<PAGE> 1
This filing is made pursuant to Rule 424(a)
under the Securities Act of 1933 in
connection with Registration No. 333-14321
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED OCTOBER 21, 1996
PROSPECTUS
4,000,000 SHARES
LOGO
COMMON STOCK
------------------------
All of the shares of common stock, no par value ("Common Stock"), offered
hereby are being issued and sold by Dura Pharmaceuticals, Inc. (the "Company").
The Common Stock is traded on the Nasdaq National Market under the symbol
"DURA." On October 21, 1996, the last sale price of the Common Stock as reported
on the Nasdaq National Market was $33 1/2 per share. See "Price Range of Common
Stock."
SEE "RISK FACTORS" ON PAGES 8 TO 14 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
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Per Share...................... $ $ $
- -------------------------------------------------------------------------------------------------
Total(3)....................... $ $ $
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities under the Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses of the offering estimated at $350,000 payable by
the Company.
(3) The Company has granted the Underwriters an option exercisable within 30
days to purchase up to an aggregate of 600,000 shares of Common Stock to
cover over-allotments, if any. If such option is exercised, the total Price
to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if issued to and accepted by them, subject to approval
of certain legal matters by counsel for the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about November , 1996.
------------------------
MERRILL LYNCH & CO.
HAMBRECHT & QUIST
OPPENHEIMER & CO., INC.
ROBERTSON, STEPHENS & COMPANY
------------------------
The date of this Prospectus is November , 1996.
<PAGE> 2
D U R A ' S C U R R E N T P R O D U C T L I N E
The U.S. respiratory
market is the focus of
Dura's strategy. Dura
divides this market into
two primary submarkets:
1) asthma and COPD
2) allergy, cough and cold
These classes of
respiratory ailments are
treated by the 30 products
in Dura's portfolio.
Twenty-two of these
products are owned and
promoted by Dura, six are
marketed under licensing
agreements with Eli Lilly
and Company, Sanofi-
Winthrop, Inc., and two
[PHOTO OF PRODUCTS] are co-promoted with
Bausch & Lomb
Pharmaceuticals, Inc. and
Schering Corporation.
Dura's products are
promoted to key
specialists, including
allergists, pulmonologists
and ENTs, as well as to
high prescribing
generalists and
pediatricians who treat a
large number of allergy
and asthma patients.
R E C E N T A C Q U I S I T I O N S
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[PHOTO OF ENTEX(R)] [PHOTO OF CECLOR(R) CD AND KEFTAB(R)]
Dura acquired the U.S. rights to two
respiratory antibiotics, Keftab(R) and
Ceclor(R) CD, from Eli Lilly and Company
In July 1996, Dura purchased the Entex(R) in September 1996. In 1995, Keftab(R) had
line of cough/cold products from Procter & existing sales of about $15 million. Dura
Gamble Pharmaceuticals, Inc. will launch Ceclor(R) CD in October 1996.
</TABLE>
<PAGE> 3
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files annual and quarterly reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information may be inspected at the
Commission's Public Reference Section, Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, as well as at the Commission's regional offices at 7
World Trade Center, 13th Floor, New York, New York 10048; and at Citicorp
Center, 500 West Madison Street, Room 1400, Chicago, Illinois 60661-2511. Copies
of such material can also be obtained at prescribed rates at the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. In addition, the Commission maintains a World Wide Web site on the
Internet at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The Common Stock of the Company is traded on the Nasdaq
National Market.
INFORMATION INCORPORATED BY REFERENCE
The following documents filed by the Company with the Commission are hereby
incorporated by reference in this Prospectus: (1) the Annual Report of the
Company on Form 10-K for the fiscal year ended December 31, 1995, as amended;
(2) the Quarterly Report of the Company on Form 10-Q for the quarter ended March
31, 1996; (3) the Quarterly Report of the Company on Form 10-Q for the quarter
ended June 30, 1996; (4) the Quarterly Report of the Company on Form 10-Q for
the quarter ended September 30, 1996; (5) the Proxy Statement of the Company
dated April 29, 1996 in connection with the Annual Meeting of Shareholders held
on May 29, 1996; (6) the Current Report of the Company on Form 8-K filed on
January 9, 1996, as amended; (7) the Current Report of the Company on Form 8-K
dated July 3, 1996; (8) the Current Report of the Company on Form 8-K dated
September 5, 1996; and (9) the description of the Company's Common Stock
contained in its Registration Statement on Form 8-A filed on January 21, 1992.
All reports and other documents subsequently filed by the Company pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of this offering shall be deemed to be
incorporated by reference herein and to be a part hereof from the date of filing
of such reports and documents. Any statement incorporated herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent that
a statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request of such person, a copy of
any or all of the foregoing documents incorporated herein by reference (other
than exhibits to such documents, unless such exhibits are specifically
incorporated by reference into any such document). Requests for such documents
should be submitted in writing to Mitchell R. Woodbury, Vice President and
General Counsel, at Dura Pharmaceuticals, Inc., 5880 Pacific Center Boulevard,
San Diego, California 92121 or by telephone at (619) 457-2553.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF
THE COMPANY ON NASDAQ IN ACCORDANCE WITH RULE 10b-6A UNDER THE SECURITIES
EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
3
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
incorporated by reference and appearing elsewhere in this Prospectus, including
the information under "Risk Factors." Except as otherwise noted, all information
in this Prospectus assumes no exercise of the Underwriters' over-allotment
option. This Prospectus contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed under "Risk Factors," as well as those
discussed elsewhere in this Prospectus.
THE COMPANY
Dura Pharmaceuticals, Inc. ("Dura" or the "Company") is a specialty
respiratory pharmaceutical and pulmonary drug delivery company. The Company is
engaged in marketing prescription products to physicians in the U.S. who treat
patients suffering from asthma, hay fever, chronic obstructive pulmonary disease
("COPD"), the common cold and related respiratory ailments (the "U.S.
Respiratory Market"). Dura has strategically focused on the U.S. Respiratory
Market because of its size (approximately $4.8 billion in sales in 1995) and
growth opportunities. Additionally, the fragmented nature of the market and the
identifiable base of physician prescribers allow the Company to achieve
significant market penetration with a specialized sales force. The Company
currently markets 30 prescription products, including 26 which are off-patent.
The Company also has a separate mail service pharmacy which dispenses
respiratory pharmaceuticals, Health Script Pharmacy Services, Inc. ("Health
Script").
Dura employs a dual marketing strategy utilizing its focused field sales
force of approximately 150 people and a dedicated managed care sales and
marketing group that covers managed care organizations and retail pharmacy
chains. Dura's field sales force targets a physician base which includes
approximately 60,000 U.S. allergists, ear, nose and throat physicians ("ENTs"),
pulmonologists and a selected subset of pediatricians and generalist physicians,
who the Company believes collectively write approximately 70% of respiratory
pharmaceutical prescriptions. Dura believes that its field sales force calls on
approximately one-half of the target physician base. The Company's managed care
sales and marketing group concentrates on sales to large regional and national
managed care organizations. The Company expects to continue expanding both the
field sales force and the managed care sales and marketing group as warranted by
market opportunities. During 1995, in addition to building its existing business
of dispensing respiratory pharmaceuticals through home healthcare providers,
Health Script launched a new program under the name "Healthco HomeRx" in which
the Dura field sales force provides information concerning the services of
Health Script to Dura's targeted physician base.
This marketing strategy has allowed Dura to leverage its distribution
capabilities by acquiring the rights to market additional prescription
pharmaceutical products through acquisition, in-license or co-promotion
arrangements. Since 1992, the Company has acquired 21 products targeted at the
U.S. Respiratory Market. In July 1996, the Company acquired from Procter &
Gamble Pharmaceuticals, Inc. ("P&G") worldwide rights to the Entex products,
consisting of four prescription upper respiratory drugs. In September 1996, the
Company acquired from Eli Lilly and Company ("Lilly") U.S. marketing rights to
the antibiotics Keftab and Ceclor CD. The Company began marketing Keftab in
September 1996, and expects to launch Ceclor CD in late October 1996.
The Company is developing or has contracted for the development of four
currently-marketed respiratory prescription pharmaceuticals. Three of these
products are being developed by Elan Corporation, plc ("Elan") as part of its
collaborative relationship with the Company and utilize Elan's drug delivery
expertise and proprietary technologies. The fourth product is being developed
internally.
Another key component of Dura's strategy is to develop the Spiros pulmonary
drug delivery system ("Spiros"). Spiros is being designed to aerosolize
pharmaceuticals in dry powder formulations for delivery to the lungs while
providing certain advantages over other currently-used methods of pulmonary drug
delivery.
4
<PAGE> 5
The Company has a three-level development program for Spiros which entails (i)
developing, on behalf of Spiros Development Corporation ("Spiros Corp."),
certain drug applications for use in Spiros, including in the near-term
albuterol, beclomethasone and ipratropium, three of the most
frequently-prescribed pharmaceutical agents to treat respiratory conditions,
and, in the longer term, certain proteins and peptides, (ii) licensing Spiros
primarily to pharmaceutical companies, including Mitsubishi Chemical Corporation
("Mitsubishi") and Fujisawa Pharmaceutical Co., Ltd. ("Fujisawa"), generally for
use with certain of their proprietary respiratory products, and (iii) developing
Spiros, in collaboration with third parties, for the systemic delivery of
compounds through the lungs for respiratory and non-respiratory indications as
an alternative to current invasive delivery techniques. The Company has licensed
certain rights to Spiros Corp. to continue a significant portion of the
development program for Spiros, including funding of ongoing and future clinical
trials of albuterol and beclomethasone in a cassette version of Spiros, and
formulation, preclinical development and clinical trials of albuterol,
beclomethasone and ipratropium in a blisterdisk version of Spiros. The Company
has the right to purchase all of the currently outstanding shares of callable
common stock of Spiros Corp. through December 31, 1999 at predetermined prices
(the "Purchase Option").
In April 1996, Dura completed dosing of subjects in a clinical trial in the
U.S. on behalf of Spiros Corp. focusing on dose selection using a formulation of
powdered albuterol with Spiros under an Investigational New Drug ("IND")
application filed with the United States Food and Drug Administration ("FDA").
In July 1996, the Company commenced long-term and short-term clinical trials
which, along with earlier studies, are intended to serve as the basis for the
filing of a New Drug Application ("NDA") by Dura in 1997 seeking FDA approval,
on behalf of Spiros Corp., to market albuterol in the Spiros cassette system.
The Company is also preparing an IND application for U.S. studies on
beclomethasone in the Spiros cassette system which will be filed on behalf of
Spiros Corp. In addition, Dura, on behalf of Spiros Corp., has performed powder
formulation work with the peptide drug salmon calcitonin which in a pilot
clinical trial demonstrated the ability to develop macromolecule aerosol powder
formulation which achieved systemic delivery using the Spiros technology.
The Company was incorporated under the laws of California in 1981. The
Company's principal executive offices are located at 5880 Pacific Center
Boulevard, San Diego, California 92121. Its telephone number is (619) 457-2553.
RECENT DEVELOPMENTS
In July 1996, the Company acquired the Entex line consisting of four
prescription upper respiratory drugs from P&G. In September 1996, the Company
acquired the U.S. rights to the cephalosporin antibiotics Keftab and Ceclor CD
from Lilly. The U.S. antibiotic market was $4.8 billion in 1995, of which $1.6
billion was accounted for by cephalosporin antibiotics. The Company believes
that this acquisition complements its existing strategy since approximately 70%
of antibiotics are prescribed for respiratory infections. Keftab is an
antibiotic indicated for respiratory tract, skin and soft tissue infections.
Ceclor CD is a twice-a-day dosage form of cefaclor typically taken for seven
days. Ceclor, Lilly's currently marketed cefaclor, is normally taken three times
a day for 10 days, and generated $161.0 million in sales in the U.S. for the 12
months ended June 30, 1996. The Company expects to launch Ceclor CD in late
October 1996. The Company believes these product acquisitions further its
strategy of acquiring prescription pharmaceuticals which are marketed by its
sales force to its targeted physicians. To support the introduction and growth
of these products, the Company intends to increase its field sales force from
approximately 150 people currently to approximately 250 people by mid-1997.
The Company recently reported revenues and net income of $63.3 million and
$14.5 million, respectively, for the nine months ended September 30, 1996,
compared to $35.7 million and $4.4 million, respectively, for the comparable
period of 1995. Increased revenues and net income were primarily the result of
increased sales of newly-acquired products, higher revenues at Health Script and
increased contract revenues.
5
<PAGE> 6
RISK FACTORS
In addition to the other information contained in this Prospectus, the
discussion of risk factors on pages 8 through 14 of this Prospectus should be
considered carefully in evaluating an investment in the Common Stock. The risks
of investing in the Common Stock include the following factors: "Reduction in
Gross Margins;" "Third-Party Reimbursement; Pricing Pressures;" "Dependence on
Acquisition of Rights to Pharmaceutical Products;" "Development Risks Associated
With Spiros;" "Risks Associated With Recent Acquisitions;" "Customer
Concentration; Consolidation of Distribution Network;" "Seasonality and
Fluctuating Quarterly Results;" "Competition;" "Dependence on Third Parties;
Limited Manufacturing Experience;" "Managing Growth of Business;" "Uncertainty
of Profitability; Need for Additional Funds;" "Potential Exercise of Purchase
Options for Spiros Corp. Callable Common Stock and Albuterol Product; Dilution;"
"Government Regulation; No Assurance of FDA Approval;" "Patents and Proprietary
Rights;" "Product Liability and Recall;" "Attraction and Retention of Key
Personnel;" "Volatility of the Company Stock Price;" "Absence of Dividends;"
"Change in Control;" "Proposition 211;" and "Forward-Looking Statements."
THE OFFERING
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Common Stock offered hereby........................... 4,000,000 shares
Common Stock to be outstanding after this offering.... 41,741,578 shares(1)
Use of Proceeds....................................... To acquire, in-license, co-promote,
develop and commercialize
pharmaceuticals or to acquire
companies developing and/or marketing
such pharmaceuticals; to fund product
development programs, including
Spiros; and for working capital and
facilities expansion. See "Use of
Proceeds."
Nasdaq National Market Symbol......................... DURA
</TABLE>
- ---------------
(1) Excludes (a) 2,899,605 shares of Common Stock issuable upon the exercise of
options outstanding at September 30, 1996 under the Company's stock option
plan, (b) 851,081 shares of Common Stock available for future grants under
such plan and (c) 4,696,624 shares of Common Stock issuable upon exercise
of warrants outstanding at September 30, 1996. See "Capitalization" and
"Description of Capital Stock."
6
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
FISCAL YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
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CONSOLIDATED STATEMENT OF
OPERATIONS DATA:(1)
Sales.............................. $ 5,546 $ 9,561 $15,816 $22,199 $ 39,308 $27,139 $45,900
Contract revenues.................. -- -- 2,297 10,481 12,194 8,556 17,407
Total revenues............ 5,546 9,561 18,113 32,680 51,502 35,695 63,307
Operating income (loss)(2)......... (3,302) (7,016) (8,240) 1,456 (37,252) 3,501 12,173
Net income (loss)(2)............... (4,392) (6,769) (8,173) 1,936 (35,778) 4,435 14,471
Net income (loss) per share
(primary)(2)(3).................. (0.46) (0.47) (0.55) 0.10 (1.53) 0.16 0.37
Weighted average number of common
and common equivalent
shares(3)........................ 9,506 14,506 14,988 19,860 23,440 27,324 38,890
</TABLE>
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<CAPTION>
SEPTEMBER 30, 1996
---------------------
DECEMBER 31, AS
1995 ACTUAL ADJUSTED(4)
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CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments................. $ 67,820 $ 87,238 $214,690
Working capital................................................... 59,717 66,551 194,003
Total assets...................................................... 143,997 334,556 462,008
Long-term obligations (excluding current portion of long-term
obligations).................................................... 15,427 9,300 9,300
Shareholders' equity.............................................. 109,097 279,356 406,808
</TABLE>
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(1) Summary Consolidated Financial Information includes Health Script subsequent
to its acquisition on March 22, 1995, Dura Delivery Systems, Inc. ("DDSI")
subsequent to its acquisition on December 29, 1995, the Rondec product line
subsequent to its acquisition on June 30, 1995, the Entex product line
subsequent to its acquisition on July 3, 1996 and the Ceclor CD and Keftab
products subsequent to their acquisition on September 5, 1996. See Notes 10
and 11 of the Notes to Consolidated Financial Statements.
(2) In 1993 and 1995, the Company incurred charges for purchase options and
acquired in-process technology totaling $2.3 million and $43.8 million,
respectively. If these charges were excluded, Dura would have reported a
net loss of $5.9 million, or $0.39 per share, for 1993 and net income of
$8.0 million, or $0.28 per share, in 1995. See Notes 10 and 11 of the Notes
to Consolidated Financial Statements.
(3) Adjusted for a two-for-one stock split paid in the form of a 100% stock
dividend effective July 1, 1996. For additional information relating to net
income (loss) per share and common equivalent shares, see Note 2 of the
Notes to Consolidated Financial Statements.
(4) Adjusted to give effect to the sale of 4,000,000 shares of Common Stock by
the Company hereunder and the receipt of the net proceeds therefrom at an
assumed public offering price of $33.50 per share. See "Use of Proceeds."
7
<PAGE> 8
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. In addition to the other information contained in this Prospectus,
prospective investors should carefully consider the following risk factors
before purchasing the Common Stock offered hereby.
Reduction in Gross Margins. There is no proprietary protection for most of
the products sold by the Company and substitutes for such products are sold by
other pharmaceutical companies. The Company expects average selling prices for
many of its products to decline over time due to competitive and reimbursement
pressures. While the Company will seek to mitigate the effect of this decline in
average selling prices, there can be no assurance that the Company will be
successful in these efforts. See "Business -- Competition."
Third-Party Reimbursement; Pricing Pressures. The Company's commercial
success will depend in part on the availability of adequate reimbursement from
third-party health care payors, such as government and private health insurers
and managed care organizations. Third-party payors are increasingly challenging
the pricing of medical products and services. There can be no assurance that
reimbursement will be available to enable the Company to achieve market
acceptance of its products or to maintain price levels sufficient to realize an
appropriate return on the Company's investment in product acquisition,
in-licensing and development. The market for the Company's products may be
limited by actions of third-party payors. For example, many managed health care
organizations are now controlling the pharmaceuticals that are on their
formulary lists. The resulting competition among pharmaceutical companies to
place their products on these formulary lists has created a trend of downward
pricing pressure in the industry. In addition, many managed care organizations
are pursuing various ways to reduce pharmaceutical costs and are considering
formulary contracts primarily with those pharmaceutical companies that can offer
a full line of products for a given therapy sector or disease state. There can
be no assurance that the Company's products will be included on the formulary
lists of managed care organizations or that downward pricing pressure in the
industry generally will not negatively impact the Company's operations. Further,
a number of legislative and regulatory proposals aimed at changing the health
care system have been proposed. While the Company cannot predict whether any
such proposals will be adopted or the effect such proposals may have on its
business, the pending nature of such proposals, as well as the adoption of any
proposal, is likely to exacerbate industry-wide pricing pressures and could have
a material adverse effect on the Company. See "Business -- Government
Regulation."
Dependence on Acquisition of Rights to Pharmaceutical Products. The
Company's strategy for growth is dependent, in part, upon acquiring,
in-licensing and co-promoting pharmaceuticals targeted primarily at allergists,
ENTs, pulmonologists and a selected subset of pediatricians and generalist
physicians. Other companies, including those with substantially greater
resources, are competing with the Company for the rights to such products. There
can be no assurance that the Company will be able to acquire, in-license or co-
promote additional pharmaceuticals on acceptable terms, if at all. The failure
of the Company to acquire, in-license, co-promote, develop or market
commercially successful pharmaceuticals would have a material adverse effect on
the Company. Furthermore, there can be no assurance that the Company, once it
has obtained rights to a pharmaceutical product and committed to payment terms,
will be able to generate sales sufficient to create a profit or otherwise avoid
a loss. See "Business -- Strategy" and "Business -- Strategic Alliances."
Development Risks Associated With Spiros. Spiros will require significant
additional development. In addition, regulatory approvals for each drug to be
delivered through the use of Spiros will have to be obtained prior to
commercialization. There can be no assurance that development of Spiros will be
completed successfully, that Spiros will not encounter problems in clinical
trials that will cause the delay or suspension of such trials, that current or
future testing will show Spiros to be safe or efficacious or that Spiros will
receive regulatory approval. Moreover, even if Spiros does receive regulatory
approval, there can be no assurance that Spiros will be commercially successful,
have all of the patent and other protections necessary to prevent competitors
from producing similar products and not infringe on patent or other proprietary
rights of third parties. The failure of Spiros to receive timely regulatory
approval and achieve commercial success would have
8
<PAGE> 9
a material adverse effect on the Company. See "Business -- Spiros" and
"Business -- Relationship with Spiros Corp."
Risks Associated With Recent Acquisitions. In September 1996, the Company
acquired from Lilly exclusive U.S. rights to market and distribute Keftab and
Ceclor CD and entered into a manufacturing agreement with Lilly which terminates
in certain circumstances. Any interruption in the supply of Keftab or Ceclor CD
from Lilly due to regulatory or other causes could result in the inability of
the Company to meet demand and could have a material adverse impact on the
Company.
Both Keftab and Ceclor CD are antibiotics, and the Company has limited or
no experience in marketing such products. There can be no assurance that the
Company will be able to successfully market and distribute Keftab or that Keftab
will continue to be accepted by the market at the levels previously achieved by
Lilly or at a level sufficient to maintain growth of the product. In addition,
Ceclor CD has not previously been marketed to physicians, and no assurance can
be given that the Company will be successful in introducing this product or will
be able to successfully compete with currently available products. Furthermore,
the Company will need to significantly expand its existing sales force to
address the antibiotic market, and no assurance can be given that such expansion
can be successfully completed in a timely manner, if at all. Failure to
successfully market and sell Keftab and Ceclor CD would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Dura's Current Products" and "Business -- Sales and Marketing."
Customer Concentration; Consolidation of Distribution Network. The
distribution network for pharmaceutical products has in recent years been
subject to increasing consolidation. As a result, a few large wholesale
distributors control a significant share of the market. In addition, the number
of independent drug stores and small chains has decreased as retail
consolidation has occurred. Further consolidation among, or any financial
difficulties of, distributors or retailers could result in the combination or
elimination of warehouses thereby stimulating product returns to the Company.
Further consolidation or financial difficulties could also cause customers to
reduce their inventory levels, or otherwise reduce purchases of the Company's
products which could result in a material adverse effect on the Company's
business, financial condition or results of operations.
Dura's customers include McKesson Drug Company, Bergen Brunswig Drug
Company, Cardinal Health Inc., Bindley Western Drug Company and major drug store
chains. During the first nine months of 1996, two customers individually
accounted for 15% and 11% of sales. Two customers individually accounted for 16%
and 11% of 1995 sales, three customers individually accounted for 21%, 14% and
12% of 1994 sales and two customers individually accounted for 19% and 14% of
1993 sales. The loss of any of these customer accounts could have a material
adverse effect upon the Company's business, financial condition or results of
operations.
Seasonality and Fluctuating Quarterly Results. Historically, as a result
of the winter cold and flu season, industry-wide demand for respiratory products
has been stronger in the first and fourth quarters than during the second and
third quarters of the year. In addition, variations in the timing and severity
of the winter cold and flu season have influenced the Company's results of
operations in the past. While the growth and productivity of the Company's sales
force and the introduction by the Company of new products have historically
mitigated the impact of seasonality on the Company's results of operations,
recent product acquisitions by the Company are likely to increase the impact of
seasonality on the Company's results of operations. No assurances can be given
that the Company's results of operations will not be materially adversely
affected by the seasonality of product sales.
Competition. Many companies, including large pharmaceutical firms with
financial and marketing resources and development capabilities substantially
greater than those of Dura, are engaged in developing, marketing and selling
products that compete with those offered by the Company. The selling prices of
such products typically decline as competition increases. Further, other
products now in use or under development by others may be more effective than
Dura's current or future products. The industry is characterized by rapid
technological change, and competitors may develop their products more rapidly
than Dura. Competitors may also be able to complete the regulatory process
sooner, and therefore, may begin to market their products in advance of Dura's
products. Dura believes that competition among both prescription pharmaceuticals
and
9
<PAGE> 10
pulmonary delivery systems aimed at the asthma and allergy, cough and cold
markets will be based on, among other things, product efficacy, safety,
reliability, availability and price.
