,778
International product 1,140 1,572 3,178 3,288
Milestone -- -- -- 4,000
Returns provision (338) (1,293) (667) (1,793)
-------- -------- -------- --------
Total revenue 6,747 5,518 14,214 15,273
Operating Expenses
Cost of goods sold 2,864 3,072 5,791 6,675
Research and development 1,209 1,762 2,413 3,548
Selling, general and administrative 2,282 1,554 4,499 2,907
Settlement of shareholder lawsuits -- 600 -- 600
Other restructuring costs -- (1,293) -- (1,793)
-------- -------- -------- --------
Total operating expenses 6,355 5,695 12,703 11,937
-------- -------- -------- --------
Income (loss) from operations 392 (177) 1,511 3,336
Interest and other income 597 484 1,196 963
-------- -------- -------- --------
Income before taxes 989 307 2,707 4,299
Income tax provision (99) (15) (271) (215)
-------- -------- -------- --------
Net income $ 890 $ 292 $ 2,436 $ 4,084
======== ======== ======== ========
Net income per share:
Basic $ 0.03 $ 0.01 $ 0.08 $ 0.13
Diluted $ 0.03 $ 0.01 $ 0.07 $ 0.13
Shares used in the computation of
net income per share:
Basic 32,304 32,066 32,249 32,000
Diluted 33,740 32,889 33,658 32,600
</TABLE>
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VIVUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ -------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net Income $ 890 $ 292 $ 2,436 $ 4,084
Other comprehensive income:
Unrealized gain (loss) on securities (1) 231 74 166
Income tax benefit (provision) -- (12) (7) (9)
----- ----- ------- -------
(1) 219 67 157
----- ----- ------- -------
Comprehensive income $ 889 $ 511 $ 2,503 $ 4,241
===== ===== ======= =======
</TABLE>
3
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VIVUS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash $ 14,127 $ 8,785
Available-for-sale securities 23,790 27,049
Accounts receivable 3,531 4,432
Inventories 3,395 3,527
Prepaid expenses and other assets 1,189 4,338
--------- ---------
Total current assets 46,032 48,131
Property and equipment 15,119 16,071
Available-for-sale securities, non-current 5,545 4,558
--------- ---------
Total $ 66,696 $ 68,760
========= =========
Current Liabilities:
Accounts payable $ 2,033 $ 2,453
Accrued and other liabilities 15,546 19,062
--------- ---------
Total Current liabilities 17,579 21,515
Accrued and other long-term liabilities 4,797 5,749
--------- ---------
Total liabilities 22,376 27,264
Stockholders' equity:
Common stock; $.001 par value; shares authorized
200,000; shares outstanding - June 30, 2000
32,339; December 31, 1999 32,211; 32 32
Paid in capital 132,956 132,643
Accumulated other comprehensive income (116) (190)
Accumulated deficit (88,552) (90,989)
--------- ---------
Total stockholders' equity 44,320 41,496
--------- ---------
Total $ 66,696 $ 68,760
========= =========
</TABLE>
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VIVUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
2000 1999
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,436 $ 4,084
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 1,219 1,654
Stock compensation costs -- 182
Issuance of common stock for lawsuit settlement -- 600
Changes in assets and liabilities:
Accounts receivable 901 2,679
Inventories 132 1,179
Prepaid expenses and other assets 3,149 (621)
Accounts payable (420) (1,473)
Accrued and other liabilities (4,468) 6,193
-------- --------
Net cash provided by operating activities 2,949 14,477
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment purchases (265) (75)
Investment purchases (96,114) (52,817)
Proceeds from sale/maturity of securities 98,460 40,345
-------- --------
Net cash provided by (used for) investing activities 2,081 (12,547)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of common stock options 181 133
Sale of common stock through employee
stock purchase plan 131 100
-------- --------
Net cash provided by financing activities 312 233
-------- --------
NET INCREASE IN CASH 5,342 2,163
CASH:
Beginning of period 8,785 2,989
-------- --------
End of period $ 14,127 $ 5,152
======== ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Unrealized gain on securities $ 74 $ 166
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Income taxes paid $ 524 36
</TABLE>
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VIVUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 and six-month periods
ended June 30, 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 June 30, 2000 was $6.1 million, a decrease of $2.1 million 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
------------ ----------- ----------- ----------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
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 -- -- 8,185
Incurred in first quarter 2000 ... (229) (500) (158) -- -- (887)
Incurred in second quarter 2000 .. 0 (1,015) (149) -- -- (1,164)
------- -------- -------- ------- ------- --------
Balance at June 30, 2000 ......... $ 71 $ 2,490 $ 3,573 $ -- $ -- $ 6,134
======= ======== ======== ======= ======= ========
</TABLE>
The Company expects that over the next twelve months, it will make cash
payments of approximately $1.3 million related to the restructuring, with the
remaining $4.8 million to occur in later years.
3. ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities as of June 30, 2000 and December 31, 1999, in
thousands, consist of:
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
Restructuring .......................... $ 6,134 $ 8,185
Product returns* ....................... 2,432 4,300
Income taxes ........................... 2,790 3,016
Research and clinical expenses ......... 2,377 2,803
Royalties .............................. 2,397 2,312
Unearned revenue ....................... 1,441 1,930
Employee compensation and benefits ..... 1,487 1,287
Other .................................. 1,285 978
------- -------
$20,343 $24,811
======= =======
</TABLE>
* During the first six months of 2000, the Company recorded a provision for
returns of $667 thousand that was more than offset by actual returns of
expired product of $2.5 million.
6
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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 six months of 2000 and 1999, five customers accounted for
the following percentages of revenue:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Customer A ..................................... 19% 10%
Customer B ..................................... 17% 9%
Customer C ..................................... 17% 9%
Customer D ..................................... 13% 47%
Customer E ..................................... 11% 6%
</TABLE>
7
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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 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 a leader in the development and
commercialization of innovative therapies for the treatment of sexual
dysfunction and urologic disorders in men and women. The Company developed and
manufactures the drug MUSE(R) and the medical device ACTIS(R), two innovations
in the treatment of erectile dysfunction ("ED"), also known as impotence. The
Company has filed for regulatory approval with the Food & Drug Administration
("FDA") and the European Agency for the Evaluation of Medicinal Products (EMEA)
for ALIBRA(R), its second-generation drug for the treatment of ED. The Company
anticipates initiating clinical studies with its female sexual dysfunction
("FSD") product, ALISTA(TM), during 2000. The Company also has ongoing research
and development ("R&D") programs in ED and premature ejaculation ("PE"), and
intends to pursue targeted technology acquisitions to expand its R&D pipeline.
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 product revenue of $129.3 million and a net profit of $36.6 million for
the year ended December 31, 1997.
During 1998, the Company experienced a significant decline (more than 80%)
in market demand for MUSE as a result of the introduction of a competitor's
product in April 1998. 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 continued to align its operations 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 investing in the future. The Company was awarded five
patents in the areas of FSD, ED and PE to further build and strengthen its
patent portfolio. The Company submitted a New Drug Application ("NDA") for
ALIBRA, its 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
FIRST QUARTER
The Company reported net income of $1.5 million, for $0.05 per diluted
share. The Company continued 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 agreement with AndroSolutions, Inc., whereby VIVUS has exclusive
global rights to develop and commercialize FSD technologies based on the
combined intellectual property pool.
The Company was awarded two new patents by the U.S. Patent & Trademark
Office. The first provides the Company with broad patent protection for
commercializing locally delivered PDE5 inhibitors, including the combination of
other active agents, for the treatment of ED. The second provides VIVUS with
broad patent protection for oral, topical, transdermal and transurethral
administration of serotonin antagonists, specifically 5-HT3 antagonists, to
treat PE in men.
SECOND QUARTER
The Company reported net income of $890 thousand, for $0.03 per diluted
share. Cash and available-for-sale securities increased $1.1 million to $43.5
million from March 31, 2000.
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<PAGE> 9
The Company filed for marketing authorization for ALIBRA with the EMEA
under the Centralized Procedure in Europe, which provides for marketing
authorization in all 15 European Union countries at one time.
The Company and Janssen Pharmaceutica International ("Janssen") agreed to
terminate the distribution agreement for MUSE entered into in 1997. The Company
and Janssen are working together to transition the countries in this territory
to Abbott, the Company's new international partner.
The Company signed a distribution and marketing agreement granting Abbott
Laboratories ("Abbott") exclusive rights for MUSE and ALIBRA covering all
international markets outside the U.S. This agreement also provides Abbott with
the option to co-develop and license future VIVUS transurethral products for the
treatment of ED in this territory.
The Company was added to the list of companies included in the Russell
2000(R) Small-Cap U.S. Equity Index, which is widely used as a benchmark for
both passive and active investment strategies.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
Product revenues for the quarter ended June 30, 2000 were $5.9 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 13% in the second quarter of 2000,
compared to the same period last year, and is more reflective of actual demand,
as wholesale inventory levels were much higher in 1999. During the twelve months
ended June 30, 2000, wholesale inventory levels have been approximately one-half
of one month's supply in the U.S. Lower international product revenue in the
second quarter 2000 is attributed to the transitioning of marketing and
distribution to a new international partner. The Company anticipates that it
will begin initial shipments of MUSE to Abbott during the third quarter of 2000
for certain European markets. International product revenue, however, is not
expected to change significantly from current levels until 2001.