Dura directly competes with at least 25 other companies in the U.S. which
are currently engaged in developing, marketing and selling respiratory
pharmaceuticals. Additionally, there are at least 10 companies currently
involved in the development, marketing or sales of dry powder pulmonary drug
delivery systems. There are two types of dry powder inhalers ("DPIs") currently
in commercial use worldwide. In the U.S., only individual dose DPIs are
marketed, including the Rotohaler (developed and marketed by Glaxo Wellcome,
Inc. ("Glaxo")) and the Spinhaler (developed and marketed by Fisons Limited
("Fisons")). The Turbuhaler (developed and marketed by Astra Pharmaceuticals
("Astra")), a multiple dose DPI and the leading DPI in worldwide sales, is
considered the current industry standard. It is not yet marketed in the U.S.,
although the FDA has issued an approvable letter for the first Turbuhaler
product. See "Business -- Competition."
Dependence on Third Parties; Limited Manufacturing Experience. The
Company's strategy for development and commercialization of certain of its
products is dependent upon entering into various arrangements with corporate
partners, licensors and others and upon the subsequent success of these
partners, licensors and others in performing their obligations. There can be no
assurance that the Company will be able to negotiate acceptable arrangements in
the future or that such arrangements, or its existing arrangements, will be
successful. In addition, partners, licensors and others may pursue alternative
technologies or develop alternative compounds or drug delivery systems either on
their own or in collaboration with others, including the Company's competitors.
The Company has limited experience manufacturing products for commercial
purposes and currently does not have the capability to manufacture its
pharmaceutical products and therefore is dependent on contract manufacturers for
the production of such products for development and commercial purposes. The
manufacture of the Company's products is subject to current Good Manufacturing
Practice ("cGMP") regulations prescribed by the FDA. The Company relies on a
single manufacturer for each of its products. In the event that the Company is
unable to obtain or retain third-party manufacturing, it may not be able to
commercialize its products as planned. There can be no assurance that the
Company will be able to continue to obtain adequate supplies of such products in
a timely fashion at acceptable quality and prices. Also, there can be no
assurance that the Company will be able to enter into agreements for the
manufacture of future products with manufacturers whose facilities and
procedures must comply with cGMP and other regulatory requirements. The
Company's current dependence upon others for the manufacture of its products may
adversely affect future profit margins, if any, on the sale of those products
and the Company's ability to develop and deliver products on a timely and
competitive basis.
In June 1995, the Company completed construction of its manufacturing
facility located in a Company-owned building adjacent to its headquarters. The
Company is currently expanding its facilities to provide additional
manufacturing capabilities. The facility initially is intended to be used to
formulate, mill, blend and manufacture drugs to be used with Spiros, pending
regulatory approval. Equipment purchases and validation are currently scheduled
through 1997. The Company's manufacturing facility must be registered with and
licensed by various regulatory authorities and comply with cGMP requirements
prescribed by the FDA and the State of California. Any failure or significant
delay in the validation of or obtaining a satisfactory regulatory inspection of
the new facility could have a material adverse effect on the Company's ability
to manufacture products in connection with Spiros. See
"Business -- Manufacturing."
Managing Growth of Business. The Company has recently experienced
significant growth as total revenues increased 80% in fiscal 1994, 58% in fiscal
1995 and 77% in the first nine months of 1996 as compared to prior periods.
During fiscal 1995, the Company executed three agreements relating to the
acquisition, in-licensing and co-promotion of products and acquired Health
Script. During 1996, the Company commenced a co-promotion of Uni-Dur and
executed agreements relating to the acquisition of the Entex, Ceclor CD and
Keftab products. Due to the Company's emphasis on acquiring and in-licensing
respiratory pharmaceutical products, the Company anticipates that the
integration of the recently-acquired businesses and products, as well as any
future acquisitions, will require significant management attention and expansion
of its sales force. The Company's ability to achieve and maintain profitability
is based on management's ability
10
<PAGE> 11
to manage its changing business effectively. See "-- Attraction and Retention of
Key Personnel" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Uncertainty of Profitability; Need for Additional Funds. The Company has
experienced significant operating losses in the past and at September 30, 1996,
the Company's accumulated deficit was approximately $88.8 million. Although the
Company achieved profitability on an annual basis in fiscal 1994 and 1995 (prior
to the charge of approximately $43.8 million in the fourth quarter of 1995 in
connection with the exercise of its option to purchase all of the outstanding
stock of Dura Delivery Systems, Inc. ("DDSI") and its cash contribution to
Spiros Corp.), there can be no assurance that revenue growth or profitability
will continue on a quarterly or annual basis in the future. The acquisition and
in-licensing of products, the expansion of the Company's sales force in response
to acquisition and in-licensing of products, the maintenance of the Company's
existing sales force, the upgrade and expansion of its facilities, continued
pricing pressure and the potential exercise of the Purchase Option or the
Albuterol Purchase Option (as defined below), as well as funds that Dura, at its
option, may provide for Spiros development, both internally and through Spiros
Corp., will require the commitment of substantial capital resources and may also
result in significant losses. Depending upon, among other things, the
acquisition and in-licensing opportunities available to it, the Company may need
to raise additional funds for these purposes. The Company may seek such
additional funding through public and private financings, including equity
financings. Adequate funds for these purposes, whether through financial markets
or from other sources, may not be available when needed or on terms acceptable
to the Company. Insufficient funds may require the Company to delay, scale back
or prevent some or all of its product acquisition and in-licensing programs, the
upgrade and expansion of its facilities, the potential exercise of the Purchase
Option and/or the Albuterol Purchase Option and further development of Spiros.
The Company anticipates that its existing capital resources, together with cash
expected to be generated from operations, available bank borrowings and the
proceeds of this offering, should be sufficient to finance its current
operations and working capital requirements through at least November 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Potential Exercise of Purchase Options for Spiros Corp. Callable Common
Stock and Albuterol Product; Dilution. The Company has a contractual
relationship with Spiros Corp. relating to the development of Spiros, pursuant
to which certain rights to Spiros were transferred by the Company and DDSI to
Spiros Corp. Dura has a Purchase Option with respect to all of the currently
outstanding shares of callable common stock of Spiros Corp. If Dura exercises
the Purchase Option, it will be required to make a substantial cash payment or
to issue shares of Common Stock, or both. A payment in cash would reduce Dura's
capital resources. A payment in shares of Common Stock would result in a
decrease in the percentage ownership of Dura's shareholders at that time. The
exercise of the Purchase Option will likely require Dura to record a significant
charge to earnings and may adversely impact future operating results. If Dura
does not exercise the Purchase Option prior to its expiration, the Company's
rights in and to Spiros with respect to certain compounds will be terminated.
Dura also has the option to provide funding for Spiros development in certain
circumstances. Dura believes that the current funds of Spiros Corp. will be
sufficient to fund product development by Spiros Corp. through the first half of
1998. Development of Spiros Corp. products may require significant additional
funds.
As part of the Company's contractual relationship with Spiros Corp., the
Company received an option to purchase certain rights to an albuterol product in
a cassette version of Spiros (the "Albuterol Purchase Option") exercisable at
any time through the earlier of 60 days after FDA approval of such albuterol
product or December 31, 1999. If the Company exercises the Albuterol Purchase
Option, it will be required to make a cash payment of at least $15.0 million
which could have an adverse effect on its capital resources. The Company may not
have sufficient capital resources to exercise the Albuterol Purchase Option
which may result in the Company's loss of valuable rights. In addition,
continuation of development and commercialization of an albuterol product in a
cassette version of Spiros may require substantial additional expenditures by
Dura. As of the date of this Prospectus, Dura has no plans to provide additional
funding to Spiros Corp. and has not made any determination as to the likelihood
of its exercise of the Purchase Option or the Albuterol Purchase Option. See
"Business -- Relationship with Spiros Corp."
Government Regulation; No Assurance of FDA Approval. Development, testing,
manufacturing and marketing of the Company's products are subject to extensive
regulation by numerous governmental
11
<PAGE> 12
authorities in the U.S. and other countries. The process of obtaining FDA
approval of pharmaceutical products and drug delivery systems is costly and
time-consuming. Any new pharmaceutical must undergo rigorous preclinical and
clinical testing and an extensive regulatory approval process mandated by the
FDA. Marketing of drug delivery systems also requires FDA approval, which can be
costly and time-consuming to obtain. The Company will need to obtain regulatory
approval for each drug to be delivered through the use of Spiros. There can be
no assurance that the pharmaceutical products currently in development, or those
products acquired or in-licensed by the Company, will be approved by the FDA. In
addition, there can be no assurance that all necessary clearances will be
granted to the Company or its licensors for future products or that FDA review
or actions will not involve delays adversely affecting the marketing and sale of
the Company's products. For both currently marketed and future products, failure
to comply with applicable regulatory requirements can, among other things,
result in the suspension of regulatory approval, as well as possible civil and
criminal sanctions. In addition, changes in regulations could have a material
adverse effect on the Company.
The FDA is continuing an evaluation of the effectiveness of all drug
products containing ingredients marketed prior to 1962 (the year of enactment of
the "Drug Amendments of 1962" to the Federal Food, Drug, and Cosmetic Act) as
part of its Drug Efficacy Study Implementation ("DESI") program and will
determine which drugs are considered "new drugs" requiring approval through a
New Drug Application ("NDA") for marketing. A policy guide issued by the FDA
indicates that the FDA will implement procedures to determine whether the new
drug provisions are applicable to existing products. If a final determination is
made that a particular drug requires an approved NDA, such approval will be
required for marketing to continue. If such a determination is made, the FDA
might impose various requirements; for example, it might require that the
current product be the subject of an approved NDA, that the product be
reformulated and an NDA approval be obtained, that the product must be sold on
an over-the-counter basis rather than as a prescription drug or that the product
must be removed from the market. There can be no assurance as to which of these
courses the FDA will require, if any, with respect to most of the Company's
pharmaceutical products or whether the Company will be able to obtain any
approvals that the FDA may deem necessary. If any of these actions are taken by
the FDA, such actions could have a material adverse effect on the Company's
business. In addition, the Company's Tornalate Metered Dose Inhaler uses
chlorofluorocarbon ("CFC") propellants. If CFCs are banned for use in the
Tornalate Metered Dose Inhaler, then the Company will not be able to market that
product for sale, which could have a material adverse effect on the Company.
Health Script is subject to regulation by state regulatory authorities,
principally state boards of pharmacy. In addition, Health Script is subject to
regulation by other state and federal agencies with respect to reimbursement for
prescription drug benefits provided to individuals covered primarily by
publicly-funded programs. See "Business -- Government Regulation."
Patents and Proprietary Rights. The Company's success will depend in part
on its ability to obtain patents on current or future products or formulations,
defend its patents, maintain trade secrets and operate without infringing upon
the proprietary rights of others, both in the U.S. and abroad. However, only
four of the pharmaceuticals currently marketed by the Company are covered by
patents. The Company also has licenses or license rights to certain other U.S.
and foreign patent and patent applications. There can be no assurance that
patents, U.S. or foreign, will be obtained, or that, if issued or licensed to
the Company, they will be enforceable or will provide substantial protection
from competition or be of commercial benefit to the Company or that the Company
will possess the financial resources necessary to enforce or defend any of its
patent rights. Federal court decisions establishing legal standards for
determining the validity and scope of patents in the field are in transition.
For example, in a currently pending case, the U.S. Supreme Court will consider
whether to alter or replace the traditional standard for determining patent
infringement under the doctrine of equivalents. There can be no assurance that
the historical legal standards surrounding questions of validity and scope will
continue to be applied or that current defenses as to issued patents in the
field will offer protection in the future. The commercial success of the Company
will also depend upon avoiding the infringement of patents issued to competitors
and upon maintaining the technology licenses upon which certain of the Company's
current products are, or any future products under development might be, based.
Litigation, which could result in substantial cost to the Company, may be
necessary to enforce the Company's patent and license rights or to determine the
scope and validity of the proprietary rights of third parties. If any
12
<PAGE> 13
of the Company's products are found to infringe upon patents or other rights
owned by third parties, the Company could be required to obtain a license to
continue to manufacture or market such products. There can be no assurance that
licenses to such patent rights would be made available to the Company on
commercially reasonable terms, if at all. If the Company does not obtain such
licenses, it could encounter delays in marketing affected products while it
attempts to design around such patents or it could find that the development,
manufacture or sale of products requiring such licenses are not possible. The
Company currently has certain licenses from third parties and in the future may
require additional licenses from other parties to develop, manufacture and
market commercially viable products effectively. There can be no assurance that
such licenses will be obtainable on commercially reasonable terms, if at all, or
that the patents underlying such licenses will be valid and enforceable. See
"Business -- Patents and Proprietary Rights."
Product Liability and Recall. The Company faces an inherent business risk
of exposure to product liability claims in the event that the use of its
technologies or products is alleged to have resulted in adverse effects. Such
risks will exist even with respect to those products that receive regulatory
approval for commercial sale. While the Company has taken, and will continue to
take, what it believes are appropriate precautions, there can be no assurance
that it will avoid significant product liability exposure. The Company currently
has product liability insurance; however, there can be no assurance that the
level or breadth of any insurance coverage will be sufficient to fully cover
potential claims. There can be no assurance that adequate insurance coverage
will be available in the future at acceptable costs, if at all, or that a
product liability claim or recall would not materially and adversely affect the
business or financial condition of the Company.
Attraction and Retention of Key Personnel. The Company is highly dependent
on the principal members of its management staff, the loss of whose services
might impede the achievement of development objectives. Although the Company
believes that it is adequately staffed in key positions and that it will be
successful in retaining skilled and experienced management, operational and
scientific personnel, there can be no assurance that the Company will be able to
attract and retain such personnel on acceptable terms. The loss of the services
of key scientific, technical and management personnel could have a material
adverse effect on the Company, especially in light of the Company's recent
significant growth. The Company does not maintain key-person life insurance on
any of its employees. See "Business -- Human Resources" and "Management."
Volatility of the Company Stock Price. The market prices for securities of
emerging companies, including the Company, have historically been highly
volatile. Future announcements concerning the Company or its competitors may
have a significant impact on the market price of the Common Stock. Such
announcements might include financial results, the results of testing,
technological innovations, new commercial products, changes to government
regulations, government decisions on commercialization of products, developments
concerning proprietary rights, litigation or public concern as to safety of the
Company's products. See "Price Range of Common Stock."
Absence of Dividends. The Company has never paid any cash dividends on its
Common Stock. In accordance with certain bank loan agreements, the Company is
restricted from paying cash dividends without prior bank approval. The Company
currently anticipates that it will retain all available funds for use in its
business and does not expect to pay any cash dividends in the foreseeable
future. See "Dividend Policy."
Change in Control. Certain provisions of the Company's charter documents
(including cumulative voting provisions for electing directors, provisions
providing for two classes of directors serving staggered two-year terms and
provisions permitting the Company to issue preferred stock in the future) and
terms relating to the acceleration of the exercisability of certain warrants and
options relating to the purchase of such securities by the Company in the event
of a change in control may have the effect of delaying, deferring or preventing
a change in control of the Company, thereby possibly depriving shareholders of
receiving a premium for their shares of the Common Stock. See "Description of
Capital Stock -- California Law and Certain Charter Provisions."
Proposition 211. A pending initiative on the November 1996 California
ballot would, if passed by voters and upheld against potential court challenges,
subject corporations and their directors and officers to increased risk of suit
and may prohibit corporations from indemnifying officers and directors and
expose directors and officers of corporations to increased risk of personal
liability. Proposition 211, if passed and upheld, could
13
<PAGE> 14
increase litigation expenses and the cost of related insurance and adversely
affect the financial position and results of operations of Dura. In addition,
the increased risk of personal liability could interfere with the ability of
Dura to attract and retain directors and officers, which could adversely affect
the Company's competitive position.
Forward-Looking Statements. Prospective investors are cautioned that the
statements in this Prospectus that are not descriptions of historical facts may
be forward-looking statements that are subject to risks and uncertainties.
Actual results could differ materially from those currently anticipated due to a
number of factors, including those identified under "Risk Factors" and elsewhere
in this Prospectus or documents incorporated by reference herein.
14
<PAGE> 15
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,000,000 shares of
Common Stock offered by the Company are estimated to be $127,452,500
($146,622,875 if the Underwriters' over-allotment option is exercised in full),
assuming a public offering price of $33.50 per share. These proceeds, together
with the Company's existing cash, cash equivalents, short-term investments and
cash generated from operations, will be used for general corporate purposes,
including: (i) to acquire, in-license, co-promote, develop and commercialize
pharmaceuticals targeted at Dura's physician base or to acquire companies
developing and/or marketing such pharmaceuticals; (ii) to fund product
development programs, including Spiros products; and (iii) for working capital
and facilities expansion. At present, the Company is actively pursuing the
acquisition of rights to several products and/or companies which may require the
use of substantial capital resources; however, there are no present agreements
or commitments with respect to any such acquisition.
The cost, timing and amount of funds required for all specific uses by the
Company cannot be precisely determined by the Company at this time and is at
management's discretion. The rate of the Company's progress in acquiring and
in-licensing new products or acquiring companies developing and/or marketing
such products, the timing and nature of regulatory action and the availability
of alternative methods of financing, including agreements with other companies
relating to the development, manufacture and marketing of products, will also
determine the allocation and timing of the Company's use of the proceeds from
this offering.
Pending applications of the proceeds as described above, the Company plans
to invest the net proceeds of the offering in high-grade, short-term,
interest-bearing investments.
15
<PAGE> 16
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the over-the-counter market and prices are
quoted on the Nasdaq National Market under the symbol "DURA." The following
table sets forth the intraday high and low prices for the Common Stock for the
periods indicated, as reported on the Nasdaq National Market, as adjusted for
the 2-for-1 stock split in the form of a 100% stock dividend, effective July 1,
1996.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1994:
1st Quarter.................................................... $ 5 $ 3 1/8
2nd Quarter.................................................... 5 1/2 3 3/4
3rd Quarter.................................................... 6 5/8 5 1/8
4th Quarter.................................................... 7 1/4 5 1/4
YEAR ENDED DECEMBER 31, 1995:
1st Quarter.................................................... $ 7 1/2 $ 5 3/4
2nd Quarter.................................................... 9 7/8 6 1/2
3rd Quarter.................................................... 17 1/2 9
4th Quarter.................................................... 17 3/4 13 1/4
YEAR ENDING DECEMBER 31, 1996:
1st Quarter.................................................... $27 1/4 $16 3/8
2nd Quarter.................................................... 34 11/16 22
3rd Quarter.................................................... 40 1/2 19 3/4
4th Quarter (through Oct. 21).................................. 38 29 1/2
</TABLE>
On October 21, 1996, the last reported sale price of the Common Stock on
the Nasdaq National Market was $33 1/2 per share. As of October 1, 1996, there
were approximately 300 holders of record of the Common Stock.
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock. In
accordance with certain bank loan agreements, the Company is restricted from
paying cash dividends without prior bank approval. The Company currently
anticipates that it will retain all available funds for use in its business and
does not expect to pay any cash dividends in the foreseeable future.
16
<PAGE> 17
CAPITALIZATION
The following table sets forth the actual capitalization of the Company at
September 30, 1996, and as adjusted to reflect the sale of 4,000,000 shares of
Common Stock offered hereby at an assumed public offering price of $33.50 per
share and the receipt of net proceeds of such sale. See "Use of Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------
AS
ACTUAL ADJUSTED
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and short-term investments.............. $ 87,238 $214,690
======== =======
Current portion of long-term obligations....................... $ 27,972 $ 27,972
======== =======
Long-term obligations (excluding current portion of long-term
obligations)(1).............................................. $ 9,300 $ 9,300
-------- -------
Shareholders' equity:
Preferred Stock, no par value; 5,000,000 shares authorized;
no shares issued or outstanding........................... -- --
Common Stock, no par value; 100,000,000 shares authorized;
37,741,578 shares outstanding (actual); 41,741,578 shares
outstanding (as adjusted)(2).............................. 371,406 498,858
Accumulated deficit.......................................... (88,849) (88,849)
Unrealized gain on investments............................... 23 23
Warrant subscriptions receivable............................. (3,224) (3,224)
-------- -------
Total shareholders' equity........................... 279,356 406,808
-------- -------
Total capitalization................................. $288,656 $416,108
======== =======
</TABLE>
- ---------------
(1) For additional information relating to long-term obligations, see Note 6 of
the Notes to Consolidated Financial Statements.
(2) Excludes (a) 2,899,605 shares of Common Stock issuable upon the exercise of
options outstanding at September 30, 1996 under the Company's stock option
plan, (b) 851,081 shares of Common Stock available for future grants under
such plan and (c) 4,696,624 shares of Common Stock issuable upon exercise of
warrants outstanding at September 30, 1996. See "Description of Capital
Stock."
17
<PAGE> 18
SELECTED CONSOLIDATED FINANCIAL DATA
The statement of operations data set forth below for each of the three
years in the period ended December 31, 1995, and the balance sheet data at
December 31, 1994 and 1995, are derived from, and are qualified by reference to,
the audited financial statements incorporated by reference in this Prospectus
and Registration Statement and included elsewhere in this Prospectus and should
be read in conjunction with those financial statements and notes thereto. The
statement of operations data for the fiscal years ended December 31, 1991 and
1992, and the balance sheet data at December 31, 1991, 1992 and 1993, are
derived from audited financial statements not included herein. The management of
the Company believes that the unaudited information at September 30, 1996, and
for the nine-month periods ended September 30, 1995 and 1996, contains all
adjustments, consisting of only normal recurring accruals, necessary for a fair
presentation of the financial position at such date and the results of
operations for such periods. Operating results for the nine-month period ended
September 30, 1996, are not necessarily indicative of results to be expected for
the fiscal year ending December 31, 1996 or any other interim period. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the Company's financial statements and related notes incorporated by reference
in this Prospectus and Registration Statement and included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
FISCAL YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:(1)
Revenues:
Sales........................................ $ 5,546 $ 9,561 $15,816 $22,199 $ 39,308 $27,139 $45,900
Contract..................................... -- -- 2,297 10,481 12,194 8,556 17,407
------- ------- ------- ------- -------- ------- -------
Total revenues................................. 5,546 9,561 18,113 32,680 51,502 35,695 63,307
------- ------- ------- ------- -------- ------- -------
Operating costs and expenses:
Cost of sales................................ 1,588 2,700 3,782 3,894 10,618 7,259 12,553
Clinical, development and regulatory......... 469 1,354 2,819 9,354 8,408 5,997 12,121
Selling, general and administrative.......... 5,856 12,267 17,294 17,871 25,580 18,676 26,121
Goodwill amortization and writedowns......... 935 256 143 105 375 262 339
Other charges(2)............................. -- -- 2,315 -- 43,773 -- --
------- ------- ------- ------- -------- ------- -------
Operating income (loss)........................ (3,302) (7,016) (8,240) 1,456 (37,252) 3,501 12,173
Other income (expense)......................... (1,090) 247 67 514 1,880 1,116 4,060
------- ------- ------- ------- -------- ------- -------
Pre-tax income (loss).......................... (4,392) (6,769) (8,173) 1,970 (35,372) 4,617 16,233
Provision for income taxes(3).................. -- -- -- 34 406 182 1,762
------- ------- ------- ------- -------- ------- -------
Net income (loss)(2)........................... $(4,392) $(6,769) $(8,173) $ 1,936 $(35,778) $ 4,435 $14,471
======= ======= ======= ======= ======== ======= =======
Net income (loss) per share(2)(4)
Primary...................................... $ (0.46) $ (0.47) $ (0.55) $ 0.10 $ (1.53) $ 0.16 $ 0.37
======= ======= ======= ======= ======== ======= =======
Fully Diluted................................ $ 0.15 $ 0.36
======= =======
Weighted average number of common and common
equivalent shares(4)
Primary...................................... 9,506 14,506 14,988 19,860 23,440 27,324 38,890
Fully Diluted................................ 28,650 39,657
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments.... $ 2,082 $13,459 $ 6,541 $36,026 $ 67,820 $ 87,238
Working capital...................................... 1,972 12,992 6,830 36,506 59,717 66,551
Total assets......................................... 5,325 26,339 20,048 56,072 143,997 334,556
Long-term obligations (excluding current portion of
long-term obligations)............................. 9,169 4,635 4,719 2,780 15,427 9,300
Shareholders' equity (deficit)(5).................... (5,191) 18,310 12,571 48,537 109,097 279,356
</TABLE>
- ---------------
(1) Selected financial data includes Health Script subsequent to its acquisition
on March 22, 1995, DDSI subsequent to its acquisition on December 29, 1995,
the Rondec product line subsequent to its acquisition on June 30, 1995, the
Entex product line subsequent to its acquisition on July 3, 1996 and the
Ceclor CD and Keftab products subsequent to their acquisition on September
5, 1996. See Notes 10 and 11 of the Notes to Consolidated Financial
Statements.
(2) The 1993 charge of $2.3 million represents the charge for the option to
acquire all of the outstanding stock of DDSI. The 1995 charge of $43.8
million represents the $30.8 million charge for acquired in-process
technology associated with the DDSI acquisition and the $13.0 million charge
for the contribution to Spiros Corp. If these charges were excluded, Dura
would have reported a net loss of $5.9 million, or $0.39 per share, for 1993
and net income of $8.0 million, or $0.28 per share, in 1995. See Notes 10
and 11 of the Notes to Consolidated Financial Statements.
(3) For information relating to provision for income taxes, see Note 9 of the
Notes to Consolidated Financial Statements.
(4) Adjusted for a two-for-one stock split paid in the form of a 100% stock
dividend effective July 1, 1996. For additional information relating to net
income (loss) per share and common equivalent shares, see Note 2 of the
Notes to Consolidated Financial Statements.
(5) No cash dividends were declared or paid during the periods presented.
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<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following comments should be read in conjunction with the Consolidated
Financial Statements and Notes contained therein. See "Risk Factors" for trends
and uncertainties known to the Company that could cause reported financial
information not to be necessarily indicative of future results.
RECENT DEVELOPMENTS
On September 5, 1996, the Company acquired from Lilly U.S. marketing rights
to the antibiotics Keftab and Ceclor CD. The purchase price consisted of $100.0
million paid in cash at closing. Additional future contingent payments of $15
million per year starting in 1999 and ending in 2003 are subject to Ceclor CD
remaining without an extended release cefaclor competitor in the U.S. The
Company began marketing Keftab in September 1996, and expects to launch Ceclor
CD in late October 1996.
On July 3, 1996, the Company acquired from P&G worldwide rights to the
Entex products, consisting of four prescription upper respiratory drugs. The
purchase price of $45.0 million consisted of $25.0 million in cash paid at
closing and $20.0 million due on July 3, 1997. The Company began marketing the
Entex products in July 1996.
The acquisition of the above product rights will have a material impact on
future operating results.
RESULTS OF OPERATIONS
Nine months ended September 30, 1996 as compared to the nine months ended
September 30, 1995
Total revenues for the nine months ended September 30, 1996 increased to
$63.3 million, up 77%, compared to the same period in 1995. Net income for the
nine months ended September 30, 1996 was $14.5 million, or $0.37 per share, an
increase of $10.0 million, or $0.21 per share, compared to the same period in
1995.
Pharmaceutical sales for the nine months ended September 30, 1996 increased
to $45.9 million, up 69% compared to same period in 1995. The increase was
primarily due to sales of newly-acquired products as well as higher revenues at
Health Script.
Gross profit (pharmaceutical sales less cost of sales) for the nine months
ended September 30, 1996 increased $13.5 million compared to the same period in
1995. Gross profit as a percentage of sales remained steady at 73%.
Contract revenues for the nine months ended September 30, 1996 increased
$8.9 million to $17.4 million, up 103% compared to the same period in 1995. The
Company, under agreements with several companies, conducts feasibility testing
and development work on various compounds for use with Spiros. In addition, the
Company receives royalties primarily from the co-promotion of pharmaceutical
products. Contract revenues from Spiros related development and feasibility
agreements for the nine months ended September 30, 1996 were $14.4 million,
including $12.8 million, from Spiros Corp., compared to $6.6 million, including
$5.4 from DDSI, respectively, for the same period in 1995. Contract revenues
from royalties were $3.0 million for the nine months ended September 30, 1996,
compared to $2.0 million for the same period in 1995.
Clinical, development and regulatory expenses for the nine months ended
September 30, 1996 increased $6.1 million to $12.1 million compared to the same
period in 1995. The increase reflects expenses incurred by the Company under
feasibility and development agreements covering the use of various compounds
with Spiros.
Selling, general and administrative expenses for the nine months ended
September 30, 1996 increased $7.4 million to $26.1 million compared to the same
period in 1995, and decreased to 41% of revenues compared to 52% of revenues in
1995. The dollar increase results primarily from marketing costs related to
newly-acquired products as well as higher costs of Health Script to support a
higher sales level. The decrease
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<PAGE> 20
as a percentage of revenues reflects the productivity of the sales force, the
growth of pharmaceutical sales due to product acquisitions and the growth of
contract revenues.
Interest income for the nine months ended September 30, 1996 increased $3.0
million to $4.7 million compared to the nine months ended September 30, 1995.
The increase is due to the cash generated from the August 1995 and May 1996
public stock offerings as well as cash generated from operations. Interest
expense for the nine months ended September 30, 1996 increased by $103,000
compared to the nine months ended September 30, 1995 as a result of obligations
incurred in connection with 1995 product acquisitions.
The Company recorded income tax provisions of $1.8 million for the nine
months ended September 30, 1996, compared to $182,000 for the nine months ended
September 30, 1995. The increased provision is due to the decline in the
relative use of net operating loss carryforwards. The provisions reflect the
expected combined Federal and state tax rate of 40% offset by the expected
benefit from utilization of net operating loss carryforwards.
Year ended December 31, 1995 ("1995") as compared to the year ended December
31, 1994 ("1994")
Total revenues in 1995 increased $18.8 million, or 58%, over 1994. However,
the Company incurred a net loss in 1995 of $35.8 million, or $1.53 per share,
due to charges totaling $43.8 million related to the Company's Spiros
development program. The charges consisted of a $30.8 million non-cash charge
for in-process technology acquired in connection with Dura's acquisition of DDSI
and a $13.0 million purchase option charge resulting from the cash contribution
to Spiros Corp. If the charges were excluded, the Company would have reported
net income in 1995 of $8.0 million or $0.28 per share.
Pharmaceutical sales in 1995 increased by $17.1 million, or 77%, over 1994
due primarily to the $15.3 million in sales generated by Health Script, 1995
product acquisitions and internally-developed products that were launched in the
second half of 1994. The remaining increase was generated by the pre-existing
product line for which sales growth was impacted by the relatively weak
cough/cold season experienced across the country in the first quarter of 1995.
Gross profit for 1995 increased by $10.4 million, or 57%, as compared to
1994. Gross profit as a percentage of sales decreased to 73% in 1995 from 82% in
1994 due primarily to the lower margins generated on sales by Health Script in
addition to the impact of contract pricing to managed care organizations.
Contract revenues in 1995 increased by $1.7 million as compared to 1994. In
1995 and 1994, the Company recorded contract revenues of $1.6 million and
$400,000, respectively, relating to an agreement with Drug Royalty Corporation
USA Inc. ("DRC") under which the Company received funding through December 1995
to expand its sales force. In addition, the Company conducts development work
under contracts with several companies and receives royalties. The development
contracts relate to the testing and development of various compounds for use
with Spiros and generated revenues in 1995 and 1994 of $9.5 million and $9.9
million, respectively, including $8.0 million and $9.2 million from DDSI. The
Company recorded royalties under the co-promotion arrangement with Bausch & Lomb
Pharmaceuticals, Inc. ("Bausch & Lomb") of $813,000 in 1995.
Clinical, development and regulatory expenses in 1995 decreased by
$946,000, or 10%, from 1994. Under an agreement with DDSI, the Company managed
the development of DDSI products and incurred development expenses on behalf of
DDSI in 1995 and 1994 of $6.4 million and $8.3 million, respectively, for which
it received contract revenues. The decrease in DDSI development expenses
resulted primarily from the shift from use of outside contractors to Dura
employed personnel and resources. This decrease was partially offset by
increased expenses associated with work being performed under development
contracts, for which the Company recorded contract revenues of $1.0 million in
1995, and by costs associated with the internal development of respiratory
pharmaceutical products.
Selling, general and administrative expenses in 1995 increased by $7.7
million over 1994 and decreased as a percentage of revenues from 55% in 1994 to
50% in 1995. The dollar increase results primarily from the operating costs of
Health Script, acquired in March 1995, and increased sales and contracting
levels. The decrease as a percentage of revenues reflects an increase in the
productivity of the sales force, the growth of pharmaceutical sales due to
product acquisitions and the growth of contract revenues.
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<PAGE> 21
Other income-net in 1995 increased by $1.4 million as compared to 1994. The
increase resulted primarily from interest income on cash balances generated by
the November 1994 and August 1995 stock offerings which was partially offset by
interest expense resulting from obligations incurred in connection with 1995
acquisitions.
The Company recorded income tax provisions of $406,000 and $34,000 in 1995
and 1994, respectively. The provisions reflect the expected combined Federal and
state tax rate of 40% offset by the benefit from utilization of net operating
loss carryforwards, which are generally limited to 90% of taxable income.
Year ended December 31, 1994 ("1994") as compared to the year ended December
31, 1993 ("1993")
Total revenues in 1994 increased $14.6 million, or 80%, over 1993. Net
income for 1994 was $1.9 million, or $0.10 per share, compared to a net loss of
$8.2 million, or $0.55 per share in 1993.
Pharmaceutical sales in 1994 increased by $7.5 million, or 51%, as compared
to 1993 due primarily to increased productivity of the sales force resulting in
better penetration of existing sales territories. In addition, the introduction
in August 1994 of an internally-developed pharmaceutical product produced sales
during 1994 totaling $943,000. Sales for 1993 included $1.1 million from device
products; the assets of the Company's device division were sold in August 1993.
Gross profit in 1994 increased by $6.3 million, or 52%, as compared to
1993. Gross margin increased to 82% in 1994 as compared to 76% for 1993. The
improvements in gross profit and gross margin reflected the increase in
pharmaceutical sales in absolute dollars and the elimination of device division
sales, which historically generated lower gross margins than did pharmaceutical
sales. If device sales and cost of sales were excluded from the results of
operations for 1993, gross margins for 1993 would have been 80%.
Contract revenues in 1994 consisted of $9.9 million (including $9.2 million
from DDSI) under development contracts relating to testing and development of
various compounds with Spiros, $400,000 from DRC and $161,000 in royalties from
the device division that was sold in 1993.
Clinical, development and regulatory expenses in 1994 increased by $6.5
million over those for 1993. The increase reflects expenses incurred by the
Company under its agreement with DDSI under which the Company incurred costs in
1994 and 1993 of $8.3 million and $1.5 million, respectively. Clinical,
development and regulatory expenses net of DDSI development expenses decreased
$238,000 from 1993 to 1994.
Selling, general and administrative expenses in 1994 increased by $577,000
over 1993 and decreased as a percentage of revenues from 95% in 1993 to 55% in
1994. The dollar increase resulted primarily from increased sales commissions
which are attributable to increased sales. The decrease as a percentage of
revenues reflects an increase in the productivity of the existing sales force
and the introduction of an internally-developed pharmaceutical product.
Other income-net in 1994 increased by $447,000 as compared to 1993 due
primarily to the write-off of $289,000 in interest payable representing an over
accrual of interest on a note payable.
The Company recorded an income tax provision of $34,000 in 1994 reflecting
minimum taxes. Pretax income at the expected combined Federal and state tax rate
of 40% was fully offset by the benefit of the reversal of temporary timing
differences for tax reporting purposes which reduced taxable income to zero.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased by $6.9 million to $66.6 million at
September 30, 1996, from $59.7 million at December 31, 1995. Cash equivalents
and short-term investments increased by $19.4 million to $87.2 million at
September 30, 1996, from $67.8 million at December 31, 1995. The increases
resulted primarily from the net proceeds from the May 1996 public stock offering
as well as from cash generated from operations offset by amounts paid for
product acquisitions.
In 1995, the Company completed the first phase of construction, at its
headquarters, of a manufacturing facility that will be used to formulate, mill,
blend and fill drugs to be used with Spiros, pending regulatory approval. In
1996, the Company began a two-year project to expand its manufacturing facility
to meet the
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<PAGE> 22
production needs of products to be used with Spiros, pending regulatory
approval. Included in construction in progress at September 30, 1996 are capital
expenditures of $11.0 million relating to the facility. Equipment purchases for
and validation of the manufacturing facility are currently scheduled through
1997. At September 30, 1996, the Company had open purchase commitments for
construction and validation of the facility and equipment purchases of
approximately $3.0 million and expects to spend an additional $4.0 million to
complete the facility.
At September 30, 1996, the Company had available a line of credit with a
bank providing for borrowings up to $5.0 million, against which there were no
borrowings outstanding. In accordance with bank loan agreements, all assets of
the Company are pledged as collateral to loans outstanding, and the Company is
required to maintain certain financial covenants.
The Development and Management Agreement between the Company and Spiros
Corp. requires Spiros Corp. to make payments to Dura for development and
management services within 15 days after the end of the month in which the
services are incurred. Dura records contract revenues from Spiros Corp. equal to
the amounts due from Spiros Corp. for development and management services less a
pro rata amount allocated to the warrant subscriptions receivable. The Company
has a purchase option with respect to all of the shares of Spiros Corp. which is
exercisable through December 31, 1999 at predetermined prices. In addition, the
Company has an option, through specified dates, to acquire Spiros Corp.'s
exclusive rights for use of Spiros with albuterol in the cassette version for a
minimum of $15.0 million in cash. Such option is exercisable at any time through
the earlier of 60 days after FDA approval of such albuterol product or December
31, 1999.
At September 30, 1996, the Company had an aggregate of $37.3 million in
other obligations, of which $28.0 million is to be paid within the next year. In
connection with the acquisition of Ceclor CD and Keftab marketing rights, the
Company paid $100.0 million in cash. Additional future contingent payments of
$15 million per year starting in 1999 and ending in 2003 are subject to Ceclor
CD remaining without an extended release cefaclor competitor in the U.S.
The Company has a $59.8 million net operating loss carry forward for
Federal income tax purposes of which approximately $27.5 million is currently
available to offset taxable income. The tax benefit from approximately $9.4
million of the net operating loss carry forward currently available will be
credited to common stock when and if this amount is used to offset taxable
income.
The Company anticipates that its existing capital resources, together with
cash expected to be generated from operations, available bank borrowings and the
proceeds of this offering, should be sufficient to finance its operations and
working capital requirements through at least November 1997. Significant
additional resources, however, may be required in connection with product or
company acquisitions or in-licensing opportunities. At present, the Company is
actively pursuing the acquisition of rights to several products and/or companies
which may require the use of substantial capital resources; however, there are
no present agreements or commitments with respect to any such acquisition.
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<PAGE> 23
BUSINESS
OVERVIEW
Dura is a specialty respiratory pharmaceutical and pulmonary drug delivery
company. The Company is engaged in marketing prescription products to physicians
in the U.S. who treat patients suffering from asthma, hay fever, COPD, the
common cold and related respiratory ailments. Dura has strategically focused on
the U.S. Respiratory Market because of its size (approximately $4.8 billion in
sales in 1995) and growth opportunities. Additionally, the fragmented nature of
the market and the identifiable base of physician prescribers allow the Company
to achieve significant market penetration with a specialized sales force. The
Company currently markets 30 prescription products, including 26 which are
off-patent. The Company also has a separate mail service pharmacy which
dispenses respiratory pharmaceuticals, Health Script.
Dura employs a dual marketing strategy utilizing its focused field sales
force of approximately 150 people and a dedicated managed care sales and
marketing group that covers managed care organizations and retail pharmacy
chains. Dura's field sales force targets a physician base which includes
approximately 60,000 U.S. allergists, ENTs, pulmonologists and a selected subset
of pediatricians and generalist physicians, who the Company believes
collectively write approximately 70% of respiratory pharmaceutical
prescriptions. Dura believes that its field sales force calls on approximately
one-half of the target physician base. The Company's managed care sales and
marketing group concentrates on sales to large regional and national managed
care organizations. The Company expects to continue expanding both the field
sales force and the managed care sales and marketing group as warranted by
market opportunities. During 1995, in addition to building its existing business
of dispensing respiratory pharmaceuticals through home healthcare providers,
Health Script launched a new program under the name "Healthco HomeRx" in which
the Dura field sales force provides information concerning the services of
Health Script to Dura's targeted physician base.
This marketing strategy has allowed Dura to leverage its distribution
capabilities by acquiring the rights to market additional prescription
pharmaceutical products through acquisition, in-license or co-promotion
arrangements. Since 1992, the Company has acquired 21 products targeted at the
U.S. Respiratory Market. In July 1996, the Company acquired from P&G worldwide
rights to the Entex products, consisting of four prescription upper respiratory
drugs. In September 1996, the Company acquired from Lilly U.S. marketing rights
to the antibiotics Keftab and Ceclor CD. The Company began marketing Keftab in
September 1996, and expects to launch Ceclor CD in late October 1996.
The Company is developing or has contracted for the development of four
currently-marketed respiratory prescription pharmaceuticals. Three of these
products are being developed by Elan as part of its collaborative relationship
with the Company and utilize Elan's drug delivery expertise and proprietary
technologies. The fourth product is being developed internally.
Another key component of Dura's strategy is to develop Spiros. Spiros is
being designed to aerosolize pharmaceuticals in dry powder formulations for
delivery to the lungs while providing certain advantages over other
currently-used methods of pulmonary drug delivery. The Company has a three-level
development program for Spiros which entails (i) developing, on behalf of Spiros
Corp., certain drug applications for use in Spiros, including in the near-term
albuterol, beclomethasone and ipratropium, three of the most frequently-
prescribed pharmaceutical agents to treat respiratory conditions, and, in the
longer term, certain proteins and peptides, (ii) licensing Spiros primarily to
pharmaceutical companies, including Mitsubishi and Fujisawa, generally for use
with certain of their proprietary respiratory products, and (iii) developing
Spiros, in collaboration with third parties, for the systemic delivery of
compounds through the lungs for respiratory and non-respiratory indications as
an alternative to current invasive delivery techniques. The Company has licensed
certain rights to Spiros Corp. to continue a significant portion of the
development program for Spiros, including funding of ongoing and future clinical
trials of albuterol and beclomethasone in a cassette version of Spiros, and
formulation, preclinical development and clinical trials of albuterol,
beclomethasone and ipratropium in a blisterdisk version of Spiros. The Company
has the right to purchase all of the currently outstanding shares of callable
common stock of Spiros Corp. through December 31, 1999 at predetermined prices.
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In April 1996, Dura completed dosing of subjects in a clinical trial in the
U.S. on behalf of Spiros Corp. focusing on dose selection using a formulation of
powdered albuterol with Spiros under an IND application filed with the FDA. In
July 1996, the Company commenced long-term and short-term clinical trials which,
along with earlier studies, are intended to serve as the basis for the filing of
an NDA by Dura in 1997 seeking FDA approval, on behalf of Spiros Corp., to
market albuterol in the Spiros cassette system. The Company is also preparing an
IND application for U.S. studies on beclomethasone in the Spiros cassette system
which will be filed on behalf of Spiros Corp. In addition, Dura, on behalf of
Spiros Corp., has performed powder formulation work with the peptide drug salmon
calcitonin which in a clinical trial demonstrated the ability to develop
macromolecule aerosol powder formulation which achieved systemic delivery using
the Spiros technology.
U.S. RESPIRATORY MARKET
Dura divides the U.S. Respiratory Market into two primary markets: (i)
asthma and COPD; and (ii) allergy, cough and cold.
Asthma and COPD
Asthma is a complex physiological disorder characterized by airway
hyperactivity to a variety of stimuli such as dust, pollen, stress or physical
exercise, resulting in airway obstruction that is partially or temporarily
reversible. The U.S. asthma population has grown steadily to more than 15
million people, a 66% rise since 1980. COPD is a complex condition comprising a
combination of chronic bronchitis, emphysema and airway obstruction. The disease
affects males greater than females and is exacerbated by smoking and other
insults to the lung. Incidence is as high as 20% of the adult male population,
though only a minority are clinically disabled. The U.S. combined market for
therapeutic drugs to treat asthma and COPD was over $2.3 billion in 1995. The
primary categories of therapeutic drugs used in the treatment of asthma and COPD
include bronchodilators and anti-inflammatories. Bronchodilators dilate the
airways and include beta agonists (such as bitolterol and albuterol), xanthines
(such as theophylline) and anticholinergics (such as ipratropium). Anti-
inflammatories reduce inflammation and include cromolyns and glucocorticoids
(such as triamcinolone, beclomethasone, flunisolide and budesonide).
Allergy, Cough and Cold
While the causes of allergies (which can be seasonal or perennial) and
cough and colds differ, nasal congestion and sneezing are common symptoms of
these diseases. The U.S. combined market for therapeutic drugs to treat
allergies, cough and cold was over $2.5 billion in 1995. Antihistamines and
antihistamine/decongestant combinations are the most widely used forms of
therapy for allergies and represent the largest portion of the allergy, cough
and cold market in the U.S.
Cough and cold preparations represent the next largest portion of the
allergy, cough and cold market and include decongestant and
decongestant/expectorant combinations, cough suppressants and antihistamine
combinations and expectorants.
STRATEGY
The Company's objective is to be a leading supplier of respiratory
pharmaceuticals and pulmonary drug delivery systems. The Company attempts to
achieve this objective through the implementation of the following:
- - Focusing marketing efforts on respiratory physician specialists. Dura employs
a dual marketing strategy utilizing its focused field sales force and a
dedicated managed care sales and marketing group. Dura's field sales force
targets a physician base which includes approximately 60,000 U.S. allergists,
ENTs, pulmonologists and a selected subset of pediatricians and generalist
physicians, who the Company believes collectively write approximately 70% of
respiratory pharmaceutical prescriptions. Dura believes that its field sales
force calls on approximately one-half of the target physician base. The
Company's managed care sales and marketing group concentrates on sales to
large regional and national managed care organizations. The Company expects to
continue expanding both the field sales force and the managed care sales and
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<PAGE> 25
marketing group as warranted by market opportunities. During 1995, in addition
to building its existing business of dispensing respiratory pharmaceuticals
through home healthcare providers, Health Script launched a new program under
the name "Healthco HomeRx" in which the Dura field sales force provides
information concerning the services of Health Script to Dura's targeted
physician base.
- - Acquiring, in-licensing or co-promoting respiratory prescription
pharmaceuticals. The Company seeks to acquire, in-license or co-promote
already approved respiratory prescription pharmaceuticals or companies
developing and/or marketing such pharmaceuticals. The Company is particularly
focused on respiratory drugs that are under-promoted by large pharmaceutical
companies. The Company believes that the pharmaceutical industry is undergoing
a restructuring that may create greater opportunities for the Company. For
example, many large pharmaceutical companies are reducing their sales forces,
which may lead to the underpromotion of certain products and create
significant acquisition, in-licensing and co-promotion opportunities.
Additionally, consolidation within the sector may make small product lines
less desirable to large pharmaceutical companies. At present, the Company is
actively pursuing the acquisition of rights to several products and/or
companies which may require the use of substantial capital resources; however,
there are no present agreements or commitments with respect to any such
acquisition.
- - Developing Spiros. The Company has a three-level development program for
Spiros which entails (i) developing, on behalf of Spiros Corp., certain drug
applications for use in Spiros, including in the near term albuterol,
beclomethasone and ipratropium, three of the most frequently-prescribed
pharmaceutical agents to treat respiratory conditions, and, in the longer
term, certain proteins and peptides, (ii) licensing Spiros primarily to
pharmaceutical companies generally for use with certain of their proprietary
respiratory products, and (iii) developing Spiros, in collaboration with third
parties, for the systemic delivery of compounds through the lungs for
respiratory and non-respiratory indications as an alternative to current
invasive delivery techniques. These Spiros development programs are currently
being undertaken primarily through strategic relationships with Spiros Corp.,
Elan, Mitsubishi, Fujisawa and Houghten Pharmaceuticals, Inc. ("Houghten").
- - Developing respiratory pharmaceutical products. The Company is developing or
has contracted for the development of four currently-marketed respiratory
prescription pharmaceuticals. The Company considers a number of factors in
determining which currently-marketed pharmaceuticals to develop, including (i)
projected market size and historical revenues and profits, (ii) ability to be
marketed through Dura's existing distribution channels, (iii) ability to
complement or supplement Dura's existing products and (iv) ability to be
differentiated from other currently-marketed pharmaceuticals, either by
reformulation or method of delivery.