Total revenues in the second quarter of 2000 were reduced by a returns
provision of $338 thousand for U.S. shipments, compared to $1.3 million in the
second quarter of 1999. Higher returns in 1999 are attributable to excess
inventories at wholesalers and retail pharmacies throughout most of 1998 and the
first half of 1999, resulting from the sharp decline in demand for MUSE in April
1998. During 2000, the provision for returns is management's estimate, based on
historical experience, of returns in the U.S. expected to occur in the future
related to shipments during this period.
Cost of goods sold was $2.9 million for the second quarter of 2000,
compared to $3.1 million for the second quarter 1999. Gross margin for product
sales increased by 14%, to 58%, in the second quarter of 2000 compared to the
same period last year. This increase in margin is primarily attributable to a
lower returns provision and a higher U.S. sales mix.
Research and development expenses for the second quarter of 2000 were $1.2
million, compared to $1.8 million in the second quarter of 1999. Lower spending
in the second 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 from the current levels when the Company begins clinical trials for its
FSD product, ALISTA, which are expected to start in the fourth quarter of this
year.
Selling, general and administrative expenses were $2.3 million for the
second quarter 2000, compared to $1.6 million in the second quarter of 1999.
This increase is mainly attributed to increased investment in U.S. sales and
marketing efforts.
The Company recorded a tax provision of ten percent (10%) of income before
taxes for the second 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.
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Product revenues for the six months ended June 30, 2000 were $11.7 million
in the United States and $3.2 million internationally, compared to $9.8 million
in the United States and $3.3 million internationally for the same period last
year. The 20% increase in U.S. product revenue is more reflective of actual
demand as wholesale inventory levels were much higher in 1999.
Total revenue for the six months ended June 30, 1999 includes $4.0 million
in milestone revenue related to marketing approval of MUSE in Germany and
France. The returns provision in the first half of 2000 of $667 thousand
reflects management's estimate of
9
<PAGE> 10
returns expected to occur in the future related to shipments during this period.
In 1999, the returns provision of $1.8 million was higher mainly due to the
excess inventories at wholesalers and retailers discussed above.
Cost of goods sold was $5.8 million for the six months ended June 30, 2000,
compared to $6.7 million for the same period of 1999. Gross margin for product
sales increased by 18%, to 59%, in the first half of 2000 compared to the same
period last year. This increase in margin is primarily attributable to a lower
returns provision, a higher U.S. sales mix, and production efficiencies.
Research and development expenses for the six months ended June 30, 2000
were $2.4 million, compared to $3.5 million in the same period of 1999 when the
Company was completing its Phase III clinical studies for ALIBRA.
Selling, general and administrative expense was $4.5 million for the six
months ended June 30, 2000, compared to $2.9 million in the same period of 1999.
This increase 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 six-month period 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 June 30, 2000, VIVUS has raised
$154.1 million from financing activities and has an accumulated deficit of $88.6
million at June 30, 2000.
Cash, cash equivalents and available-for-sale securities totaled $43.5
million at June 30, 2000, compared with $40.4 million at December 31, 1999. The
$3.1 million increase is primarily due to net income of $2.4 million for the six
months and payments received from AstraZeneca of $5.5 million ($3.3 million
other income and $2 million milestone revenue, and $200 thousand for trade
accounts receivable) recorded as revenue in the fourth quarter of 1999. These
increases were partially offset by the $4.9 million reduction in total
liabilities. During the third quarter of 2000, the Company expects to issue an
irrevocable standby letter of credit for $3.3 million in connection with its
leased manufacturing facilities. Upon issuance, this amount will become
restricted and not available for use in operations. This restriction will remain
through the end of the lease term, including any renewals.
Accounts receivables at June 30, 2000 were $3.5 million, compared with $4.4
million at December 31, 1999, a decrease of $901 thousand. This decrease is
primarily the result of the receipt of a $2 million milestone payment from
AstraZeneca for approval of MUSE in Italy, partially offset by an increase in
trade receivables from product shipments.
Total liabilities were $22.4 million at June 30, 2000, compared with $27.3
million at December 31, 1999, a decrease of $4.9 million. The decrease is
primarily due to payments made associated with the restructuring reserve of $2.1
million and actual returns of expired product of $2.5 million.