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DURA'S CURRENT PRODUCTS
The following prescription pharmaceuticals are currently being marketed by
Dura in the following therapeutic categories:
<TABLE>
<CAPTION>
RIGHTS YEAR
OBTAINED FROM OR INTRODUCED
PRODUCTS DEVELOPED BY BY DURA
- --------------------------------------------------------------------- ---------------------- ---------
<S> <C> <C>
ASTHMA AND COPD
TORNALATE METERED DOSE INHALER (bitolterol mesylate)............... Sanofi-Winthrop, Inc. 1993
TORNALATE SOLUTION FOR INHALATION, 0.2% (bitolterol mesylate)...... Sanofi-Winthrop, Inc. 1992
UNI-DUR (theophylline)............................................. Schering Corporation 1996
ALLERGY, COUGH AND COLD
DURA-VENT TABLETS (phenylpropanolamine HC1, guaifenesin)........... Dura Pre-1989
DURA-VENT/DA TABLETS (chlorpheniramine maleate, phenylephrine HC1,
methscopolamine nitrate)......................................... Dura Pre-1989
D.A. CHEWABLE TABLETS (chlorpheniramine maleate, phenylephrine HC1,
methscopolamine nitrate)......................................... Dura 1991
D.A. II TABLETS (chlorpheniramine maleate, phenylephrine HC1,
methscopolamine nitrate)......................................... Dura 1996
DURA-TAP/PD CAPSULES (chlorpheniramine maleate, pseudoephedrine
HC1)............................................................. Dura Pre-1989
DURA-VENT/A CAPSULES (chlorpheniramine maleate, phenylpropanolamine
HC1)............................................................. Dura Pre-1989
DURA-GEST CAPSULES (phenylephrine HC1, phenylpropanolamine HC1,
guaifenesin)..................................................... Dura Pre-1989
FENESIN TABLETS (guaifenesin)...................................... Dura Pre-1989
FENESIN DM TABLETS (guaifenesin, dextromethorphan hydrobromide).... Dura 1994
GUAI-VENT/PSE TABLETS (pseudoephedrine HC1, guaifenesin)........... Dura 1994
CROLOM (cromolyn sodium opthalmic solution USP 9%)................. Bausch & Lomb 1995
RONDEC ORAL DROPS (carbinoxamine maleate, pseudoephedrine
hydrochloride)................................................... Abbott 1995
RONDEC SYRUP (carbinoxamine maleate, pseudoephedrine
hydrochloride)................................................... Abbott 1995
RONDEC-TR TABLET (carbinoxamine maleate, pseudoephedrine
hydrochloride)................................................... Abbott 1995
RONDEC TABLET (carbinoxamine maleate, pseudoephedrine
hydrochloride)................................................... Abbott 1995
RONDEC-DM ORAL DROPS (carbinoxamine maleate, pseudoephedrine
hydrochloride, dextromethorphan hydrobromide).................... Abbott 1995
RONDEC-DM SYRUP (carbinoxamine maleate, pseudoephedrine
hydrochloride, dextromethorphan hydrobromide).................... Abbott 1995
RONDEC CHEWABLE TABLETS (brompheniramine maleate, pseudoephedrine
hydrochloride)................................................... Dura 1996
ENTEX LA TABLETS (phenylpropanolamine HC1, guaifenesin)............ P&G 1996
ENTEX PSE TABLETS (pseudoephedrine HC1, guaifenesin)............... P&G 1996
ENTEX CAPSULES (phenylephrine HC1, phenylpropanolamine HC1,
guaifenesin)..................................................... P&G 1996
ENTEX LIQUID (phenylephrine HC1, phenylpropanolamine HC1,
guaifenesin)..................................................... P&G 1996
ANTIBIOTICS
CAPASTAT SULFATE (sterile capreomycin sulfate, USP)................ Lilly 1995
SEROMYCIN (cycloserine capsules, USP).............................. Lilly 1995
FURADANTIN ORAL SUSPENSION (nitrofurantoin)........................ P&G 1996
KEFTAB (cephalexin hydrochloride).................................. Lilly 1996
CECLOR CD Tablets (anhydrous cefaclor)............................. Lilly 1996
</TABLE>
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<PAGE> 27
In July 1996, the Company acquired the Entex line consisting of four
prescription upper respiratory drugs from P&G. In September 1996, the Company
acquired the U.S. rights to the cephalosporin antibiotics Keftab and Ceclor CD
from Lilly. The U.S. antibiotic market was $4.8 billion in 1995, of which $1.6
billion was accounted for by cephalosporin antibiotics. The Company believes
that this acquisition complements its existing strategy since approximately 70%
of antibiotics are prescribed for respiratory infections. Keftab is an
antibiotic indicated for respiratory tract, skin and soft tissue infections.
Ceclor CD is a twice-a-day dosage form of cefaclor typically taken for seven
days. Ceclor, Lilly's currently marketed cefaclor, is normally taken three times
a day for 10 days, and generated $161.0 million in sales in the United States
for the 12 months ended June 30, 1996. The Company expects to launch Ceclor CD
in late October 1996. The Company believes these product acquisitions further
its strategy of acquiring prescription pharmaceuticals which are marketed by its
sales force to its targeted physicians. To support the introduction and growth
of these products, the Company intends to increase its field sales force from
approximately 150 people currently to approximately 250 people by mid-1997.
Dura's agreement with Schering Corporation to market Uni-Dur allows the
Company to further leverage the productivity of its field sales force. The
Company is promoting the product, which is used to treat asthma and reversible
bronchospasm, to a significant portion of its targeted physician base. The
extension of the Rondec product line by the introduction of Rondec Chewable
represents an additional opportunity for Dura to achieve its goal of increasing
sales and its presence in the pediatric market.
The two Tornalate products, Keftab, Ceclor CD, Capastat Sulfate and
Seromycin, are the subject of approved NDAs. Uni-Dur and Crolom are the subject
of approved Abbreviated New Drug Applications ("ANDAs"). The remaining products
are branded pharmaceuticals which are not the subject of NDAs or ANDAs.
SPIROS
Spiros is a proprietary pulmonary dry powder drug delivery system that is
designed to aerosolize pharmaceuticals in dry powder formulations for delivery
to the lungs. Currently, Metered Dose Inhalers ("MDIs") are the most commonly
used inhalation delivery systems. The Company believes dry product inhalers
("DPIs") will gradually replace MDIs as the leading pulmonary delivery system,
due primarily to CFC regulation and coordination problems associated with MDIs.
Many companies are studying alternative propellants, such as hydrofluorocarbons
("HFAs"), for use in MDIs, and one potential competitor has obtained FDA
approval to market an albuterol MDI using an HFA propellant. However, the
Company believes any product utilizing alternative propellants will still suffer
from many of the limitations of currently-marketed MDIs, including the need for
patients to coordinate breathing with actuation of the drug delivery system.
There are currently two general classes of DPIs in commercial use worldwide,
individual and multiple dose systems, and both are breath powered and flow rate
dependent. In the U.S., only individual dose DPIs are marketed. Turbuhaler, a
multiple dose DPI and the leading DPI in worldwide sales, is considered the
current industry standard. It is not yet approved for marketing by the FDA in
the U.S., although the FDA has issued an approvable letter for the first
Turbuhaler product.
Potential Advantages of Spiros
The Company believes Spiros may have certain advantages over other
currently used methods of delivery including the following:
- - Inspiratory flow rate independence. Spiros is designed to deliver a
relatively consistent drug dose to the lungs over a wide range of inspiratory
flow rates, which can vary depending on a patient's health, effort or physical
abilities. Recently-completed tests of Spiros on human subjects have shown a
relatively consistent and significant level of drug deposition throughout the
clinically relevant inspiratory range. Currently-available DPIs can vary
significantly in their level of drug deposition depending on the inspiratory
flow rate and can deliver significantly less drug at the lower flow rates
typically associated with asthma attacks.
- - Minimum need for patient coordination. Spiros is breath-actuated and does not
require the user to coordinate inhalation and actuation of the drug delivery
system. MDIs generally require the user to coordinate their breathing with
actuation of the MDI. Studies indicate that a significant percentage of
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patients, particularly young children and the elderly, do not use MDIs
correctly. Spiros is designed to solve these coordination problems by
delivering the drug to patients' lungs as they inhale.
- - Free of chlorofluorocarbon propellants. CFC propellants have ozone
destructive characteristics and are subject to worldwide regulations aimed at
eliminating their usage within the decade. Spiros will not use CFCs while most
MDIs, currently the most popular form of aerosol drug delivery, use CFCs.
Virtually all of the world's industrial nations, under the auspices of the
United Nations Environmental Program, pledged to cease use of CFCs by the year
2000. As a result of the phase out of CFCs, the Company believes that DPIs
will become a leading method for pulmonary drug delivery.
- - Reduced side effects. Spiros is designed to efficiently deliver drugs to the
lungs thereby reducing drug deposition to the mouth and throat which could
reduce the possibility of unwanted side effects of certain pharmaceutical
agents, such as coughing and local irritation. With MDIs, a significant
portion of the dose is delivered to the mouth and throat and is swallowed.
- - Patient convenience. Spiros is designed to be convenient for patients, with
features such as breath actuation (Spiros is triggered by inhalation),
portability (light weight and small size), quick delivery time, simple
operation, dose delivery feedback and multi-dose capability.
Development Program for Spiros
The Company intends to proceed with a three-level development program for
Spiros. The first level entails developing certain drug applications for use in
Spiros, including in the near-term albuterol, beclomethasone and ipratropium,
three of the most frequently-prescribed pharmaceutical agents to treat
respiratory conditions, and, in the longer term, certain proteins and peptides.
The Company is engaged in on-going discussions with the FDA regarding
submissions for clinical testing requirements for Spiros for albuterol,
beclomethasone and ipratropium aimed at facilitating the regulatory approval
process.
A pilot clinical study using an earlier generation Spiros cassette system
and a marketed form of albuterol was completed in 1994, with data showing good
lung delivery performance of the system. An IND application was filed with the
FDA in 1994 to begin clinical testing with Dura's own albuterol dry powder
formulation with the improved, current-generation Spiros cassette system. Dura
exclusively licensed rights to this formulation to Spiros Corp. In April 1996,
Dura completed dosing of subjects in a clinical trial in the United States on
behalf of Spiros Corp. focusing on dose selection using a formulation of
powdered albuterol with Spiros under an IND application filed with the FDA. In
July 1996, the Company commenced long-term and short-term clinical trials which,
along with earlier studies, are intended to serve as the basis for the filing of
an NDA by Dura in 1997 seeking FDA marketing approval, on behalf of Spiros
Corp., for albuterol in the Spiros cassette system. Considerable formulation
work for use of beclomethasone with Spiros has also been done. A study has been
completed in Canada to evaluate dose selection in 24 subjects. The Company is
preparing an IND application for U.S. studies on beclomethasone in Spiros which
will be filed by Dura on behalf of Spiros Corp. The Company intends to conduct
additional clinical trials on albuterol, beclomethasone and ipratropium in the
Spiros blisterdisk system, on behalf of Spiros Corp.
Dura, on behalf of Spiros Corp., has performed powder formulation work with
the peptide drug salmon calcitonin, which in a clinical trial demonstrated the
ability to develop macromolecule aerosol powder formulation which achieved
systemic delivery using the Spiros technology. Particle size reduction
appropriate for aerosol administration was achieved, and in vitro measurements
showed good aerosol characteristics in Spiros. The formulation was sufficiently
stable, and a clinical trial batch was manufactured in Dura's cGMP facility.
The second level consists of licensing Spiros primarily to pharmaceutical
companies for use with certain of their proprietary respiratory products. Dura
currently has a development agreement with Fujisawa and is conducting
feasibility studies for other pharmaceutical companies to assess the suitability
of certain compounds to be delivered using Spiros. There can be no assurance
that any of these feasibility studies will prove successful, or even if
successful, that the pharmaceutical companies will proceed to license Spiros for
use with these compounds. See "-- Strategic Alliances."
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The third level is to develop Spiros for the systemic delivery of compounds
through the lungs for respiratory and non-respiratory indications as an
alternative to current invasive delivery techniques. The Company commenced
development efforts on the use of Spiros with peptides and proteins in 1995.
Dura is also performing feasibility studies for pharmaceutical companies that
desire to develop Spiros for use with both respiratory drugs and drugs for
systemic pulmonary delivery now being developed by those companies. In February
1996, Dura entered into a collaborative agreement with Houghten to develop
inhalation formulations of new compounds discovered and developed by Houghten.
See "-- Strategic Alliances."
ADDITIONAL RESPIRATORY PRODUCTS UNDER DEVELOPMENT
The Company is also developing or has contracted for the development of
four currently-marketed respiratory prescription pharmaceuticals. Three of these
products are being developed by Elan as part of its collaborative relationship
with the Company and utilize Elan's drug delivery expertise and proprietary
technologies. These products have been selected because they involve complex
delivery problems which make it more difficult for them to be easily and widely
genericized. Elan is currently performing dissolution and bioavailability
studies on two of these products. See "-- Strategic Alliances." The Company is
also developing a chewable cough/cold product which would add to Dura's products
already offered to the pediatric market. This product is being developed under
contract with outside manufacturers for Dura's exclusive use and utilizes a
proprietary taste-masking technology. Dura intends to seek FDA approval to
market this product under an ANDA.
SALES AND MARKETING
Field Sales Force
Dura's specialized sales and marketing organization targets a physician
base which includes approximately 60,000 U.S. allergists, ENTs, pulmonologists,
and a selected subset of pediatricians and generalist physicians who treat a
large number of allergy and asthma patients. The Company believes this
relatively small group of physicians writes approximately 70% of respiratory
pharmaceutical prescriptions for the $4.8 billion U.S. Respiratory Market. This
concentration allows for effective market penetration by a specialized sales and
marketing organization.
As of September 30, 1996, Dura had 135 full-time pharmaceutical sales
representatives nationwide, supervised by 15 district managers and two regional
directors. Dura believes its focused sales force currently calls on
approximately one-half of its target physician base. The Company intends to
continue expansion of its field sales force as product opportunities warrant.
The Company believes that the personal relationships of Dura's sales
representatives with their physician customers are essential to the Company's
business. Dura's sales representatives differentiate themselves from the
competition by focusing primarily on asthma and allergy, cough and cold, and by
promoting pharmaceuticals used by respiratory specialists in treating patients.
With a relatively small target audience, promotional spending by Dura on
advertising and direct mail is generally inexpensive and efficient. The Company
regularly participates in local, regional and national medical meetings of the
key specialty groups. The Company believes that it has established a national
awareness of the Dura name within the U.S. Respiratory Market.
Managed Care Sales and Marketing Group
To implement Dura's dual marketing strategy, the Company established a
dedicated managed care sales and marketing group, currently consisting of four
experienced national account managers, which concentrates on sales to large
regional and national managed care organizations. These organizations include
health maintenance organizations ("HMOs"), preferred provider organizations
("PPOs"), large drug merchandising chains, nursing home providers and mail order
pharmacies. A primary goal of the managed care sales and marketing group is to
place Dura's products on approved formulary lists of HMOs and PPOs.
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HEALTH SCRIPT
In March 1995, the Company acquired Health Script, located in Denver,
Colorado. Health Script, a wholly-owned subsidiary of the Company, is a mail
service pharmacy which dispenses respiratory pharmaceuticals. Mail order
services are particularly well-suited for respiratory patients who are
long-term, chronic users of certain pharmaceuticals and to whom the convenience
and cost efficiency of mail order is appealing. Health Script was formed in 1990
to supply value-priced respiratory pharmaceutical products to patients through
the mail. Health Script currently dispenses, to its approximately 30,000
patients nationwide, over 100 respiratory products manufactured by third
parties. Since inception, Health Script has focused on working with home
healthcare providers and their patients to coordinate respiratory medication
services and patient management programs. These home healthcare providers, which
principally distribute nebulizers, inform patients about the mail services of
Health Script. The existing patient base is maintained by telephone
conversations between pharmacists and the patients in which the patients'
compliance with their doctors' prescriptions are reviewed. During 1995, in
addition to building its existing business of dispensing respiratory
pharmaceuticals through home healthcare providers, Health Script launched a new
program under the name "Healthco HomeRx" in which the Dura field sales force
provides information concerning the services of Health Script to Dura's targeted
physician base.
RELATIONSHIP WITH SPIROS CORP.
In December 1995, Spiros Corp. completed a $28.0 million private placement.
The net proceeds of this private placement and a $13.0 million cash contribution
from Dura are being used by Spiros Corp. to continue a significant portion of
the development program for Spiros, including funding of formulation,
preclinical development and ongoing and future clinical trials of albuterol,
beclomethasone and ipratropium in Spiros.
The financing involved the issuance and sale of 933,334 units at $30.00 per
unit. Each unit consisted of one share of Spiros Corp. callable common stock and
one Series S Warrant exercisable for 2.4 shares of the Common Stock at an
exercise price of $19.47 per share. In consideration for the issuance of the
Series S Warrants and Dura's cash contribution, the Company received the
Purchase Option, which can be exercised through December 31, 1999, to purchase
all of the currently outstanding shares of Spiros Corp. callable common stock at
predetermined prices, beginning at $46.88 per share (an aggregate of $43.7
million) through December 31, 1997 and increasing on a quarterly basis
thereafter to a maximum of $76.17 per share (an aggregate of $71.1 million) on
December 31, 1999. Such purchase price may be paid, at the Company's discretion,
in cash, shares of the Common Stock or a combination thereof. Any shares of
Common Stock delivered in payment of the purchase price must be covered by an
effective registration statement. If the development efforts of Spiros Corp. are
successful, the Company may exercise its right to purchase Spiros Corp.'s
callable common stock; however, the Company does not have a legal obligation to
do so. In addition, Dura has the Albuterol Purchase Option through specified
dates, exercisable at any time through the earlier of 60 days after FDA approval
of an albuterol product or December 31, 1999. The Albuterol Purchase Option
gives the Company an option to purchase certain rights to an albuterol product
in a cassette version of Spiros. In the event Dura exercises the Albuterol
Purchase Option and does not exercise the Purchase Option, Dura will pay a
royalty to Spiros Corp. on net sales of such albuterol product.
In connection with the private placement, the Company entered into the
following agreements with Spiros Corp.:
- -Technology License Agreement. Under this agreement, the Company and DDSI
granted to Spiros Corp., subject to existing agreements with Elan and
Mitsubishi, a royalty-bearing, perpetual, exclusive license to use Spiros in
connection with albuterol, beclomethasone and ipratropium and certain other
proteins and peptides (including salmon calcitonin) and certain non-exclusive
rights to all other compounds to which Dura and/or DDSI have or acquire rights
capable of transfer during the term of the Development and Management
Agreement.
- -Interim Manufacturing and Marketing Agreement. Under this agreement, Spiros
Corp. granted to the Company an exclusive license to manufacture and market
Spiros Corp. products in the U.S. in exchange for
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a royalty of 10.0% on net product sales, as defined in the agreement. This
agreement expires upon termination or expiration of the Purchase Option.
- -Development and Management Agreement. Under this agreement, Spiros Corp. has
engaged the Company to develop the Spiros Corp. products and provide general
management services to Spiros Corp.
STRATEGIC ALLIANCES
Elan Corporation, plc. In September 1994, Dura, DDSI and Elan signed
certain agreements resulting in the formation of a strategic alliance. These
agreements expanded the relationship established in April 1994 with the
definitive stock purchase agreement signed by Dura and Elan, under which Elan,
for an aggregate consideration of $3,480,000, purchased 685,714 shares of Common
Stock, along with warrants exercisable into 600,000 additional shares of Common
Stock at an exercise price of $4.38 per share. Under a technology access
agreement, Elan is developing generic versions of certain drugs. If Elan
successfully develops and obtains the appropriate regulatory approvals for the
drugs, Dura plans to market these drugs in the U.S. through its established
pharmaceutical sales and marketing organization. In November 1994, Dura
deposited with Elan $2.5 million and is required to make certain other milestone
payments in connection with this agreement. In the event such development
efforts are unsuccessful, Elan will be required to refund in cash the Company's
$2.5 million deposit.
DDSI, Dura and Elan are parties to a product licensing agreement under
which Elan received exclusive rights to develop, manufacture and market to most
countries outside the U.S. eight identified asthma and COPD compounds for use in
Spiros, including albuterol, beclomethasone and ipratropium. Dura and DDSI
assigned certain of their rights under this license agreement to Spiros Corp. in
December 1995. Additionally, Elan made a $10.0 million investment in the units
of Spiros Corp.
Mitsubishi Chemical Corporation. In October 1994, Dura, DDSI and
Mitsubishi entered into a license and supply agreement, under which Mitsubishi
was granted the exclusive right to use and sell Spiros together with a dry
powder formulation of an asthma compound in Japan, Hong Kong, Singapore, the
Republic of China (Taiwan), the Republic of Korea and the People's Republic of
China (collectively the "Territory"). DDSI's rights under the agreement were
assigned to Spiros Corp. in December 1995. Spiros Corp. has agreed to develop a
dry powder formulation of such compound for Mitsubishi and will manufacture and
supply to Mitsubishi its requirements for both Spiros and such compound.
Mitsubishi will be responsible for conducting all clinical and other work needed
to obtain regulatory approvals of Spiros and such compound in the Territory. In
connection with the license and supply agreement, Mitsubishi is obligated to
make milestone and other payments to Dura and Spiros Corp. in certain
circumstances.
Fujisawa Pharmaceutical Co., Ltd. In April 1995, the Company entered into
a collaborative development agreement with Fujisawa covering the use of Spiros
to deliver one of Fujisawa's new chemical entity asthma compounds. The agreement
was an extension of previous feasibility work completed by Dura. Pursuant to the
agreement, the Company will provide dry powder formulation assistance,
manufacturing process development and clinical trial supplies to Fujisawa
through the completion of clinical trials in Japan or June 30, 1998, whichever
occurs first. The Company received an up-front payment and is to receive
additional milestone payments and reimbursement of costs from Fujisawa. Fujisawa
can terminate the agreement upon 30 days' notice to the Company. If Fujisawa's
clinical trials are successful, the parties have agreed to negotiate additional
agreements, which could include license and supply agreements.
Houghten Pharmaceuticals, Inc. In February 1996, the Company entered into
a research and development agreement with Houghten to develop inhalation
formulations of new compounds discovered and developed by Houghten. In addition,
Dura will provide to Houghten, for a four-year period, contract services for
Houghten's drug development programs using Dura's development capabilities and
proprietary formulation and delivery technology. The Company will receive a
percentage of proceeds received by Houghten with respect to jointly-developed
compounds, and will receive contract revenues from Houghten for services
provided. Concurrently, Dura made a $5.0 million equity investment in Houghten,
which was subsequently converted into 775,193 shares of Houghten common stock.
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In addition, the Company has executed agreements with a number of
international pharmaceutical companies to conduct feasibility studies on
formulations of certain compounds for use with Spiros, including growth hormones
and proteins and peptides.
COMPETITION
The Company directly competes with at least 25 other companies in the U.S.
which are currently engaged in developing, marketing and selling respiratory
pharmaceuticals. Additionally, there are at least 10 companies currently
involved in the development, marketing or sales of dry powder pulmonary drug
delivery systems. In the U.S., only individual dose DPIs are marketed, including
the Rotohaler (developed and marketed by Glaxo) and the Spinhaler (developed and
marketed by Fisons). The Turbuhaler (developed and marketed by Astra), a
multiple dose DPI and the leading DPI in worldwide sales, is considered the
current industry standard. It is not yet marketed in the U.S., although the FDA
has issued an approvable letter for the first Turbuhaler product.
Many of these companies, including large pharmaceutical firms with
financial and marketing resources and development capabilities substantially
greater than those of the Company, are engaged in developing, marketing and
selling products that compete with those offered by the Company. The selling
prices of such products typically decline as competition increases. Further,
other products now in use or under development by others may be more effective
than the Company's current or future products. The industry is characterized by
rapid technological change, and competitors may develop their products more
rapidly than the Company. Competitors may also be able to complete the
regulatory process sooner and, therefore, may begin to market their products in
advance of the Company's products. Dura believes that competition among both
prescription pharmaceuticals and pulmonary drug delivery systems aimed at asthma
and allergy, cough and cold markets will be based on, among other things,
product efficacy, safety, reliability, availability and price.
CLINICAL, DEVELOPMENT AND REGULATORY
The Company's clinical, development and regulatory expenses relate
primarily to product development and regulatory compliance activities. Clinical,
development and regulatory expenses were $2,819,000, $9,354,000, $8,408,000,
$5,997,000 and $12,121,000 for the years ended December 31, 1993, 1994, 1995 and
the nine months ended September 30, 1995 and 1996, respectively. The clinical,
development and regulatory expenses associated with Spiros development, for
which the Company recorded contract revenues from DDSI, were $1,487,000,
$8,260,000, $6,428,000 and $4,357,000 for the years ended December 31, 1993,
1994, 1995 and the nine months ended September 30, 1995, respectively. The
clinical, development and regulatory expenses associated with Spiros
development, for which the Company recorded contract revenues from Spiros Corp.,
were $12,825,000 for the nine months ended September 30, 1996.
PATENTS AND PROPRIETARY RIGHTS
The Company considers the protection of discoveries in connection with its
development activities important to its business. The Company intends to seek
patent protection in the U.S. and selected foreign countries where deemed
appropriate. On July 12, 1994, the Company was issued a U.S. patent on Spiros
and the Company has filed a continuation-in-part covering certain improvements.
The issued patent covers, among other claims, use in Spiros of an impeller to
create an aerosol cloud of a drug intended for inhalation. There can be no
assurance that the issued patent or subsequent patents, if issued, will
adequately protect the Company's design or that such patents will provide
protection against infringement claims by competitors. Dura has also filed
certain foreign patent applications relating to Spiros technology. There can be
no assurance that additional patents, U.S. or foreign, will be obtained covering
Company products or that, if issued or licensed to the Company, the patents
covering Company products will provide substantial protection or be of
commercial benefit to the Company. Federal court decisions establishing legal
standards for determining the validity and scope of patents in the field are in
transition. For example, in a currently pending case, the U.S. Supreme Court
will consider whether to alter or replace the traditional standard for
determining patent infringement under the doctrine of equivalents. There can be
no assurance that the historical legal standards
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surrounding questions of validity and scope will continue to be applied or that
current defenses as to issued patents in the field will offer protection in the
future.
The Company also relies upon trade secrets, unpatented proprietary know-how
and continuing technological innovation to develop its competitive position. The
Company enters into confidentiality agreements with certain of its employees
pursuant to which such employees agree to assign to the Company any inventions
relating to the Company's business made by them while in the Company's employ.
There can be no assurance, however, that others may not acquire or independently
develop similar technology or, if patents are not issued with respect to
products arising from research, that the Company will be able to maintain
information pertinent to such research as proprietary technology or trade
secrets.
Tornalate Inhalation Solution and Tornalate MDI are covered by patents
filed by Sanofi-Winthrop, Inc. which expire in the near-term. The Keftab and
Ceclor CD products or processes to make such products are covered by patents
which expire in 2003, 2005 and 2007. The Company's other asthma, allergy, cough
and cold pharmaceuticals are not protected by patents.
GOVERNMENT REGULATION
The manufacturing and marketing of the Company's products are subject to
regulation by Federal and state government authorities, including the FDA, the
Environmental Protection Agency ("EPA") and the Occupational Safety and Health
Administration ("OSHA"), in the U.S. and other countries. In the U.S.,
pharmaceuticals and drug delivery systems, including Spiros, are also subject to
rigorous FDA regulation. The Federal Food, Drug, and Cosmetic Act and the Public
Health Service Act govern the testing, manufacture, safety, efficacy, labeling,
storage, record keeping, approval, advertising and promotion of the Company's
products. Product development and approval within this regulatory framework
takes a number of years and involves the expenditure of substantial resources.
To obtain FDA approval for Spiros and the compounds to be used with it,
Dura is required to conduct each of the following steps and possibly others: (i)
preclinical (laboratory and possibly animal tests), (ii) the submission to the
FDA of an application for an IND, which must become effective before human
clinical trials may commence, (iii) adequate and well-controlled human clinical
trials to establish the safety and efficacy, (iv) the submission of an NDA to
the FDA for marketing approval, and (v) the FDA approval of the NDA prior to any
commercial sale or shipment. In addition to obtaining FDA approval for each
product, each domestic drug and/or device manufacturing facility must be
registered with and approved by the FDA. Domestic manufacturing facilities are
subject to biennial inspections by the FDA and must comply with cGMP for both
drugs and devices. To supply products for use in the U.S., foreign manufacturing
establishments must comply with cGMP and other requirements and are subject to
periodic inspection by the FDA or by regulatory authorities in such countries
under reciprocal agreements with the FDA.
Preclinical testing includes laboratory evaluation of product chemistry and
animal studies, if appropriate, to assess the safety and efficacy of the product
and its formulation. The results of the preclinical tests are submitted to the
FDA as part of an IND, and unless the FDA objects, the IND will become effective
30 days following its receipt by the FDA, thus allowing the product to be tested
in humans.
Clinical trials involve the administration of the pharmaceutical product to
healthy volunteers or to patients identified as having the condition for which
the pharmaceutical agent is being tested. The pharmaceutical is administered
under the supervision of a qualified principal investigator. Clinical trials are
conducted in accordance with Good Clinical Practice and protocols previously
submitted to the FDA (as part of the IND) that detail the objectives of the
study, the parameters used to monitor safety and the efficacy criteria
evaluated. Each clinical study is conducted under the auspices of an independent
Institutional Review Board ("IRB") at the institution at which the study is
conducted. The IRB considers, among other things, the design of the study,
ethical factors, the safety of the human subjects and the possible liability
risk for the institution.
Clinical trials for new products are typically conducted in three
sequential phases that may overlap. In Phase I, the initial introduction of the
pharmaceutical into healthy human volunteers, the emphasis is on
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testing for safety (adverse effects), dosage tolerance, metabolism,
distribution, excretion and clinical pharmacology. Phase II involves studies in
a limited patient population to determine the initial efficacy of the
pharmaceutical for specific targeted indications, to determine dosage tolerance
and optimal dosage and to identify possible adverse side effect and safety
risks. Once a compound is found to be effective and to have an acceptable safety
profile in Phase II evaluations, Phase III trials are undertaken to more fully
evaluate clinical outcomes. The FDA reviews both the clinical plans and the
results of the trials and may require the study to be discontinued at any time
if there are significant safety issues.
The results of the preclinical and clinical trials are submitted to the FDA
in the form of an NDA (or a Product License Application for biological products)
for marketing approval. FDA approval can take several months to several years,
or approval may be denied. The approval process can be affected by a number of
factors, including the severity of the side effects, the availability of
alternative treatments and the risks and benefits demonstrated in clinical
trials. Additional animal studies or clinical trials may be requested during the
FDA review process and may delay marketing approval. After FDA approval for the
initial indication, further clinical trials are necessary to gain approval for
the use of the product for any additional indications. The FDA may also require
post-marketing testing and surveillance to monitor for adverse effects, which
can involve significant additional expense.
Although the FDA has considerable discretion to decide what requirements
must be met prior to approval, the Company believes the FDA is likely to
regulate each combination of Spiros with a compound as a discrete pharmaceutical
or drug product requiring separate approval as a new drug. The Company believes
that the approval process for each drug/delivery combination now under
development may be shorter than the full NDA process described above because the
safety and efficacy of the compounds have already been established in currently
marketed formulations and delivery mechanisms. There can be no assurance,
however, that the approval process will be shorter or that any NDA submitted by
the Company will eventually be approved.
For both currently-marketed and future products, failure to comply with
applicable regulatory requirements after obtaining regulatory approval can,
among other things, result in the suspension of regulatory approval, as well as
possible civil and criminal sanctions. In addition, changes in regulations could
have a material adverse effect on the Company.
The Federal Food, Drug, and Cosmetic Act requires that any "new drug" must
be approved pursuant to an NDA. The term "new drug" is defined as any drug which
is not generally recognized among qualified experts as safe and effective for
its labeled intended uses. Certain exemptions from this definition exist for
products marketed without change since prior to 1938 (the date of enactment of
the Federal Food, Drug, and Cosmetic Act) or, with respect to the need to show
effectiveness for drug products marketed prior to October 10, 1962 (the date of
enactment of the "Drug Amendments of 1962"). The Company presently markets 16
drug products for which the FDA has not yet made a determination as to their
status as new drugs under the Federal Food, Drug, and Cosmetic Act. The FDA is
continuing an evaluation of the effectiveness of all products containing
ingredients marketed prior to 1962 that are not the subject of an approved NDA
as part of its DESI program and will determine which are new drugs requiring
approval through an NDA for marketing. The existence of currently-marketed
prescription pharmaceuticals that contain one or more active ingredients first
introduced in the marketplace before 1962 and that are marketed based on their
manufacturers' belief that such products are not subject to the new drug
provisions of the Act is recognized in paragraph B ("Pre-1962 Prescription Drugs
Not Covered By An NDA") of the Food and Drug Administration's Compliance Policy
Guide, Chapter 32c (Guide 7132c.02). This Policy Guide indicates that the FDA
will implement procedures to determine whether the new drug provisions are or
are not applicable to these products. The Policy Guide requires that products
covered by paragraph B not be similar or related to any drug included in the
DESI program, or have a different formulation or conditions for use than
products marketed before November 13, 1984. If a product is not covered by
paragraph B, the FDA could make a determination as to whether or not the new
drug provisions are applicable to it without first implementing the procedures
called for by the Policy Guide. The Company believes that nine of its
prescription pharmaceutical products may be covered by paragraph B of the Policy
Guide and it is aware that one of its products may be considered to be similar
or related to a DESI drug. Also, it is not aware of evidence to substantiate
that three of its
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products have the same formulation or conditions for use as products marketed
before November 13, 1984. These products could be subject at any time to an FDA
determination that an NDA is required. If a final determination is made that a
particular drug requires an approved NDA, such approval will be required for
marketing to continue. If such a determination is made, the FDA might impose
various requirements: for example, it might require that the current product be
the subject of an approved NDA, that the product be reformulated and NDA
approval obtained, that the product must be sold on an over-the-counter basis
rather than as a prescription drug, or that the product must be removed from the
market. There can be no such assurance as to which of these courses the FDA will
require or whether the Company will be able to obtain any approvals which the
FDA may deem necessary. If any of these actions are taken by the FDA, such
actions could have a material adverse effect on the Company's business.
In April 1996, the export provisions of the Federal Food, Drug, and
Cosmetic Act were relaxed to permit the export of unapproved drugs to a foreign
country, provided the product complies with the laws of that country and has
valid marketing authorization in at least one of a list of designated "Tier 1"
countries. Once a product is exported to a qualified foreign country, the
Company will be subject to the applicable foreign regulatory requirements
governing human clinical trials and marketing approval in that country. The
requirements relating to the conduct of clinical trials, product licensing,
pricing and reimbursement vary widely from country to country and there can be
no assurance that the Company or any of its collaborators will be able to meet
and fulfill the statutory requirements in a particular country.
Health Script is subject to regulation by state regulatory authorities,
principally state boards of pharmacy. In addition, Health Script is subject to
regulation by other state and Federal agencies with respect to reimbursement for
prescription drug benefits provided to individuals covered primarily by publicly
funded programs.
MANUFACTURING
In June 1995, the Company completed construction of its manufacturing
facility located in a Company-owned building adjacent to its headquarters. The
facility initially is intended to be used to formulate, mill, blend and
manufacture drugs to be used with Spiros, pending regulatory approval. Equipment
purchases for and validation of the facility are currently scheduled through
1997. The Company's manufacturing facility must be registered with and licensed
by various regulatory authorities and comply with cGMP requirements prescribed
by the FDA and the State of California. The Company is currently expanding its
facilities to provide additional manufacturing capabilities. The Company relies
on a single manufacturer for certain of its products. Any failure or significant
delay in the validation of or obtaining a satisfactory regulatory inspection of
the new facility could have a material adverse effect on the Company's ability
to manufacture products in connection with Spiros.
The Company has limited experience manufacturing products for commercial
purposes and currently does not have the capability to manufacture its
pharmaceutical products and therefore is dependent on contract manufacturers for
the production of such products for development and commercial purposes. The
Company's current dependence upon others for the manufacture of its products may
adversely affect the future profit margin, if any, on the sale of those products
and the Company's ability to develop and deliver products on a timely and
competitive basis.
FACILITIES
The Company owns and occupies two buildings that are situated on one parcel
of land located in San Diego, California. One building, consisting of
approximately 31,000 square feet, is used primarily as office space for
research, regulatory, sales and administrative personnel. The second building,
consisting of approximately 49,000 square feet, contains the Company's
manufacturing facility that will be used to formulate, mill, blend and fill
drugs to be used with Spiros, lab and research facilities and warehouse space.
The Company also occupies an additional 34,000 square feet of office and
laboratory space pursuant to a short-term lease, and is examining other longer
term space opportunities.
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<PAGE> 36
The Company also leases approximately 16,660 square feet of space in
Denver, Colorado which houses the operations of Health Script's mail service
pharmacy. The lease term expires in December 2000 with one five-year renewal
option.
HUMAN RESOURCES
The Company employed 369 employees (of which 355 are full-time) as of
September 30, 1996, consisting of 151 people in sales and marketing (of which
135 constitute the field sales force and the managed care sales and marketing
group), 37 in administration and finance, 68 in clinical, regulatory and
research and development, 24 in operations and 89 at Health Script. None of the
Company's employees are represented by a labor union and the Company believes it
maintains positive relations with both field and corporate personnel.
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<PAGE> 37
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND OTHER KEY EMPLOYEES
The executive officers, directors and key employees of Dura as of October
1, 1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION HELD WITH THE COMPANY
- --------------------------------- ---- ------------------------------------------------------
<S> <C> <C>
Cam L. Garner.................... 48 President, Chief Executive Officer, and Chairman of
the Board
David S. Kabakoff................ 48 Executive Vice President and Director
James W. Newman.................. 51 Senior Vice President, Finance and Administration,
Chief Financial Officer and Assistant Secretary
Charles W. Prettyman............. 50 Senior Vice President, Development and Regulatory
Affairs
Walter F. Spath.................. 52 Senior Vice President, Sales and Marketing, and
Director
Julia Brown...................... 49 Vice President, Business Development
Chester Damecki.................. 49 Vice President, Operations
Robert K. Schultz................ 40 Vice President, Product Development
David Sudolsky................... 38 Vice President, Marketing
Clyde L. Witham.................. 48 Vice President, Aerosol Technology
Mitchell R. Woodbury............. 54 Vice President, General Counsel and Secretary
Michael T. Borer................. 37 General Manager, Health Script
James C. Blair(1)(2)............. 57 Director
Herbert J. Conrad(2)............. 63 Director
Joseph C. Cook(1)................ 54 Director
David F. Hale(2)................. 47 Director
Gordon V. Ramseier(1)............ 51 Director
Charles G. Smith................. 68 Director
</TABLE>
- ---------------
(1) Members of the Audit Committee of the Board of Directors.
(2) Members of the Compensation Committee of the Board of Directors.
MR. GARNER joined the Company in October 1989 as Executive Vice President
and a Director of the Company. He has served as President and Chief Executive
Officer since May 1990 and was named Chairman of the Board of Directors in 1995.
Mr. Garner also currently serves as a Director of Spiros Corp. Prior to joining
the Company, Mr. Garner served as President of Syntro Corporation, a
biotechnology company, from November 1987 to June 1989. Mr. Garner is currently
a Director of Houghten, and Safeskin Corporation, a manufacturer of medical
supplies. From October 1983 to October 1987, he served as Senior Vice President
of Sales and Marketing at Hybritech, Inc., a biotechnology company
("Hybritech"). Mr. Garner received an MBA from Baldwin-Wallace College and a BS
in Biology from Virginia Wesleyan College.
DR. KABAKOFF joined the Company in May 1996 as Executive Vice President and
was elected a director in May 1996. Dr. Kabakoff also currently serves as
President, Chief Executive Officer and a Director of Spiros Corp. Prior to
joining the Company, Dr. Kabakoff held several positions at Corvas
International, Inc., a biopharmaceutical company ("Corvas") since 1989, most
recently serving as Chief Executive Officer, President and a director. He was
named Chairman of the Board of Corvas in January 1996. From March 1983 to March
1989, Dr. Kabakoff was employed by Hybritech, most recently as Senior Vice
President of Research and Development -- Diagnostics. Dr. Kabakoff received a
Ph.D. in Organic Chemistry from Yale University and a BA in Chemistry from Case
Western Reserve University.
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<PAGE> 38
MR. NEWMAN joined the Company in September 1991 and currently serves as
Senior Vice President, Finance and Administration, Chief Financial Officer and
Assistant Secretary. Prior to joining the Company, Mr. Newman served as
President of George Wimpey of Texas and previously as Vice President, Chief
Financial Officer, of George Wimpey, Inc., a land development and homebuilding
company, from October 1987 to September 1991. Mr. Newman holds an MBA in Finance
from Golden Gate University and a BS in Accounting from University of Illinois.
Mr. Newman has been a Certified Public Accountant in California since 1972.
MR. PRETTYMAN joined the Company in December 1991 and currently serves as
Senior Vice President, Development and Regulatory Affairs. Prior to joining the
Company, Mr. Prettyman served as Vice President, Regulatory Affairs and
Compliance at The Purdue Frederick Company, a privately-held pharmaceutical
company, from August 1988 to November 1991. From January 1987 until August 1988,
Mr. Prettyman served as Executive Director, Drug Regulatory Affairs, Central
Nervous System Development at Ciba-Geigy Pharmaceuticals. From January 1977
until December 1987, Mr. Prettyman held various positions with the FDA,
including Director, Program Management, Office of the Commissioner. Mr.
Prettyman received an MS in Biological Science from George Washington University
and a BS degree in Biology from Randolph Macon College.
MR. SPATH joined the Company in July 1988 and currently serves as Senior
Vice President, Sales and Marketing, and has served as a Director since
September 1991. Prior to joining the Company, Mr. Spath was Corporate Vice
President, Commercial Development, at Searle Pharmaceuticals ("Searle") from
October 1986 to July 1988. He joined Searle in May 1975 and held various
marketing and sales positions from 1975 to 1986. Prior to joining Searle, Mr.
Spath was a marketing manager at Pfizer Pharmaceuticals. Mr. Spath received an
MBA in Marketing from University of Maryland and a BS in Economics from
Villanova.
MS. BROWN joined the Company in March 1995 as Vice President, Business
Planning and became Vice President, Business Development in October 1995. Prior
to joining the Company, Ms. Brown spent over 25 years with Lilly and certain
subsidiaries dealing with pharmaceuticals, medical devices and diagnostics. From
October 1992 to December 1994, she was general manager of IVAC Corporation's
Vital Signs Division. From September 1986 to October 1992, Ms. Brown held
several marketing positions with Hybritech, including Division Vice President of
Marketing. Ms. Brown holds a BS in Microbiology from Louisiana Tech University.
MR. DAMECKI joined the Company in December 1995 as Vice President,
Operations. Prior to joining the Company, Mr. Damecki was Vice President of
Operations with Gensia from January 1991 to February 1995. From November 1985 to
December 1990 he was Vice President of Operations with Hybritech. Before joining
Hybritech, Mr. Damecki was Vice President of Operations for BBL Microbiology
Systems, a division of Becton, Dickinson and Company. Earlier in his career he
held several key operations positions at Ortho Pharmaceutical Corporation, a
division of Johnson and Johnson. He holds an MBA from Fairleigh Dickinson
University and a BS in Engineering from New Jersey Institute of Technology.
DR. SCHULTZ joined the Company in September 1994, and was promoted to Vice
President, Product Development in January 1995. Prior to joining Dura, he was a
project manager for the Inhalation Technology Group at 3M Pharmaceuticals ("3M")
where he managed the evaluation and development of new aerosol technologies and
existing metered dose inhaler products. During his 14 years with 3M, Dr. Schultz
specialized in developing inhalation drug delivery systems. Dr. Schultz received
a Ph.D. in Pharmaceutics and a BS degree in Pharmacy from the University of
Minnesota.
MR. SUDOLSKY joined the Company in June 1987 and was promoted to Vice
President, Business Development in March 1990 and became Vice President,
Marketing in October 1995. Prior to joining the Company, Mr. Sudolsky served as
an associate with Booz, Allen & Hamilton, a management consulting firm ("Booz
Allen"), where he specialized in health care and high technology industries. Mr.
Sudolsky received an MBA in Marketing, Finance and International Business from
Columbia University Graduate School of Business and a BS in Chemical Engineering
from Columbia University School of Engineering and Applied Science.
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<PAGE> 39
MR. WITHAM joined the Company in October 1994, and was promoted to Vice
President, Aerosol Technology in January 1995. Prior to joining Dura, he was
manager of the Fine Particle Technology Program in the Physical Sciences
Division at SRI International ("SRI"), a contract research firm. During his 21
years with SRI, Mr. Witham specialized in fine particle technology, aerosol
generation technology, polymer compounding, air pollution control, equipment
design, product development and manufacturing process improvement. Mr. Witham
received an MS degree in Environmental Engineering from Stanford University and
a BS degree in Chemical Engineering from Brigham Young University.
MR. WOODBURY joined the Company in June 1994 as Vice President, General
Counsel and Secretary. Prior to joining the Company, Mr. Woodbury served as Vice
President, General Counsel and Secretary at Advanced Tissue Sciences, Inc., a
biomedical company, from June 1992 to June 1994. From October 1991 until June
1992, Mr. Woodbury served as Senior Vice President, General Counsel of
Intermark, Inc. ("Intermark"), a publicly held operating/holding company. He was
elected Vice President and Corporate Counsel of Intermark in 1980 and had served
as Corporate Secretary since 1981. Mr. Woodbury received his J.D. from the
University of San Diego School of Law and a BA in Business Administration from
San Diego State University.
MR. BORER joined the Company in April 1994 and served as Senior Director of
Finance, until being named General Manager of the Company's Health Script
division in August 1996. From June 1993 to April 1994, Mr. Borer served as
Project Leader at San Diego Gas & Electric, and from June 1981 to June 1993, Mr.
Borer held various positions, the last of which was Senior Manager, with the
accounting firm of Deloitte & Touche. Mr. Borer holds a BS in Business
Administration from San Diego State University and has been a certified public
accountant since 1984.
DR. BLAIR has served as a Director of the Company since April 1986. Dr.
Blair has been a general partner of Domain Associates, a venture capital
management company, since 1985. From 1969 to 1985, Dr. Blair was an officer of
three investment banking and venture capital firms. Dr. Blair is a director of
Amylin Pharmaceuticals, Inc. ("Amylin"), CoCensys Inc., Gensia and Houghten, all
biopharmaceutical companies.
MR. CONRAD has served as a Director of the Company since June 1994. Mr.
Conrad served as President of the Pharmaceuticals Division and Senior Vice
President of Hoffmann-La Roche Inc. ("Roche") from 1982 until his retirement in
August 1993. Mr. Conrad joined Roche in 1960 and held various positions over the
years, including Senior Vice President of the Pharmaceuticals Division, Chairman
of the Board of Medi-Physics, Inc. and Vice President, Public Affairs and
Planning Division. Mr. Conrad is a director of Gensia, Biotechnology General
Corp., a biotechnology company, and Bradley Pharmaceuticals, a pharmaceutical
company.
MR. COOK has served as a Director of the Company since August 1995. Mr.
Cook has been President of Cambrian Associates, LLC since 1994 and has been a
principal of Life Science Advisors, Inc. ("LSA") since it was founded in 1994.
Mr. Cook retired as Group Vice President, Global Manufacturing, Engineering and
Corporate Quality at Lilly in 1993. During his 28 years with Lilly, Mr. Cook was
Vice President of Sales and Marketing, Chief Financial Officer for Elanco
Products Company, and General Manager of a worldwide business unit of Lilly. He
is currently a director of Amylin, NABI, Inc., a biopharmaceutical company, and
Personnel Management, Inc., a temporary services company.
MR. HALE has served as a Director of the Company since March 1986. Mr. Hale
has served as President and Chief Executive Officer of Gensia since June 1987
and Chairman of the Board since 1991. Prior to joining Gensia, Mr. Hale was
President and Chief Executive Officer of Hybritech. From 1980 to 1982, Mr. Hale
was Vice President, General Manager of BBL Microbiology Systems, a division of
Becton-Dickinson and Company, and from 1970 to 1980 he held various sales and
marketing management positions with Ortho Pharmaceutical Corporation, a division
of Johnson & Johnson. Mr. Hale is currently Chairman of the Board of Gensia and
is a director of Genta Incorporated.
MR. RAMSEIER has served as a Director of the Company since September 1986.
Mr. Ramseier has been Executive Director of a private consulting company, The
Sage Group, since 1995. The Sage Group provides consulting services to companies
in the health care field. Prior to his consulting work, Mr. Ramseier served as
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<PAGE> 40
President and Chief Executive Officer of Onco Therapeutics, Inc. from 1992 until
1994. Prior to joining Onco, Mr. Ramseier operated a private consulting company
from May 1990 to April 1992. From September 1986 to May 1990, Mr. Ramseier
served as President and Chief Executive Officer of the Company. From 1979 to
1986, Mr. Ramseier served as a Vice President of Booz Allen.