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<PAGE> 11
RISK FACTORS
LIMITED SALES AND MARKETING EXPERIENCE
The Company supports MUSE sales in the U.S. through physician and patient
information/help lines, targeted 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. After the launch of Viagra in April 1998, demand for MUSE has declined
more than eighty percent in the U.S. There can be no assurance that demand for
the Company's product MUSE will not decline further. The Company has filed an
NDA with the FDA for its second ED product, ALIBRA. Pending FDA approval, there
can be no assurance that the Company will be able to adequately support sales of
ALIBRA in the U.S. The Company is currently evaluating alternative strategic
options regarding distribution of ALIBRA in the U.S. There can be no assurance
that the Company's options are viable, or that the Company will be able to
successfully implement those options.
In June 2000, the Company entered into an agreement granting Abbott
Laboratories exclusive marketing and distribution rights for MUSE and ALIBRA
(pending regulatory approval) in all countries outside the United States. This
agreement does not have minimum purchase commitments and the Company is entirely
dependent on Abbott's efforts to distribute and sell the Company's products
effectively in all markets except the United States. There can be no assurance
that such efforts will be successful or that Abbott will continue to support the
product.
INTENSE COMPETITION
Competition in the pharmaceutical and medical products industries is
intense and is characterized by extensive research efforts and rapid
technological progress. Certain treatments for 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 ED 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 abilities 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, 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, 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. Until the Company
secures and qualifies additional sources of plastic components or an additional
sterilization facility, it is 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
11
<PAGE> 12
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 new
drug products rapidly. The process of developing new drugs and/or therapeutic
products is inherently complex and uncertain. The Company must make long-term
investments and commit significant resources before knowing whether its
development initiative programs will eventually result in products that will
receive regulatory approval and achieve market acceptance. After the FDA and
international regulatory authorities approve 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 existing 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 to the FDA to market ALIBRA.
The FDA may take up to 12 months or longer to review and approve the Company's
application, 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
this transurethral system to treat ED will be successful in the marketplace.
In May 2000, the Company filed for marketing authorization for ALIBRA with
the European Agency for the Evaluation of Medicinal Products (EMEA) under the
Centralized Process in Europe. The Company's application with the EMEA does not
guarantee approval, and the EMEA 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 this transurethral system to treat ED will be successful in the
marketplace.
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.
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 the 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.
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<PAGE> 13
HISTORY OF LOSSES AND LIMITED OPERATING HISTORY
The Company has generated a cumulative net loss of $88.6 million for the
period from its inception through June 30, 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.
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. The Company expects the gross margin from sales
of MUSE to 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.
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, 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 four United States patents deriving
from patent applications originally filed by Alza, covering inventions of Dr.
Virgil Place made while he was an employee of Alza. The patents are directed to
dosage forms for administering a therapeutic agent to the urethra, methods for
treating ED, and specific drug formulations that can be delivered
transurethrally for the treatment of ED. With one exception, the patents derive
from patent applications that were filed in the United States prior to June 8,
1995, and will therefore have a seventeen-year patent term calculated from the
date of patent grant. Foreign patents have been granted in Australia, Europe
(including Austria, Belgium, Denmark, France, Germany, Great Britain, Greece,
Ireland, Italy, Luxembourg, the Netherlands, Spain, Sweden and Switzerland),
Finland, Ireland, New Zealand, Norway, Portugal, 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 twelve issued United States patents, six pending United
States patent applications, three granted foreign patents, and fifteen pending
foreign patent applications. Several of these patents and applications further
address the prevention, treatment and diagnosis of ED, while others are directed
to
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<PAGE> 14
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.
The Company entered into an agreement with AndroSolutions, Inc., a
privately held biomedical corporation based in Knoxville, Tennessee, that owns
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 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, that the Company will have adequate remedies for any
breach, or that the Company's trade secrets will not otherwise become known or
be independently developed by competitors. In addition, protracted and costly
litigation may be necessary to enforce and determine the scope and validity of
the Company's proprietary rights.
DEPENDENCE ON THE COMPANY'S TRANSURETHRAL SYSTEM FOR ERECTION
MUSE and ALIBRA, drug products developed by the Company to treat ED, rely
on a single therapeutic approach, a 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
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<PAGE> 15
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.
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.
GOVERNMENT REGULATION AND UNCERTAINTY OF PRODUCT APPROVALS
The Company's research, preclinical development, clinical studies,
manufacturing and marketing of its products are subject to rigorous testing and
extensive regulation 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 the
FDA and is applying for marketing authorization in the European countries via
the centralized procedure. There is no guarantee, 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. 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 require safety and
efficacy data that will entail 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 result
in fines, suspensions of regulatory approvals, product recalls, operating
restrictions and criminal prosecution, among other things. 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.