DR. SMITH has served as a Director of the Company since December 1988. Dr.
Smith also serves as a member of the Company's Scientific Advisory Board. He has
operated a private consulting company since April 1986 and is currently a
consultant for several health care companies. Prior to his consulting work, Dr.
Smith served with Revlon Health Care Group as Vice President of Research and
Development from January 1975 to March 1986.
40
<PAGE> 41
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the ownership
of the Common Stock as of October 1, 1996, and as adjusted to reflect the sale
of the shares of the Common Stock offered hereby by the Company, by (i) all
those known by the Company to be beneficial owners of more than five percent of
its outstanding Common Stock, (ii) each director and the five most highly
compensated executive officers of the Company and (iii) all executive officers
and directors of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING SHARES(2)
NAME AND ADDRESS NUMBER OF SHARES ----------------------------------
OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED(1) BEFORE OFFERING AFTER OFFERING
- ---------------------------------------------- --------------------- --------------- --------------
<S> <C> <C> <C>
Pilgrim Baxter & Associates Ltd.(3)........... 3,510,200 9.3% 8.4%
1255 Drummers Lane
Wayne, Pennsylvania 19087
Husic Capital Management(3)................... 2,426,200 6.4% 5.8%
555 California Street
San Francisco, California 94104
Investors Research Corporation(3)............. 2,000,000 5.3% 4.8%
4500 Main Street
Kansas City, Missouri 64141
James C. Blair(4)............................. 21,000 * *
Herbert J. Conrad(5).......................... 8,000 * *
Joseph C. Cook(6)............................. 97,363 * *
Cam L. Garner(7).............................. 167,674 * *
David F. Hale(8).............................. 10,000 * *
David S. Kabakoff............................. 2,000 * *
James W. Newman(9)............................ 105,665 * *
Charles W. Prettyman(10)...................... 9,842 * *
Gordon V. Ramseier(11)........................ 42,000 * *
Charles G. Smith(12).......................... 54,000 * *
Walter F. Spath(13)........................... 115,448 * *
David Sudolsky(14)............................ 143,734 * *
All directors and executive officers as a
group (13 persons)(15)...................... 789,653 * *
</TABLE>
- ---------------
* Less than 1%
(1) Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock shown as beneficially owned by them. Share ownership in
each case includes shares issuable upon exercise of certain outstanding
options and warrants as described in the footnotes below.
(2) Percentage of ownership is calculated pursuant to SEC Rule 13d-3(d)(1).
(3) Based on a Form 13F filed with the SEC.
(4) Includes options, now exercisable or exercisable within 60 days, to
purchase 8,000 shares of Common Stock held by Mr. Blair.
(5) Includes options, now exercisable or exercisable within 60 days, to
purchase 8,000 shares of Common Stock held by Mr. Conrad.
(6) Includes options, now exercisable or exercisable within 60 days, to
purchase 30,000 shares of Common Stock held by Mr. Cook, and options to
purchase 65,363 shares of Common Stock held by LSA. As a principal of LSA,
Mr. Cook may be deemed to be the indirect beneficial owner of shares held
by LSA.
(7) Includes options, now exercisable or exercisable within 60 days, to
purchase 42,092 shares of Common Stock held by Mr. Garner.
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<PAGE> 42
(8) Includes options, now exercisable or exercisable within 60 days, to
purchase 10,000 shares of Common Stock held by Mr. Hale.
(9) Includes options, now exercisable or exercisable within 60 days, to
purchase 83,343 shares of Common Stock held by Mr. Newman.
(10) Includes options, now exercisable or exercisable within 60 days, to
purchase 9,842 shares of Common Stock held by Mr. Prettyman.
(11) Includes options, now exercisable or exercisable within 60 days, to
purchase 42,000 shares of Common Stock held by Mr. Ramseier.
(12) Includes options, now exercisable or exercisable within 60 days, to
purchase 54,000 shares of Common Stock held by Dr. Smith.
(13) Includes options, now exercisable or exercisable within 60 days, to
purchase 114,866 shares of Common Stock held by Mr. Spath.
(14) Includes options, now exercisable or exercisable within 60 days, to
purchase 138,752 shares of Common Stock held by Mr. Sudolsky.
(15) Includes options, now exercisable or exercisable within 60 days, to
purchase 618,825 shares of Common Stock held by directors and executive
officers as a group.
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<PAGE> 43
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock and 5,000,000 shares of Preferred Stock, no par value
("Preferred Stock"). On July 1, 1996, the Company effected a two-for-one stock
split of its Common Stock paid in the form of a 100% stock dividend. All share
amounts and per share exercise prices have been adjusted to give effect to this
stock dividend.
COMMON STOCK
At September 30, 1996, there were 37,741,578 shares of Common Stock
outstanding and held of record by approximately 300 shareholders. The holders of
Common Stock are entitled to one vote for each share held of record on all
matters submitted to a vote of the shareholders, except that upon giving the
legally required notice, shareholders may cumulate their votes in the election
of directors. In cumulative voting, the holders of Common Stock are entitled to
cast for each share held the number of votes equal to the number of directors to
be elected. A holder may cast all of his or her votes for one nominee or
distribute them among any number of nominees for election. Subject to
preferences that may be applicable to any outstanding Preferred Stock, holders
of Common Stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available. See "Price
Range of Common Stock" and "Dividend Policy." In the event of liquidation,
dissolution or winding up of the Company, holders of Common Stock are entitled
to share ratably in all assets remaining after payment of liabilities and the
liquidation preference of any outstanding Preferred Stock. Holders of Common
Stock have no preemptive rights and no right to convert their Common Stock into
any other securities. All outstanding shares of Common Stock are fully paid and
nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to issue the Preferred Stock in
one or more series and to fix the rights, priorities, preferences,
qualifications, limitations and restrictions, including the dividend rates,
conversion rights, voting rights, terms of redemption, terms of sinking funds,
liquidation preferences and the number of shares constituting any series of the
designation of such series, without any further vote or action by the
shareholders, which could decrease the amount of earnings and assets available
for distribution to holders of Common Stock or adversely affect the rights and
powers, including voting rights, of the holders of the Common Stock. The
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
shareholders, may discourage bids for the Common Stock at a premium over the
market price of the Common Stock and may adversely affect the market price of
and the voting and other rights of the holders of Common Stock. At present, the
Company has no plans to issue any of the Preferred Stock.
WARRANTS TO PURCHASE COMMON STOCK
At September 30, 1996, there were outstanding warrants to purchase an
aggregate of 9,496 shares at prices ranging from $.25 per share to $6.00 per
share, 600,000 shares at $4.38 per share and 200,000 shares at $6.48 per share.
Each warrant contains provisions for the adjustment of the exercise price and
the aggregate number of shares issuable upon exercise of the warrant under
certain circumstances, including stock dividends, stock splits, reorganization,
reclassifications or consolidations. The holders of certain of the warrants are
entitled to certain registration rights with respect to the Common Stock issued
or issuable upon exercise thereof. The Company has registered the resale of
shares of Common Stock issuable upon exercise of 209,496 warrants on a shelf
Form S-3. See "-- Registration Rights."
Also outstanding at September 30, 1996, were Series W Warrants to purchase
an aggregate of 1,647,126 shares at $2.38 per share and Series S Warrants to
purchase an aggregate of 2,240,002 shares at an exercise price of $19.47 per
share, subject to adjustment as defined in the warrants (collectively, the
Series W Warrants and the Series S Warrants are referred to herein as the
"Warrants"). The Series W Warrants are currently exercisable through September
27, 2000. The Series S Warrants will be exercisable after December 29, 1997 or
sooner under certain circumstances (the "Series S Exercise Date") through
December 29, 2000. The Warrants contain provisions for the adjustment of the
exercise price and the
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<PAGE> 44
aggregate number of shares issuable upon exercise of the Warrants under certain
circumstances, including stock splits, stock combinations, rights offerings,
stock dividends or certain special dividends with respect to the Common Stock.
In addition, the exercise price and the number of shares issuable upon exercise
of the Series W Warrants and the Series S Warrants will be appropriately
adjusted, with respect to the Series W Warrants, in the event of the issuance of
the Common Stock at a per share price less than the exercise price of the Series
W Warrants, and with respect to the Series S Warrants, in the event of the
issuance of the Common Stock below fair market value (as defined in the Series S
Warrants). The Company has registered the resale of shares of Common Stock
issuable upon exercise of the Series W Warrants on a shelf Form S-3. The Company
is obligated to register the shares of Common Stock issuable upon exercise of
the Series S Warrants, and in certain circumstances, the Series W Warrants, upon
demand or with the registration of other securities of the Company. See
"-- Registration Rights."
REGISTRATION RIGHTS
Pursuant to the Investors' Rights Agreement dated as of September 27, 1993
(the "1993 Registration Rights Agreement"), the holders of shares issuable upon
exercise of the Company's Series W Warrants are entitled to notice of a
registration of securities by the Company. The Company has registered on a shelf
Form S-3 the resale of the 1,647,126 shares of Common Stock issuable upon
exercise of all of the currently outstanding Series W Warrants issued by the
Company (the "Series W Shares"). The Company is further obligated to file a
registration statement with respect to the resale of the Series W Warrants 30
days after a registration statement on Form S-3 becomes available for use by the
Company with respect to the registration of the resale of the Series W Warrants.
If, prior to the earlier of (i) September 27, 1996 (or, in the case of any
holder who cannot resell his Series W Warrant under Rule 144(k), September 27,
1998) or (ii) the effective date of a registration statement on Form S-3 with
respect to the resale of the Series W Warrants, the Company registers its
securities, the holders of the Series W Warrants will have the right to include
their Series W Warrants in such registration. Until the earlier of September 27,
1998 or the effective date of a registration statement on Form S-3 with respect
to the registration of the resale of the Series W Warrants, the holders of a
majority of the then outstanding Series W Warrants can demand the filing of one
registration statement on Form S-3 with respect to the resale of the Series W
Warrants then outstanding.
Pursuant to the Registration Rights Agreement dated as of April 17, 1994,
the holder of 914,024 outstanding shares of the Common Stock (and 600,000 shares
issuable upon exercise of an outstanding warrant) is entitled to notice of
registration of any of the Company's securities under the Securities Act and is
entitled to include its registrable securities in such registration. In
addition, such holder is entitled to request registration of its registrable
securities on Form S-3 (or other successor form) under the Securities Act. All
registration expenses in connection with Company registrations will be borne by
the Company and all registration expenses in connection with the holder's
requested registration on Form S-3 will be borne by the holder, up to a maximum
of $100,000. All selling expenses will be borne by the holder. The Company is
required to indemnify the holder and the underwriters for such holder, if any,
under certain circumstances. Registration rights may be transferred only to a
transferee of registrable securities who, after such transfer, holds 200,000
shares of registrable securities. The registration rights granted under this
agreement terminate on April 17, 1999 (or, with respect to registration on Form
S-3, if earlier, the date on which the holder is able to sell all registrable
securities under Rule 144(k)).
Pursuant to the Investors' Rights Agreement dated as of December 29, 1995
(the "1995 Registration Rights Agreement"), the Company is obligated to use its
best efforts to file a registration statement on Form S-3 with respect to the
resale of the shares of Common Stock issuable upon exercise of the Series S
Warrants (the "Series S Shares") on or before December 29, 1997. In addition, if
at any time after December 29, 1997, the Company registers its securities, the
holders of the Series S Warrants will have the right to include the resale of
the Series S Shares in such registration.
Pursuant to the 1993 Registration Rights Agreement and the 1995
Registration Rights Agreement, the Company is required to bear all the
registration expenses. The Company is required to indemnify the holders and the
underwriters for such holders, if any, under certain circumstances. The
Company's respective
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<PAGE> 45
obligations to register the Series W Warrants and the Series S Shares will each
terminate in certain circumstances.
CALIFORNIA LAW AND CERTAIN CHARTER PROVISIONS
The Company's Sixth Restated Articles of Incorporation contain a provision
(the "Fair Price Provision") that applies to mergers and certain other types of
business combinations with a person holding 15% or more of the voting stock of
the Company (an "Interested Shareholder") Under California law, with certain
exceptions, an affirmative vote is required by the holders of the majority of
the outstanding shares of each constituent corporation to any proposed merger or
consolidation and of any corporation proposing to sell all or substantially all
of its assets Other transactions that are considered business combinations under
the Fair Price Provision would not be subject to any legal requirement for a
shareholder vote The Fair Price Provision requires that shareholders who are
independent of the Interested Shareholder receive in connection with a business
combination at least the amount paid by the Interested Shareholder for other
shares acquired by the Interested Shareholder If the requirements of the Fair
Price Provision are not satisfied, then, with certain limited exceptions, the
merger or other business combination must be approved by either (i) holders of
not less than 50% of the then outstanding voting stock, or (ii) by a majority of
the Continuing Directors A "Continuing Director" is a director not affiliated
with the Interested Shareholder and elected prior to the time the Interested
Shareholder became an Interested Shareholder and any successor chosen by a
majority of the Continuing Directors.
The Company's Sixth Restated Articles of Incorporation and Bylaws require
that any action required or permitted to be taken by shareholders of the Company
must be effected at a duly called annual or special meeting of shareholders and
may not be effected by a consent in writing.
The Company's Sixth Restated Articles of Incorporation divide the Board
into two classes of directors serving staggered two-year terms, with one class
of directors to be elected at each annual meeting of shareholders The
classification of directors has the effect of making it more difficult to change
the composition of the Board.
The Company's Sixth Restated Articles of Incorporation and Bylaws provide
that vacancies created by an increase in the size of the Board of Directors may
be filled only by an affirmative vote of the majority of the directors in
office, although less than a quorum Vacancies resulting from other causes may be
filled either by holders of a majority of the Company's voting stock or a
majority of directors in office, although less than a quorum The ability of less
than the majority of the Company's directors to fill vacancies is limited by
Section 305 of the California Corporations Code Under such Section 305, if,
after the filling of any vacancy by the directors of a corporation, the
directors then in office who have been elected by the corporation's shareholders
constitute less than a majority of the directors then in office, then: (i) any
holder of more than five percent of the corporation's outstanding voting stock
may call a special meeting of shareholders, or (ii) the superior court of the
appropriate county may order a special meeting of the shareholders to elect the
entire board of directors of the corporation The provision that newly created
directorships are to be filled only by the Board would prevent a person seeking
majority representation on the Board from obtaining such representation simply
by enlarging the Board and filling the new directorships created thereby with
his or her own nominees.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is ChaseMellon
Shareholder Services.
45
<PAGE> 46
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement"), the Company has agreed to sell to each of the
Underwriters named below, and each of the Underwriters, for whom Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Hambrecht & Quist LLC, Oppenheimer & Co.,
Inc. and Robertson, Stephens & Company LLC are acting as representatives (the
"Representatives"), has severally agreed to purchase from the Company the number
of shares of Common Stock set forth opposite its name below. In the Purchase
Agreement, the several Underwriters have agreed, subject to the terms and
conditions set forth therein, to purchase all of such shares if any are
purchased. In the event of default by an Underwriter, the Purchase Agreement
provides that, in certain circumstances, purchase commitments of the
nondefaulting Underwriters may be increased or the Purchase Agreement may be
terminated.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................
Hambrecht & Quist LLC................................................
Oppenheimer & Co., Inc...............................................
Robertson, Stephens & Company LLC....................................
-------------
Total................................................... 4,000,000
=============
</TABLE>
The Representatives of the Underwriters have advised the Company that they
propose initially to offer the shares to the public at the public offering price
set forth on the cover page of this Prospectus, and to certain dealers at such
price less a concession not in excess of $ per share. The Underwriters may
allow, and such dealers may reallow, a discount not in excess of $ per share
on sales to certain other dealers. After the public offering, the public
offering price, concession and discount may be changed.
The Company has granted the Underwriters an option exercisable for 30 days
from the date hereof to purchase up to 600,000 additional shares of Common Stock
to cover over-allotments, if any, at the public offering price, less the
underwriting discount. If the Underwriters exercise this option, each of the
Underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage thereof which the number of shares of
Common Stock to be purchased by it shown in the foregoing table is of the
4,000,000 shares of Common Stock initially offered hereby.
The Purchase Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or will contribute to payments the Underwriters may be required
to make in respect thereof.
In connection with this offering, certain underwriters and selling group
members may engage in passive market making transactions in the Common Stock on
Nasdaq immediately prior to the commencement of sales in this offering, in
accordance with Rule 10b-6A under the Exchange Act. Passive market making
consists of, among other things, displaying bids on Nasdaq limited by the bid
prices of independent market makers and purchases limited by such prices and
effected in response to order flow. Net purchases by a passive market maker on
each day are limited to a specified percentage of the passive market maker's
average daily trading volume in the Common Stock during a specified prior period
and all passive market making activities must be discontinued when such limit is
reached. Passive market making may stabilize the market price of Common Stock at
a level above that which might otherwise prevail and, if commenced, may be
discontinued at any time.
46
<PAGE> 47
The holders of approximately 171,000 shares of Common Stock (and
approximately 562,000 shares of Common Stock issuable upon exercise of
outstanding options) have agreed not to sell, offer to sell, grant any option
for the sale of, or otherwise dispose of or transfer any shares of Common Stock
without the prior written consent of the Representatives for a period of 90 days
after the date of the Purchase Agreement. The Company has agreed that, for a
period of 90 days after the date of the Purchase Agreement, it will not, without
the prior written consent of the Representatives, issue, offer for sale, sell,
transfer, grant options to purchase or otherwise dispose of any shares of its
Common Stock or securities convertible into or exchangeable for its Common Stock
or other equity security, except shares issued pursuant to the exercise of
warrants outstanding as of the date of this Prospectus and pursuant to its stock
option plan.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Brobeck, Phleger & Harrison LLP, San Diego, California. Pillsbury
Madison & Sutro LLP, San Francisco, California are acting as counsel for the
Underwriters in connection with certain legal matters relating to the shares of
Common Stock offered hereby.
EXPERTS
The financial statements of the Company as of December 31, 1994 and 1995
and for each of the three years in the period ended December 31, 1995 included
and incorporated by reference in this Prospectus and the financial statements of
DDSI as of December 31, 1993 and 1994 and for the periods then ended
incorporated by reference in this Prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports, which are included
and incorporated by reference herein, and have been so included and incorporated
in reliance upon the reports of such firm given upon their authority as experts
in accounting and auditing.
The statements concerning the U.S. federal regulatory process for
investigating and obtaining FDA clearance of drugs and medical devices in this
Prospectus under the caption "Risk Factors -- Government Regulation; No
Assurance of FDA Approval," "Business -- Government Regulation" and other
references herein relating to such processes have been reviewed and approved by
Kleinfeld, Kaplan and Becker, regulatory counsel for the Company, as an expert
in such matters, and are included herein in reliance upon that review and
approval. In conducting this review, Kleinfeld, Kaplan and Becker assumed the
accuracy and adequacy of the factual statements and conclusions in this
Prospectus concerning the Company's manufacturing capabilities and procedures,
compliance with regulatory requirements, the status of its drugs under
development and the potential significance of such drugs in targeting the
disease states identified.
ADDITIONAL INFORMATION
The Company has filed the Registration Statement with the Commission under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules filed therewith. For further
information with respect to the Company and the Common Stock offered hereby,
reference is hereby made to such Registration Statement and to the exhibits and
schedules filed therewith. Statements contained in this Prospectus regarding the
contents of any contract or other document are not necessarily complete, and in
each instance reference is made to the copy of such contract or document filed
as an exhibit to the Registration Statement or the documents incorporated into
the Prospectus by reference, each such statement being qualified in all respects
by such reference. The Registration Statement, including the exhibits and
schedules thereto, may be inspected without charge at the principal office of
the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of
all or any part thereof may be obtained from such office upon payment of the
prescribed fees.