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.
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<PAGE> 16
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 by certain state and
foreign regulatory agencies for compliance with cGMP requirements 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 requirements 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.
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.
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.
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.
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
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<PAGE> 17
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 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.
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<PAGE> 18
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 19, 2000, the Company was named, along with other defendants, in a
civil action filed in the Superior Court of New Jersey. The Complaint in this
action alleges that plaintiff was the victim of sexual harassment during the
second quarter of 1998, while she was working as a temporary worker for the
Company at a facility operated by Paco Pharmaceutical Services, Inc. At the
time, the Company was leasing space and workers from Paco to assist it with the
manufacture of the Company's product, MUSE. The complaint alleges hostile work
environment, and quid pro quo sexual harassment, and seeks compensatory and
punitive damages. The Company denies liability, and intends to defend the case
vigorously. At this early stage in the litigation, it is not possible to predict
the outcome of the suit with any degree of certainty. In addition, plaintiff has
not yet provided the Company with information concerning the extent of her
alleged damages, so it is not possible to estimate the extent of any loss in the
event plaintiff prevails against the Company. Nevertheless, an adverse judgment
in this litigation is not expected to have a material impact on the Company's
financial position.
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. On December 3, 1999, Janssen submitted
its response to the Company's arbitration demand denying liability. On June 29,
2000, Janssen filed an amended response that included counterclaims against
Vivus for $1.8 million based on the Company's alleged improper calculation of
its Cost of Goods charged to Janssen pursuant to the Distribution Agreement.
Although the Company has yet to file its response to the counterclaims, Vivus
believes they are without merit and intends to defend against them vigorously.
The Company intends to amend its arbitration demand to include claims for lost
profits due to Janssen's failure to use the requisite diligence and reasonable
efforts to gain regulatory approval for and launch MUSE in each country of the
Territory. The Company also intends to include claims based on Janssen's
development of a competing product intended for use in the treatment of male ED,
in violation of the Distribution Agreement. The Company's amended demand will
seek an award of $7.9 million plus costs and interest. Administration of the
arbitration has been transferred to JAMS and a three-member arbitration panel
has been selected. The parties are currently in the process of conducting
discovery and anticipate a hearing in January of 2001.
On October 5, 1998, the Company was named in a civil action filed in the
Superior Court of New Jersey by its landlord. This Complaint sought 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 litigation was dismissed on the
Company's motion for summary judgment, and the parties were directed to proceed
to arbitration to determine the amount of removal security to be posted. The
Company and its landlord have reached a tentative agreement whereby the Company
expects to post removal security in the amount of approximately $3.3 million
through an irrevocable standby letter of credit during the third quarter of
2000.
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
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<PAGE> 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held on May 31, 2000. Matters voted
on at that meeting were: (i) the election of six directors; (ii) amendment to
the 1994 Employee Stock Purchase Plan; and (iii) the confirmation of the
appointment of Arthur Andersen LLP as independent public accountants for the
fiscal year ended December 31, 2000. Tabulations for each proposal and
individual director were as follows:
Proposal I. Election of Directors
DIRECTOR FOR WITHHELD
-------- ----------- --------
Virgil A. Place, MD 28,689,271 545,663
Leland F. Wilson 28,735,684 499,250
Mark B. Logan 28,701,687 533,247
Linda M. Shortliffe, MD 28,699,086 535,848
Mario M. Rosati 28,750,714 484,220
Joseph E. Smith 28,719,621 515,313
Proposal II. Amendment to the 1994 Employee Stock Purchase Plan
FOR AGAINST ABSTAIN NO VOTE
--- ------- ------- -------
27,830,642 1,214,352 189,940 --
Proposal III. Confirmation of the Appointment of Arthur Andersen LLP
FOR AGAINST ABSTAIN NO VOTE
--- ------- ------- -------
28,750,908 357,923 126,103 --
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
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
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
10.24A(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 the Registrant 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
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.
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
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
10.40(15)++ License and Supply Agreement made as of May 23, 2000
between the Registrant and Abbott Laboratories, Inc.
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.
(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.
21
<PAGE> 22
(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.
(15) 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,
2000.
(b) REPORTS ON FORM 8-K
None
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 10, 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
23
<PAGE> 24
VIVUS, INC.
INDEX TO EXHIBITS*
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
10.40 License and Supply Agreement made as of May 23, 2000 between the
Registrant and Abbott Laboratories, Inc.
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.
24