47
<PAGE> 48
DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and (Unaudited) September
30, 1996............................................................................ F-3
Consolidated Statements of Operations for the Years Ended December 31, 1993, 1994, and
1995 and for the Nine Months Ended (Unaudited) September 30, 1995 and 1996.......... F-4
Consolidated Statements of Shareholders' Equity for the Period from January 1, 1993 to
December 31, 1995 and the Period from (Unaudited ) January 1, 1996 to September 30,
1996................................................................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and
1995 and the Nine Months Ended (Unaudited) September 30, 1995 and 1996.............. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 49
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Dura Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of Dura
Pharmaceuticals, Inc. and subsidiaries as of December 31, 1994 and 1995, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of Dura Pharmaceuticals, Inc. and
subsidiaries as of December 31, 1994 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
San Diego, California
January 29, 1996
(April 26, 1996 as to the
reclassifications described
in Note 2)
F-2
<PAGE> 50
DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DOLLARS IN THOUSANDS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................... $33,463 $ 25,554 $ 33,849
Short-term investments.................................. 2,563 42,266 53,389
Accounts and other receivables.......................... 2,792 6,957 15,523
Inventory............................................... 1,819 3,069 7,743
Prepaid and other....................................... 409 612 919
------- -------- --------
Total current assets............................ 41,046 78,458 111,423
PROPERTY.................................................. 8,332 16,133 20,624
LICENSE AGREEMENTS AND PRODUCT RIGHTS..................... 3,496 39,065 187,026
GOODWILL.................................................. 518 7,083 6,743
OTHER..................................................... 2,680 3,258 8,740
------- -------- --------
TOTAL........................................... $56,072 $143,997 $ 334,556
======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses................... $ 3,505 $ 7,225 $ 14,016
Accrued wages, taxes and benefits....................... 915 1,341 2,884
Current portion of long-term obligations................ 120 10,175 27,972
------- -------- --------
Total current liabilities....................... 4,540 18,741 44,872
------- -------- --------
LONG-TERM OBLIGATIONS:
Notes payable -- bank................................... 2,780 6,611
Other long-term obligations............................. 8,816 9,300
------- -------- --------
Total long-term obligations..................... 2,780 15,427 9,300
------- -------- --------
OTHER NON-CURRENT LIABILITIES............................. 215 732 1,028
------- -------- --------
Total liabilities............................... 7,535 34,900 55,200
------- -------- --------
COMMITMENTS (Note 5)
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, shares
authorized -- 5,000,000; no shares issued or
outstanding
Common stock, no par value, shares
authorized -- 100,000,000; issued and
outstanding -- 20,906,364, 31,079,424 and 37,741,578
respectively......................................... 116,269 216,514 371,406
Accumulated deficit.................................. (67,542) (103,320) (88,849)
Unrealized gain on investments....................... 103 23
Warrant subscriptions receivable..................... (4,200) (3,224)
Notes receivable from shareholders................... (190)
------- -------- --------
Total shareholders' equity...................... 48,537 109,097 279,356
------- -------- --------
TOTAL........................................... $56,072 $143,997 $ 334,556
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 51
DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
---------------------------- -----------------
1993 1994 1995 1995 1996
------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Sales......................................... $15,816 $22,199 $ 39,308 $27,139 $45,900
Contract...................................... 2,297 10,481 12,194 8,556 17,407
------- ------- -------- ------- -------
Total revenues............................. 18,113 32,680 51,502 35,695 63,307
------- ------- -------- ------- -------
OPERATING COSTS AND EXPENSES:
Cost of sales................................. 3,782 3,894 10,618 7,259 12,553
Clinical, development and regulatory.......... 2,819 9,354 8,408 5,997 12,121
Selling, general and administrative........... 17,294 17,871 25,580 18,676 26,121
Goodwill amortization......................... 143 105 375 262 339
Charge for acquired in-process technology and
purchase options........................... 2,315 43,773
------- ------- -------- ------- -------
Total operating costs and expenses......... 26,353 31,224 88,754 32,194 51,134
------- ------- -------- ------- -------
OPERATING INCOME (LOSS)......................... (8,240) 1,456 (37,252) 3,501 12,173
------- ------- -------- ------- -------
OTHER:
Interest income............................... 332 483 2,768 1,636 4,664
Interest expense.............................. (261) (246) (906) (499) (602)
Other -- net.................................. (4) 277 18 (21) (2)
------- ------- -------- ------- -------
Total other................................ 67 514 1,880 1,116 4,060
------- ------- -------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES............... (8,173) 1,970 (35,372) 4,617 16,233
PROVISION FOR INCOME TAXES...................... -- 34 406 182 1,762
------- ------- -------- ------- -------
NET INCOME (LOSS)............................... $(8,173) $ 1,936 $(35,778) $ 4,435 $14,471
======= ======= ======== ======= =======
NET INCOME (LOSS) PER SHARE
PRIMARY....................................... $ (0.55) $ 0.10 $ (1.53) $ 0.16 $ 0.37
FULLY DILUTED................................. $ 0.15 $ 0.36
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES:
PRIMARY....................................... 14,988 19,860 23,440 27,324 38,890
FULLY DILUTED................................. 28,650 39,657
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 52
DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
UNREALIZED NOTES
COMMON STOCK GAIN WARRANT RECEIVABLE
----------------- ACCUMULATED (LOSS) ON SUBSCRIPTIONS FROM
SHARES AMOUNT DEFICIT INVESTMENTS RECEIVABLE SHAREHOLDERS TOTAL
------ -------- ------------ ----------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993............... 14,964 $ 79,953 $ (61,305) $ (338) $ 18,310
Exercise of stock options............ 34 9 9
Compensation expense -- stock
options............................ 177 177
Cancellation of restricted stock and
related notes receivable........... (40) (148) 148
Issuance of common stock warrants.... 2,247 2,247
Net loss............................. (8,173) (8,173)
------ -------- --------- ---- ------- ----- --------
BALANCE, DECEMBER 31, 1993............. 14,958 82,238 (69,478) -- -- (190) 12,570
Issuance of common stock at $4.37 per
share, net of issuance costs of
$11................................ 686 2,990 2,990
Issuance of common stock at $5.48 per
share.............................. 228 1,250 1,250
Issuance of common stock at $6.37 per
share, net of issuance costs of
$2,269............................. 4,900 28,968 28,968
Exercise of stock options and
warrants........................... 134 157 157
Issuance of common stock warrants,
net of issuance
costs of $5........................ 625 625
Compensation expense -- stock
options............................ 41 41
Net income........................... 1,936 1,936
------ -------- --------- ---- ------- ----- --------
BALANCE, DECEMBER 31, 1994............. 20,906 116,269 (67,542) -- -- (190) 48,537
Issuance of common stock at $12.75
per share, net of issuance costs of
$3,483............................. 4,494 53,815 53,815
Issuance of common stock in
connection with the purchase of
DDSI callable common stock......... 2,286 33,489 33,489
Issuance of common stock warrants.... 5,040 $(4,200) 840
Collections on notes receivable...... 177 177
Cancellation of restricted stock and
related notes receivable........... (4) (13) 13 --
Exercise of stock options and
warrants........................... 3,398 7,914 7,914
Unrealized gain on available-for-sale
short-term investments............. $ 103 103
Net loss............................. (35,778) (35,778)
------ -------- --------- ---- ------- ----- --------
BALANCE, DECEMBER 31, 1995............. 31,080 216,514 (103,320) 103 (4,200) -- 109,097
Unaudited:
Issuance of common stock at $29.37
per share, net of issuance costs
of $8,340........................ 5,405 150,431 150,431
Collections on warrant
subscriptions receivable......... 976 976
Exercise of stock options and
warrants......................... 1,257 4,461 4,461
Unrealized loss on
available-for-sale short-term
investments...................... (80) (80)
Net income......................... 14,471 14,471
------ -------- --------- ---- ------- ----- --------
BALANCE, SEPTEMBER 30, 1996............ 37,742 $371,406 $ (88,849) $ 23 $(3,224) -- $279,356
====== ======== ========= ==== ======= ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 53
DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- --------------------
1993 1994 1995 1995 1996
------- ------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)...................................... $(8,173) $ 1,936 $(35,778) $ 4,435 $ 14,471
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization........................ 1,034 687 1,962 1,262 5,415
Charges for acquired in-process technology and
purchase options................................... 2,210 30,773
Other................................................ 555 84 21 50
Changes in assets and liabilities:
Accounts and other receivables..................... (521) (1,309) (4,089) (4,103) (8,566)
Inventory.......................................... 334 (738) (1,110) (718) (4,674)
Prepaid and other assets........................... 39 74 (241) 58 (263)
Accounts payable and other liabilities............. (463) 1,356 3,655 1,498 9,294
Accrued wages, taxes and benefits.................. 68 166 400 615 1,543
------- ------- -------- -------- ---------
Net cash provided by (used for) operating
activities.................................... (4,917) 2,256 (4,428) 3,068 17,270
------- ------- -------- -------- ---------
INVESTING ACTIVITIES:
Purchases of short-term investments.................. (21) (95,716) (62,903) (103,902)
Sales and maturities of short-term investments....... 2,764 56,117 6,936 92,697
Purchases of long-term investments................... (494) (5,000)
Capital expenditures................................. (1,909) (2,756) (7,835) (6,735) (5,477)
Company/product acquisitions, net of cash received... 744 (2,616) (128,600)
Development deposit.................................. (1,250)
Other................................................ (15) (40) (60) (40) (526)
------- ------- -------- -------- ---------
Net cash provided by (used for) investing
activities....................................... 840 (4,067) (47,244) (65,358) (150,808)
------- ------- -------- -------- ---------
FINANCING ACTIVITIES:
Issuance of common stock and warrants, net........... 46 32,739 61,606 56,090 154,389
Issuance of notes payable............................ 4,360 4,360
Principal payments on notes payable.................. (157) (1,464) (203) (7,056)
Principal payments on other long-term obligations.... (22,000) (20,140) (5,500)
Other................................................ 33
------- ------- -------- -------- ---------
Net cash provided by (used for) financing
activities....................................... (78) 31,275 43,763 40,310 141,833
------- ------- -------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... (4,155) 29,464 (7,909) (21,980) 8,295
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD....... 8,154 3,999 33,463 33,462 25,554
------- ------- -------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............. $ 3,999 $33,463 $ 25,554 $ 11,482 $ 33,849
======= ======= ======== ======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized)................ $ 257 $ 852 $ 68 $ 13 $ --
Income taxes......................................... $ -- $ 34 $ 44 $ 44 $ 51
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 54
DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1996 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
1. THE COMPANY AND ITS BUSINESS
Organization -- Dura Pharmaceuticals, Inc. ("Dura" or the "Company") is a
developer and marketer of prescription pharmaceutical products for the treatment
of allergies, asthma and related respiratory conditions.
Principles of Consolidation -- The consolidated financial statements
include the accounts of Dura and its wholly owned subsidiaries, Health Script
Pharmacy Services, Inc., acquired on March 22, 1995 and Dura Delivery Systems,
Inc. ("DDSI"), acquired on December 29, 1995. All intercompany transactions and
balances are eliminated in consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions. Assets, liabilities, revenues and expenses, and disclosure of
contingent assets and liabilities are affected by such estimates and
assumptions. Actual results could differ from those estimates.
Interim Financial Data -- The interim financial data relating to September
30, 1996 and the nine months ended September 30, 1995 and 1996 are unaudited;
however, in the opinion of management, the interim data includes all
adjustments, consisting of normal recurring accruals, necessary for a fair
statement of the financial position and results of operations for the interim
periods. The results for the nine months ended September 30, 1996 are not
necessarily indicative of the results to be expected for the full year or for
any other interim periods.
Cash Equivalents -- Cash equivalents include only highly liquid securities
with an original maturity of three months or less.
Short-term Investments -- Short-term investments consist of government
securities, corporate bonds and commercial paper, which management has
classified as available-for-sale securities in the accompanying consolidated
financial statements (Note 3). Such investments are carried at fair value, with
the unrealized gains and losses, net of tax, reported as a separate component of
shareholders' equity. The amortized cost of short-term investments is adjusted
for amortization of premiums and accretion of discounts to maturity. Such
amortization is included in interest income.
Concentration of Credit Risk -- The Company invests its excess cash in U.S.
Government securities and debt instruments of financial institutions and
corporations with strong credit ratings. The Company has established guidelines
relative to diversification of its cash investments and their maturities that
are designed to maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and interest rates.
The Company has not experienced any significant losses on its cash equivalents
or short-term investments.
The Company extends credit on an uncollateralized basis primarily to
wholesale drug distributors and home healthcare providers throughout the United
States. Historically, the Company has not experienced significant credit losses
on its customer accounts. Two customers individually accounted for 19% and 14%
of 1993 sales, three customers individually accounted for 21%, 14% and 12% of
1994 sales, and two customers individually accounted for 16% and 11% of 1995
sales.
Inventory -- Inventory is stated at the lower of cost (first-in, first-out
method) or market and is comprised of finished goods and samples.
Property -- Property is stated at cost and depreciated over the estimated
useful lives of the assets (primarily five years, with the exception of the
Company's buildings, which is depreciated over a period of 30
F-7
<PAGE> 55
DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
years) using the straight-line method. Depreciation and amortization expense
totaled $336,500, $380,300 and $530,000 during 1993, 1994 and 1995,
respectively.
License Agreements and Product Rights -- The cost of license fees and
product rights are capitalized and amortized on a straight-line basis over the
periods estimated to be benefited, ranging from 20 to 25 years. Amortization of
capitalized license fees and product rights, and related royalty payments are
included in selling, general and administrative expenses in the consolidated
statements of operations. Amortization of license fees and product rights
totaled $200,000, $200,000 and $1,055,000 in 1993, 1994 and 1995, respectively.
Goodwill -- Goodwill is stated at cost and amortized on a straight-line
basis over the periods estimated to be benefited, which range from 10 to 20
years.
Evaluation of License Agreements, Product Rights and Goodwill -- The
Company's policy is to evaluate, at each balance sheet date, the appropriateness
of the carrying values of the unamortized balances of license agreements,
patents and goodwill on the basis of estimated future cash flows and other
factors. If such evaluations were to indicate a material impairment of these
intangible assets, such impairment would be recognized by a writedown of the
applicable asset.
Revenue Recognition -- Revenues from product sales are recognized upon
shipment. The Company is obligated to accept from customers the return of
pharmaceuticals which have reached their expiration date for which it generally
ships replacement merchandise. The Company has not historically experienced
significant returns of expired pharmaceuticals.
Contract revenue is recognized on a basis consistent with the performance
requirement of the contract. Payments received in advance of performance are
recorded as deferred revenue.
Clinical, Development and Regulatory Expenses -- Clinical, development and
regulatory costs are expensed as incurred.
Net Income (Loss) per Share -- Net income (loss) per share is computed
based on the weighted average number of common and common equivalent shares
during each full year. Common equivalent shares consist of stock options and
warrants and are included in the computation of net income per share using the
treasury stock method. In loss years, common equivalent shares are excluded as
the effect would be antidilutive. Net income (loss) per share is unchanged on a
fully-diluted basis for all full years presented and have been adjusted to
reflect the two for one stock split effective July 1, 1996.
Accounting for Stock-Based Compensation -- In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," which requires the
Company to adopt disclosure provisions for stock-based compensation effective
January 1, 1996. The standard defines a fair value method of accounting for
stock options and other equity instruments. Under the fair value method,
compensation is measured at the grant date based on the fair value of the award
and is recognized over the service period, which is usually the vesting period.
This standard encourages rather than requires companies to adopt the fair value
method of accounting for employee stock-based transactions. Companies are
permitted to continue to account for such transactions under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," but will be required to disclose in a note to the financial
statements pro forma net income and net income per share as if the new method of
accounting had been applied. The Company has elected to continue to apply APB
Opinion No. 25 in its financial statements and will disclose in future annual
reports the required pro forma information in a footnote.
Reclassifications -- Prior to Dura's acquisition of DDSI on December 29,
1995, Dura recorded costs made on behalf of DDSI as they were incurred and
simultaneously accrued reimbursement from DDSI by crediting the related costs.
In 1996, Dura is recording contract revenues from Spiros Development Corporation
F-8
<PAGE> 56
DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
("Spiros Corp."), a separate entity formed in December 1995, equal to the
amounts due from Spiros Corp. for development and management services less a
prorata amount allocated to the warrant subscription receivable. The DDSI
reimbursements included in prior periods' financial statements have been
reclassified to contract revenues to conform to the presentation used for Spiros
Corp. in 1996. The following summarizes the impact of the reclassification on
the prior periods' statements of operations (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS
---------------------------- ENDED
1993 1994 1995 SEPTEMBER 30,
------ ------ ------ 1995
-------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Contract................................. $2,297 $9,161 $8,016 $ 5,452
Total Revenues........................ 2,297 9,161 8,016 5,452
OPERATING COSTS AND EXPENSES:
Clinical, development and regulatory:
Less reimbursement from Dura Delivery
Systems, Inc.......................... 1,487 8,260 6,428 4,357
Selling, general and administrative........ 810 901 1,588 1,095
------ ------ ------ ------
Total operating costs and
expenses....................... $2,297 $9,161 $8,016 $ 5,452
====== ====== ====== ======
</TABLE>
In addition, certain other reclassifications have also been made to amounts
included in the prior periods' financial statements to conform with the
financial statement presentation for the year ended December 31, 1995 and the
nine months ended September 30, 1996.
3. SHORT-TERM INVESTMENTS
The following is a summary of available-for-sale investments (in
thousands):
<TABLE>
<CAPTION>
GROSS ESTIMATED
UNREALIZED FAIR
COST GAINS VALUE
------- ---------- ---------
<S> <C> <C> <C>
DECEMBER 31, 1995:
U.S. government securities........................... $23,148 $ 80 $23,228
U.S. corporate debt securities....................... 19,015 23 19,038
------- ---- -------
Total...................................... $42,163 $103 $42,266
======= ==== =======
DECEMBER 31, 1994:
U.S. government securities........................... $ 2,563 -$- $ 2,563
======= ==== =======
</TABLE>
The amortized cost and estimated fair value of available-for-sale
investments at December 31, 1995, by contractual maturity, are shown below (in
thousands):
<TABLE>
<CAPTION>
ESTIMATED
FAIR
COST VALUE
------- ---------
<S> <C> <C>
Due in one year or less......................................... $31,548 $ 31,588
Due after one year through two years............................ 10,615 10,678
------- -------
Total................................................. $42,163 $ 42,266
======= =======
</TABLE>
F-9
<PAGE> 57
DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. BALANCE SHEET DETAILS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
1994 1995 -------------
------- -------
(IN THOUSANDS)(UNAUDITED)
<S> <C> <C> <C>
Property -- at cost:
Land............................................. $ 1,615 $ 1,615 $ 1,615
Building......................................... 3,305 3,450 3,578
Machinery and equipment.......................... 954 2,365 5,110
Furniture and fixtures........................... 816 1,392 1,490
Construction in progress -- manufacturing
facility...................................... 2,430 8,687 11,114
------- ------- --------
9,120 17,509 22,907
Less accumulated depreciation and amortization... (788) (1,376) (2,283)
------- ------- --------
Property......................................... $ 8,332 $16,133 $ 20,624
======= ======= ========
License agreements and product rights:
Capitalized cost................................. $ 4,000 $40,624 $ 192,724
Less accumulated amortization.................... (504) (1,559) (5,698)
------- ------- --------
License agreements and product rights............ $ 3,496 $39,065 $ 187,026
======= ======= ========
Goodwill:
Goodwill from acquisitions....................... $ 4,124 $11,063 $ 11,063
Less accumulated amortization.................... (3,606) (3,980) (4,320)
------- ------- --------
Goodwill......................................... $ 518 $ 7,083 $ 6,743
======= ======= ========
Accounts payable:
Accounts payable................................. $ 2,023 $ 3,412 $ 7,768
Contractual sales rebates........................ 513 1,605 2,987
Other accrued expenses........................... 969 2,208 3,261
------- ------- --------
Accounts payable................................. $ 3,505 $ 7,225 $ 14,016
======= ======= ========
</TABLE>
5. COMMITMENTS
Leases -- The Company leases and subleases office space under operating
leases expiring through December 2000. Rent expense, net of sublease income, was
$-0-, $30,000 and $121,000 for 1993, 1994 and 1995, respectively. Aggregate
future minimum lease obligations under non-cancelable operating leases are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING LEASE
DECEMBER 31, OBLIGATIONS
------------------------------------------------------------------ -----------
<S> <C>
1996........................................................... $ 294
1997........................................................... 304
1998........................................................... 181
1999........................................................... 160
2000........................................................... 173
------
Total................................................... $ 1,112
======
</TABLE>
F-10
<PAGE> 58
DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Employee Savings Plans -- The Company has a 401(k) plan that allows
participating employees to contribute 1% to 15% of their salary, subject to
annual limits. The Board may, at its sole discretion, approve Company
contributions. The Company made contributions to the plan totaling $89,800 and
$223,500 in 1994 and 1995, respectively.
The Company has a non-qualified deferred compensation plan that allows
eligible employees to defer up to 100% of their compensation. As of December 31,
1995, $506,600 has been deferred under this plan which is included in other
assets and other non-current liabilities. The amounts deferred under this plan
are transferred to a trust and managed by an investment manager. At December 31,
1995 the investments held by the trust consisted primarily of 16,667 units of
Spiros Corp. (Note 10).
Capital -- In 1995 the Company completed construction, at its headquarters,
of a manufacturing facility that will be used to formulate, mill, blend and fill
drugs to be used with Spiros, a dry powder pulmonary drug delivery system (Note
10), pending regulatory approval. Cumulative capital expenditures on the
facility as of December 31, 1995 were approximately $8.7 million. Equipment
purchases for and validation of the manufacturing facility are currently
scheduled through 1997. At September 30, 1996, the Company had open purchase
commitments for validation of the facility and equipment purchases of
approximately $3.0 million. During the years ended December 31, 1994 and 1995
the Company capitalized interest of $40,000 and $487,000, respectively, as a
cost of constructing the manufacturing facility.
6. DEBT AND OTHER OBLIGATIONS
Line of Credit -- The Company has a loan and security agreement with a bank
for the borrowing of up to $5.0 million that terminates in June 1997. Borrowings
under the agreement are limited to 2.5 times the most recent quarter's earnings
(as defined) before interest, taxes and depreciation and amortization ($5.0
million available at December 31, 1995 and September 30, 1996) and bear interest
at the bank's prime rate plus 0.5% (9.0% at December 31, 1995 and 8.75% at
September 30, 1996). At December 31, 1994 and 1995, and September 30, 1996 there
were no borrowings outstanding under this agreement.
Secured Promissory Notes -- At December 31, 1995 the Company had $7,056,500
in outstanding borrowings under secured promissory notes with a bank. The
borrowings bear interest at the bank's prime rate plus 1.5% (10.0% at December
31, 1995) with a minimum annual rate of 7% and a maximum of 12%. Principal and
interest are payable monthly with balloon principal payments in October 1997 and
November 2000. The Company retired all of its outstanding bank debt,
approximately $6.9 million, in May 1996.
The bank loans were collateralized by a first deed of trust on the
Company's facility and a blanket lien on substantially all Company assets. The
agreements required the Company to maintain certain covenants including, among
others, quick assets (as defined) to current liabilities of not less than 1.25
to one and debt service ratio not less than 1.5 to one. The agreements also
stipulated that the Company shall maintain profitability on a quarterly basis
with allowance for one loss quarter. At December 31, 1994 and 1995, the Company
was in compliance with all loan covenants.
Note Payable -- In connection with the acquisition of Health Script (Note
11), the Company issued a $1.5 million non-interest bearing note due April 1,
1996. The note was paid in full on April 1, 1996.
Other Obligations -- In connection with the acquisition of license and
product rights in 1995 and 1996 (Note 10), the Company entered into agreements
which require future payments. The obligations are non-interest bearing and, as
they pertain to the product rights agreements, are principally contingent on the
certain products remaining available by prescription only or on the absence of
certain competing products.
F-11
<PAGE> 59
DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At September 30, 1996, the future annual maturities of principal under
notes payable and other obligations are summarized as follows (in thousands):
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31,
--------------------------------------------------------------------------
<S> <C>
1996...................................................................... $ 4,550
1997...................................................................... 26,500
1998...................................................................... 3,000
1999...................................................................... 3,000
2000...................................................................... 500
Thereafter................................................................ 2,000
--------
39,550
Imputed interest (5.0%-7.0%).............................................. (2,278)
--------
Net obligation............................................................ 37,272
Less current portion...................................................... (27,972)
--------
Net long-term obligations................................................. $ 9,300
========
</TABLE>
The future annual maturities exclude approximately $82.9 million in future
contingent obligations due in years 1999 through 2004. (See Note 10)
7. CAPITAL STOCK
Stock Split -- On May 29, 1996, the Company declared a 2-for-1 stock split
in the form of a 100% dividend on the Company's common stock effective July 1,
1996 for shareholders of record on June 17, 1996. All share amounts and per
share exercise prices presented have been adjusted to give effect to this stock
dividend.
Common Stock -- In November 1994, August 1995, and May 1996, the Company
completed offerings of 4,900,000, 4,494,000, and 5,405,000 shares of common
stock, respectively, resulting in net proceeds to the Company of $29.0 million,
$53.8 million, and $150.4 million respectively (Note 2). On May 29, 1996 the
Company's shareholders approved an amendment to the Articles of Incorporation
increasing the number of authorized shares of common stock from 25 to 100
million.
In April 1994, the Company entered into a definitive stock and warrant
purchase agreement with Elan Corporation, plc, ("Elan"), a developer and
marketer of drug delivery systems. Under the purchase agreement Elan purchased
685,714 shares of the Company's common stock for $3.0 million. In November 1994,
the Company issued 228,310 shares of common stock to Elan, at a price per share
of $5.48, as partial consideration for a development deposit (Note 10).
In December 1995, the Company issued 2,285,108 shares of common stock in
connection with the acquisition of DDSI (Note 11).
Common Stock Warrants -- In connection with the private placement completed
by the Company and DDSI in September 1993 (Note 10), DDSI investors received
Series W warrants to purchase an aggregate of 3,640,000 shares of the Company's
common stock and callable warrants to purchase an aggregate of 3,380,000 shares
each of the Company's common stock. The Series W warrants (i) are exercisable at
$2.38 per share, subject to adjustment upon the occurrence of certain events as
defined, (ii) are exercisable through September 27, 2000 and (iii) provide for
certain registration rights. The callable warrants were canceled in December
1995 when the Company exercised its right to purchase the DDSI callable common
stock (Note 10).
F-12
<PAGE> 60
DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On April 17, 1994, Elan acquired a warrant to purchase 600,000 shares of
the Company's common stock for total consideration of $480,000. The warrant (i)
is exercisable at $4.38 per share, subject to adjustment upon the occurrence of
certain events as defined in the agreement, (ii) is exercisable through April
17, 1999, and (iii) provides for certain piggyback and demand registration
rights.
On September 21, 1994, Drug Royalty Corporation, Inc. (DRC) (Note 10)
acquired a warrant to purchase 200,000 shares of the Company's common stock for
total consideration of $150,000. The warrant (i) is exercisable at $6.48 per
share, subject to adjustment upon the occurrence of certain events as defined in
the agreement, (ii) is exercisable through September 21, 1999, and (iii)
provides for certain piggy-back registration rights. In June 1995, the Company
filed a registration statement to register the common stock underlying the
warrant, and the holder transferred the warrant to JP Morgan Securities, Inc. in
July 1995.
On March 22, 1995, the Company, in connection with the acquisition of
Health Script (Note 11), issued warrants for 1,200,000 shares of the Company's
common stock exercisable at $7.32 per share. On April 26, 1996, the Company
exercised its option to redeem the warrant by issuing 503,232 shares of the
Company's Common Stock to the holder of the warrant.
In connection with the private placement completed by the Company and
Spiros Corp. on December 29, 1995 (Note 10), Spiros Corp. investors received
Series S warrants to purchase an aggregate of 2,240,002 shares of the Company's
common stock. The Series S warrants (i) are exercisable at $19.47 per share,
subject to adjustment upon the occurrence of certain events as defined, (ii) are
exercisable through December 29, 2000, (iii) provide for certain registration
rights and (iv) separate from the Spiros Corp callable common stock on December
29, 1997 or earlier upon the occurrence of certain events as defined.
The following table summarizes the warrants outstanding at (unaudited)
September 30, 1996 (in thousands, except per share data):
<TABLE>
<CAPTION>
WARRANTS SHARES COVERED EXERCISE PRICE
WARRANT DESCRIPTION OUTSTANDING BY WARRANTS PER SHARE
------------------------------------------------ ----------- -------------- --------------
<S> <C> <C> <C>
Series W warrants............................... 1,177 1,647 $2.38
Series S warrants............................... 1,867 2,240 $19.47
Elan warrants................................... 600 600 $4.38
JP Morgan warrants.............................. 200 200 $6.48
Other........................................... 9 9 $0.25-$6.00
----- -----
Total warrants outstanding............ 3,853 4,696
===== =====
</TABLE>
Common Shares Reserved -- The Company had reserved shares of common stock
for issuance as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1994 1995 1996
------ ----- -------------
(UNAUDITED)
<S> <C> <C> <C>
Issuance under 1992 stock option plan................. 3,276 3,182 3,751
Exercise of common stock warrants..................... 8,218 5,974 4,696
------ ----- -----
Total shares reserved....................... 11,494 9,156 8,447
====== ===== =====
</TABLE>
8. STOCK OPTIONS
The Company's 1992 stock option plan (the "Plan") provides for the grant of
options to officers and other key employees of the Company, and to certain
directors, consultants and independent contractors of the Company, to purchase
up to 4,507,360 shares of the Company's common stock. On February 21, 1996 the
shares authorized under the Company's stock option plan, as adjusted for the
July 1, 1996 stock dividend, were
F-13
<PAGE> 61
DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
increased by 1,500,000 to a total of 6,007,360. The plan provides for the
automatic issuance of options to purchase 8,000 and 30,000 shares of the
Company's common stock to non-employee Board members at the date of each annual
shareholders' meeting and upon initial election to the Board of Directors,
respectively. Generally, options are to be granted at prices equal to at least
100% of the fair market value of the stock at the date of grant, expire not
later than ten years from the date of grant and become exercisable ratably over
a four-year period following the date of grant.
The Plan provides that in the event of a corporate transaction, as defined,
all outstanding options shall become fully exercisable immediately prior to the
effective date of such transaction and shall terminate upon such effective date.
The Board of Directors may also grant officers of the Company limited stock
appreciation rights in tandem with their outstanding options. In addition,
limited stock appreciation rights shall be granted in connection with all
automatic option grants under the Plan. Upon the occurrence of a hostile
takeover, as defined, each outstanding option with such a limited stock
appreciation right in effect for at least six months will automatically be
canceled in return for a cash distribution from the Company in an amount equal
to the excess of the takeover price, as defined, over the aggregate exercise
price. As of December 31, 1994 and 1995, options to purchase 198,000 and 244,000
shares of common stock, respectively, were outstanding with limited stock
appreciation rights.
The following table summarizes stock option activity under the Plan:
<TABLE>
<CAPTION>
SHARES
---------------------------------------------------------
OPTIONS OPTIONS AVAILABLE EXERCISE PRICE
OUTSTANDING FOR GRANT PER SHARE
----------- ----------------- -----------------------
<S> <C> <C> <C>
Balance, January 1, 1993........................... 2,180,000 512,660 $ 0.25 - $ 4.50
Options granted.................................. 420,860 (420,860) $ 2.28 - $ 3.00
Options exercised................................ (34,306) $ 0.25 - $ 2.28
Options canceled................................. (61,892) 61,892 $ 0.25 - $ 4.50
--------- ----------
Balance, December 31, 1993......................... 2,504,662 153,692 $ 0.25 - $ 4.50
Options authorized............................... 750,000
Options granted.................................. 872,260 (872,260) $ 3.50 - $ 6.00
Options exercised................................ (131,964) $ 0.25 - $ 3.62
Options canceled................................. (119,240) 119,240 $ 0.25 - $ 4.87
--------- ----------
Balance, December 31, 1994......................... 3,125,718 150,672 $ 0.25 - $ 6.00
Options authorized............................... 1,000,000
Options granted.................................. 1,100,606 (1,100,606) $ 6.50 - $15.31
Options exercised................................ (1,093,848) $ 0.25 - $ 9.22
Options canceled................................. (80,108) 80,108 $ 0.25 - $15.31
--------- ----------
Balance, December 31, 1995......................... 3,052,368 130,174 $ 0.25 - $15.31
Unaudited:
Options authorized............................... 1,500,000
Options granted.................................. 804,000 (804,000) $ 16.75 - $40.00
Options exercised................................ (931,856) $ 0.25 - $29.94
Options canceled................................. (24,907) 24,907 $ 2.28 - $32.32
--------- ----------
Balance, September 30, 1996........................ 2,899,605 851,081 $ 0.25 - $40.00
========= ==========
Exercisable, December 31, 1995..................... 1,524,090 $ 0.25 - $15.31
=========
Exercisable, (unaudited) September 30, 1996........ 1,148,441 $ 0.25 - $40.00
=========
</TABLE>
F-14
<PAGE> 62
DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Deductible temporary differences:
Net operating loss carryforwards............................. $ 20,786 $ 22,052
Capitalized research and development......................... 6,388
Research and development credits............................. 1,670
Reserves and accruals not currently deductible............... 83 728
Depreciation and amortization................................ -- (319)
-------- --------
Total deferred tax assets...................................... 20,869 30,519
Valuation allowance for deferred tax assets.................... (20,869) (30,519)
-------- --------
Net deferred tax assets........................................ $ -- $ --
======== ========
</TABLE>
The Company has provided a 100% valuation allowance against deferred tax
assets as of December 31, 1994 and 1995 as realization of such assets is
uncertain. At December 31, 1995, the valuation allowance for deferred tax assets
included approximately $3.5 million that will be credited to common stock when
and if the underlying deferred tax asset is recognized.
At December 31, 1995, the Company had Federal and California net operating
loss ("NOL") carryforwards of approximately $59.8 million and $28.1 million,
respectively. The difference between the NOL carryforwards for Federal and
California income tax purposes is attributable to the 50% limitation on
California NOL carryforwards. The Federal and California NOL carryforwards will
begin expiring in 1998 and 1996, respectively, unless previously utilized. As of
December 31, 1995, approximately $27.5 million of the total Federal NOL
carryforwards were currently available for use by the Company to generally
offset 90% of pretax income. The difference between the total NOL carryforwards
and the NOL carryforwards currently available for use by the Company results
from the limitations of Section 382 of the Internal Revenue Code due to a
"change of ownership." The NOL carryforwards available for use by the Company as
a result of the Section 382 limitation will be increased by approximately $2.9
million per year through 2006. While the Company believes the limitation is
approximately $2.9 million per year, this amount is not certain, nor is it
certain that a subsequent change of ownership could not result in a further
limitation. In addition, the NOL carryforwards are subject to review and
potential disallowance by the Internal Revenue Service upon audit of the Federal
income tax returns of the Company.
F-15
<PAGE> 63
DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the income tax provision (benefit) based on Federal
statutory rates and income (loss) before income taxes to the provision for
income taxes, as reported, is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1994 1995
----- --------
<S> <C> <C>
Provision (benefit) at Federal statutory rates................... $ 660 $(12,027)
Tax effect of timing differences -- Write-off of development
inventory...................................................... (660)
Charges for acquired in-process technology and purchase
options........................................................ 14,883
NOL carryforwards utilized....................................... (2,946)
Federal alternative minimum tax.................................. 235
Other............................................................ 34 261
----- -------
Provision for income taxes....................................... $ 34 $ 406
===== =======
</TABLE>
During the year ended December 31, 1995 the Company recorded a tax benefit
from stock option exercises of $235,000 which was credited to common stock.
10. LICENSE, ROYALTY AND DEVELOPMENT AGREEMENTS
General Agreements -- The Company has several license, royalty and
development agreements. The following agreements, exclusive of those related to
Spiros Corp., generally provide for royalty payments on product sales in the
range of 3.5% to 15%. Generally, product commercialization establishes the
obligation for certain royalty and/or license payments.
Powder Inhaler -- The Company has a worldwide license from a private
inventor to certain dry powder drug delivery technology. The technology uses a
device to aerosolize pharmaceuticals in dry powder formulations for
intrapulmonary and intranasal administration. The Company is required to pay the
inventor royalties on future sales of this device. The following development
arrangements have been entered into regarding the dry powder inhaler technology
("Spiros"):
Private Placement with DDSI -- On September 27, 1993, DDSI, a Delaware
corporation, completed a $13.0 million private placement to fund the development
of Spiros for use with certain compounds. The private placement consisted of 1.3
million units at $10.00 per unit. Each unit consisted of one share of DDSI
callable common stock, a Series W warrant (Note 7) to purchase 2.8 shares of the
Company's common stock and a callable warrant (Note 7). In exchange for the
Series W warrants, the Company acquired the right ("DDSI Purchase Option")
through December 31, 1999 to buy all of the shares of DDSI callable common
stock. A one-time purchase option expense of $2.2 million was recorded by the
Company in September 1993 representing the fair market value of the Series W
warrants. Under the Development and Management Agreement described below between
the Company and DDSI, DDSI used the proceeds from the private placement to
develop Spiros and Spiros applications for the drugs albuterol and
beclomethasone.
In September 1994, DDSI and Elan entered into a loan agreement under which
Elan loaned to DDSI $5.0 million in September 1994 and $5.0 million in March
1995. Under certain conditions the loans were convertible by Elan into shares of
DDSI Callable Common Stock. On December 7, 1995 Elan converted the principal and
interest due under the loans into 639,119 shares of DDSI callable common stock.
On December 29, 1995, the Company executed its right under the DDSI
Purchase Option and purchased 100% of DDSI's callable common stock (Note 11).
Under a development and management agreement, DDSI engaged the Company to
develop the DDSI products and provide general management services to DDSI for a
management fee equal to 10% of direct development costs, as defined. During
1993, the Company received a reimbursement of approximately $1.6 million
representing development costs incurred by the Company during the period
February 1, 1993 to September 27, 1993 and organization and offering expenses
related to the
F-16
<PAGE> 64
DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
private placement. Dura recorded contract revenues under the agreement with DDSI
for the years ended December 31, 1993, 1994 and 1995 of $2,297,000, $9,161,000
and $8,016,000, respectively. Included in contract revenues from DDSI for the
years ended December 31, 1993, 1994 and 1995, is $47,400, $166,600 and $358,200,
respectively, representing the 10% management fee.
Private Placement with Spiros Corp. -- On December 29, 1995, Spiros Corp.,
a separate, newly formed Delaware corporation, completed a $28.0 million private
placement to fund the development of Spiros for use with certain compounds.
Under agreements described below between the Company and Spiros Corp., Spiros
Corp. will use the proceeds from the private placement and a $13.0 million
contribution from Dura to develop Spiros and Spiros applications for albuterol,
beclomethasone and ipratropium (the "Compounds"), and selected proteins and
peptides. If these development efforts are successful, the Company may execute
its right to purchase Spiros Corp.'s callable common stock; however, the Company
does not have a legal obligation to purchase such shares of Spiros Corp.
The private placement consisted of 933,334 units at $30.00 per unit. Each
unit consisted of one share of Spiros Corp. callable common stock and a Series S
warrant (Note 7) to purchase 2.4 shares of the Company's common stock. In
exchange for the Series S warrants and the contribution of $13.0 million to
Spiros Corp., the Company has the right ("Spiros Purchase Option") through
December 31, 1999, to purchase all of the currently outstanding shares of Spiros
Corp. callable common stock at predetermined prices. The purchase price begins
at $46.88 per share (an aggregate of $43.7 million) through December 31, 1997
and increasing on a quarterly basis thereafter to a maximum of $76.17 per share
(an aggregate of $71.1 million) on December 31, 1999. Such purchase price may be
paid, at the Company's discretion, in cash, shares of the Company's common
stock, or a combination thereof. In addition, Dura has the option through
specified dates, to acquire Spiros Corp's exclusive rights for use of Spiros
with albuterol in the cassette version (the "Albuterol Purchase Option"). In the
event Dura acquires rights for use of Spiros with albuterol in the cassette
version and does not exercise the Spiros Purchase Option, Dura will pay a
royalty to Spiros Corp. on net sales of such product. A purchase option expense
of $13.0 million representing the cash contributed to Spiros Corp. was recorded
in December 1995. The Company also recorded a warrant subscription receivable
and corresponding increase in common stock of $4.2 million representing the fair
market value of the Series S warrants.
In connection with the December 29, 1995 private placement, the Company
also entered into certain other agreements with Spiros Corp. which are
summarized as follows:
Technology License Agreement -- Under this agreement, the Company granted
to Spiros Corp., subject to existing agreements with Elan and Mitsubishi
Chemical Corporation, a royalty-bearing, perpetual, exclusive license to use
Spiros in connection with the Compounds and certain off-patent proteins and
compounds, and certain non-exclusive rights to other compounds. Such agreement
expires upon exercise by the Company of the Spiros Purchase Option and prior to
such expiration, the Company may exercise the Albuterol Purchase Option under
terms set forth in the agreement.
Interim Manufacturing and Marketing Agreement -- Under this agreement,
Spiros Corp. granted to the Company exclusive license to manufacture and market
Spiros Corp. products in the U.S. in exchange for a royalty of 10.0% on net
product sales, as defined. Such agreement expires on exercise or termination of
the Spiros Purchase Option.
Development and Management Agreement -- Under this agreement, Spiros Corp.
has engaged the Company to develop the Spiros Corp. products and provide general
management services to Spiros Corp. The agreement requires Spiros Corp to make
payments to Dura for development and management services within 15 days after
the end of the month in which the services are provided. Dura will record
contract revenues from Spiros Corp. equal to the amounts due from Spiros Corp.
for costs and fees less a prorata amount allocated to the Series S warrant
subscription receivable (Note 7). At December 31, 1995 the Company had a
receivable from Spiros for $413,000 representing amounts due from Spiros Corp.
for development costs incurred by the
F-17
<PAGE> 65
DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company in 1995 and organization and offering expenses related to the private
placement. During the nine months ended September 30, 1996 the Company recorded
contract revenues under the development and management agreement with Spiros
Corp. of $12,825,000.
Fujisawa -- In April 1995, the Company entered into a collaborative
development agreement with Fujisawa Pharmaceutical Co., Ltd. ("Fujisawa")
covering the use of Spiros to deliver one of Fujisawa's new chemical entity
asthma compounds. The agreement was an extension of previous feasibility work
completed by the Company. Pursuant to the agreement the Company will provide dry
powder formulation assistance, manufacturing process development and clinical
trial supplies to Fujisawa through the completion of clinical trials in Japan or
June 30, 1998, whichever occurs first. The Company received an up-front payment
and is to receive additional milestone and reimbursement payments from Fujisawa.
Fujisawa can terminate the agreement upon 30 days notice to the Company. If
Fujisawa's clinical trials are successful, the parties have agreed to negotiate
additional agreements, which would include license and supply agreements.
Elan -- On September 5, 1994, the Company and Elan signed certain
agreements as part of the formation of a strategic alliance. The agreements
which set forth this strategic alliance include the (i) Technology Access
Agreement and (ii) Protein and Peptide Development Agreement. The Technology
Access Agreement provides for Elan to utilize its drug delivery expertise and
proprietary technologies to develop respiratory pharmaceuticals and to supply
such drugs to the Company for sale exclusively in the U.S. in such dosage
strengths and package sizes as are typically marketed in the U.S. After Elan
obtains the appropriate regulatory approvals, the Company plans to market these
drugs in the U.S. through its established pharmaceutical sales and marketing
organization. On November 1, 1994, the Company deposited with Elan $2.5 million
in cash and common stock (Note 7) and is required to make certain other
milestone payments, aggregating $300,000 for each approved drug, in connection
with this agreement. In the event Elan's development efforts are unsuccessful,
Elan shall be required to refund in cash the Company's $2.5 million deposit. The
Protein and Peptide Development Agreement provides for the development by Elan
of up to five compounds, including at least one protein and one peptide
compound, for systemic delivery through the lungs utilizing Spiros. The Company
and Elan have agreed that at or before the expiration of this agreement, if the
results of Elan's research and development are characterized by both parties as
favorable, the parties will negotiate a further agreement relating to the sales
and marketing of these compounds for use in Spiros.
In addition, the Company, Elan and DDSI entered into a product licensing
agreement, under which Elan received exclusive rights to develop, manufacture
and market to most countries outside of North America eight identified
respiratory compounds for use with Spiros. In December 1995, the Company and
DDSI assigned their rights and obligations under this agreement to Spiros Corp.
Additionally, Elan made a $10.0 million investment in the units of Spiros Corp.
(Note 10).
Houghten Pharmaceuticals, Inc. -- In February 1996, Dura entered into an
agreement with Houghten Pharmaceuticals, Inc. ("Houghten") to provide, for a
four-year period, contract services for Houghten's drug development programs
using Dura's development capabilities and proprietary formulation and delivery
technology. Dura will receive (a) contract revenues from Houghten for services
provided and (b) rights to collaborate with Houghten on the development of new
compounds. Concurrently, Dura made a $5.0 million equity investment in Houghten,
which was subsequently converted into 775,193 shares of Houghten common stock.
Sanofi-Winthrop -- The Company has a worldwide license agreement for the
sale of bitolterol inhalation solution (excluding Italy) and bitolterol metered
dose inhaler (excluding Italy and Puerto Rico), pharmaceuticals used in the
treatment of asthma. The agreement provides for the payment of royalties on
sales and certain other upfront and anniversary license fees and terminates in
June 2022.
DRC -- In September 1994, the Company entered into a ten-year agreement
with DRC USA Inc., a Nevada corporation ("DRC"), under which the Company
received funding during the period October 1, 1994
F-18
<PAGE> 66
DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
through December 31, 1995 to expand its sales force in specified territories. In
connection with entering into such agreement, the Company issued a warrant to an
affiliate of DRC (Note 7) and is required to pay royalties on net revenues in
the specified territories, as defined, through September 2004. For the period
October 1, 1994 through December 31, 1994 and the year ended December 31, 1995
the Company recorded contract revenue of $400,000 and $1,600,000, respectively,
under this agreement.
Eli Lilly and Company -- On April 13, 1995, the Company signed an exclusive
licensing agreement to market two anti-tuberculosis products to the United
States respiratory market. The agreement required payments in 1995 of
approximately $3.6 million and provides for an additional payment in December
1996 of $550,000 (Note 6). The agreement also requires semi-annual royalty
payments based on net sales of the licensed products.
Rondec Product Line -- On June 14, 1995, the Company signed an agreement
with Ross Products Division of Abbott Laboratories to acquire domestic rights to
the Rondec product line of six prescription cough/cold drugs. The acquisition
closed on June 30, 1995. Under the agreement the Company received cash at
closing of approximately $4.4 million, paid $20.0 million on July 14, 1995, and
is obligated to make additional future minimum payments which are contingent
principally on the acquired products remaining available by prescription only
(Note 6).
Furadantin Product Line -- On May 7, 1996, the Company acquired the
Furadantin(R) product rights from Procter & Gamble Pharmaceuticals, Inc ("P&G")
for $7.0 million. Under the agreement the Company paid cash at closing of $3.5
million and an additional $3.5 million will be paid on May 7, 1997.
Entex Product Line -- On June 17, 1996, the Company signed an agreement
with P&G to acquire the rights to the Entex products, consisting of four
prescription upper respiratory drugs (the "Entex Products"). The acquisition
closed on July 3, 1996. The purchase price of $45.0 million in cash consisted of
$25.0 million paid at closing and $20.0 million due on July 3, 1997.
Keftab and Ceclor CD -- On August 21, 1996, the Company signed an exclusive
licensing agreement to market two antibiotics Keftab and Ceclor CD. The
agreement required a payment at closing on September 5, 1996 of $100.0 million
paid in cash. Additional future contingent payments of $15 million per year
starting in the year 1999 and ending in 2003 are subject to Ceclor CD remaining
without an extended release cefaclor competitor in the U.S.
11. ACQUISITIONS
The following acquisitions have been accounted for under the purchase
method of accounting and, accordingly, the operating results of these
acquisitions are included in the Company's consolidated results of operations
from the date of acquisition.
Health Script -- On March 22, 1995, the Company acquired all of the common
stock of Health Script Pharmacy Services, Inc. and certain assets of a related
affiliate, Quintex, Ltd. (collectively "Health Script"). Health Script, located
in Denver, Colorado, is a mail service pharmacy which dispenses respiratory
pharmaceuticals. The purchase price of $7,340,000 consisted of a cash payment of
$5.0 million, a $1.5 million non-interest bearing note due April 1, 1996 (Note
6), and warrants to purchase 1,200,000 shares of the Company's common stock
(Note 7). The assets acquired include cash, inventory, furniture and equipment
valued at $425,000, and goodwill valued at approximately $6.9 million.
DDSI -- On December 29, 1995, the Company acquired all of the outstanding
callable common stock of DDSI (Note 10). The purchase price of approximately
$33.5 million consisted of 2,285,108 registered shares of the Company's common
stock. The net assets acquired included cash of $3.4 million, equipment valued
at $380,000 and DDSI's payable to Dura for development and management services
of $995,000. The excess of the purchase price over the fair value of the net
assets acquired of approximately $30.8 million was allocated to
F-19
<PAGE> 67
DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in-process technology. The Company concluded, based on an assessment of the
additional development, testing and regulatory approvals required, that the
commercial viability of the technology had not yet been established. In
addition, no alternative future uses of the technology, not requiring regulatory
approval, have been established. As a result of this assessment the acquired
in-process technology was expensed as a non-cash charge in December 1995.
The following unaudited pro forma summary presents the consolidated results
of operations as if the acquisitions had occurred on January 1, 1994, after
giving effect to certain adjustments, including amortization of goodwill and
issuance of Company common stock. These pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of what would have
occurred had the acquisitions been made on January 1, 1994, nor is it indicative
of future results.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1994 1995
------- --------
(IN THOUSANDS, EXCEPT
PER SHARE
DATA -- UNAUDITED)
<S> <C> <C>
Revenues...................................................... $31,784 $ 45,719
Net loss...................................................... $(7,166) $(13,535)
Net loss per share............................................ $ (0.32) $ (0.52)
</TABLE>
F-20
<PAGE> 68
SPIROS(TM) PULMONARY DRY POWDER DRUG DELIVERY SYSTEM
Clockwise from the top:
Spiros(TM) unit-dose system,
being developed for certain
compounds where the cost of
the drug, dosing frequency or
threat of microbial
contamination preclude the
[PHOTO OF SPIROS(TM) MODELS] use of other systems;
Spiros(TM) blisterdisk
system, being developed for
use with drugs sensitive to
moisture or light, including
macromolecules such as
peptides and proteins;
Spiros(TM) cassette system,
the first to be developed and
currently in use in clinical
trials with albuterol and
beclomethasone.
Spiros(TM) is a proprietary dry
powder delivery system under
development that is designed to
aerosolize pharmaceuticals in dry
powder formulations for
propellant-free delivery to the
lungs.
[PHOTO OF INDIVIDUAL USING SPIROS(TM)]
Spiros(TM) features:
- Inspiratory Flow Rate
Independence
- Minimum Need for Patient
Coordination
- Absence of Chlorofluorocarbon
Propellants
- Patient Convenience
Product candidates based on
Spiros(TM) are in various stages
of research or development and
have not been cleared by the
United States Food and Drug
Administration for commercial
sale. There can be no assurance
that the Company's products will
be successfully developed or
approved by regulatory
authorities for commercial sale.
DURA-VENT(R), DURA-TAP(R)/PD, Dryhaler(R), DURA-GEST(R), ENTEX(R), RONDEC(R) and
RONDEC-TR(R) are registered trademarks of the Company. The Company claims common
law trademark rights to Spiros(TM), FENESIN(TM), DURA-VENT/DA(TM), D.A.
CHEWABLE(TM), D.A.II(TM), GUAI-VENT/PSE(TM) and Healthco HomeRx(TM).
TORNALATE(R) is a registered trademark of Sanofi-Winthrop, Inc. CROLOM(TM) is a
trademark of Bausch & Lomb Pharmaceuticals, Inc. Capastat(R), Seromycin(R),
Ceclor(R) CD and Keftab(R) are registered trademarks of Eli Lilly and Company.
UNI-DUR(R) is a registered trademark of Key Pharmaceuticals, a unit of
Schering-Plough Corporation. Spinhaler(R) is a registered trademark of Fisons
Limited. Turbuhaler(R) is a registered trademark of Astra Pharmaceuticals.
Rotohaler(TM) is a trademark of Glaxo Wellcome, Inc.
<PAGE> 69
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 3
Information Incorporated by
Reference........................... 3
Prospectus Summary.................... 4
Risk Factors.......................... 8
Use of Proceeds....................... 15
Price Range of Common Stock........... 16
Dividend Policy....................... 16
Capitalization........................ 17
Selected Consolidated Financial
Data................................ 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 23
Management............................ 37
Principal Shareholders................ 41
Description of Capital Stock.......... 43
Underwriting.......................... 46
Legal Matters......................... 47
Experts............................... 47
Additional Information................ 47
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
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4,000,000 SHARES
LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MERRILL LYNCH & CO.
HAMBRECHT & QUIST
OPPENHEIMER & CO., INC.
ROBERTSON, STEPHENS & COMPANY
NOVEMBER , 1996
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