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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File number 000-19809
DURA PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-3645543
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7475 LUSK BLVD., SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE IS (619) 457-2553
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
[X] Yes [ ] No
The number of shares of the Registrant's Common Stock outstanding as of April
30, 1998 was 46,239,648.
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DURA PHARMACEUTICALS, INC.
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
December 31, 1997 and March 31, 1998 . . . . . . . . . . . . .3
Consolidated Statements of Operations -
Three months ended March 31, 1997 and 1998 . . . . . . . . . .4
Consolidated Statements of Cash Flows -
Three months ended March 31, 1997 and 1998 . . . . . . . . . .5
Notes to Consolidated Financial Statements . . . . . . . . . . .6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . .7
Risks and Uncertainties . . . . . . . . . . . . . . . . . . . 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk . . 18
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 18
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DURA PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
In thousands, except share amounts
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
ASSETS 1997 1998
----------- -----------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 72,003 $ 91,634
Short-term investments 313,218 304,162
Accounts and other receivables 40,987 30,620
Inventory 15,201 13,835
---------- ----------
Total current assets 441,409 440,251
License agreements and product rights 250,781 247,769
Property 48,525 53,257
Other assets 34,165 33,987
---------- ----------
TOTAL $ 774,880 $ 775,264
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 45,741 $ 36,824
Current portion of long-term obligations 2,798 2,846
---------- ----------
Total current liabilities 48,539 39,670
Convertible subordinated notes 287,500 287,500
Other long-term obligations 9,564 9,975
---------- ----------
Total liabilities 345,603 337,145
SHAREHOLDERS' EQUITY:
Preferred stock, par value $.001; shares authorized -
5,000,000; no shares issued or outstanding
Common stock, par value $.001; shares authorized -
100,000,000; issued and outstanding - 45,608,414
and 46,195,817, respectively 46 46
Additional paid-in capital 604,991 605,998
Accumulated other comprehensive income 176 260
Warrant subscriptions receivable (12,252) (11,665)
Accumulated deficit (163,684) (156,520)
---------- ----------
Total shareholders' equity 429,277 438,119
---------- ----------
TOTAL $ 774,880 $ 775,264
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
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DURA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands, except per share amounts
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1998
----------------------
<S> <C> <C>
REVENUES:
Sales $33,935 $35,885
Contract 6,958 12,881
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Total revenues 40,893 48,766
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OPERATING COSTS AND EXPENSES:
Cost of sales 7,970 8,093
Clinical, development and regulatory 5,761 9,151
Selling, general and administrative 15,992 22,953
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Total operating costs and expenses 29,723 40,197
------- -------
OPERATING INCOME 11,170 8,569
------- -------
OTHER:
Interest income 3,387 5,417
Interest expense (173) (3,142)
Other - net 20 13
------- -------
------- -------
Total other 3,234 2,288
------- -------
INCOME BEFORE INCOME TAXES 14,404 10,857
PROVISION FOR INCOME TAXES 5,617 3,693
------- -------
NET INCOME $ 8,787 $ 7,164
------- -------
------- -------
NET INCOME PER SHARE:
Basic $ 0.20 $ 0.16
------- -------
------- -------
Diluted $ 0.19 $ 0.15
------- -------
------- -------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
Basic 43,351 45,975
------- -------
------- -------
Diluted 47,240 48,523
------- -------
------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
4
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DURA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1998
----------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 19,809 $ 14,514
--------- ---------
INVESTING ACTIVITIES:
Purchases of short-term investments (126,131) (102,211)
Sales and maturities of short-term investments 41,121 111,351
Capital expenditures (3,835) (5,768)
Other (416) (449)
--------- ---------
Net cash provided by (used for)
investing activities (89,261) 2,923
--------- ---------
FINANCING ACTIVITIES:
Issuance of common stock and warrants - net 1,410 2,194
--------- ---------
Net cash provided by financing activities 1,410 2,194
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (68,042) 19,631
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 131,101 72,003
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 63,059 $ 91,634
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 0 $ 5,272
Income taxes $ 338 $ 370
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
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DURA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by Dura Pharmaceuticals, Inc. ("Dura" or the "Company") in
accordance with the instructions to Form 10-Q. The consolidated financial
statements reflect all adjustments, consisting of only normal recurring
accruals, which are, in the opinion of management, necessary for a fair
statement of the results of the interim periods presented. These
consolidated financial statements and notes thereto should be read in
conjunction with the audited financial statements and notes thereto included
in the Company's 1997 Annual Report to Shareholders, which statements and
notes are incorporated by reference in the Company's Annual Report on Form
10-K for the year ended December 31, 1997. The results of operations for the
interim periods are not necessarily indicative of results to be expected for
any other interim period or for the year as a whole.
The consolidated financial statements include the accounts of Dura and its
wholly-owned subsidiaries. All intercompany transactions and balances are
eliminated in consolidation. Certain reclassifications have been made to
amounts included in the prior year's financial statements to conform with the
financial statement presentation for the quarter ended March 31, 1998.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect amounts reported in the consolidated financial statements and
related notes. Changes in those estimates may affect amounts reported in
future periods.
2. NEW ACCOUNTING STANDARD
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 requires reporting and displaying comprehensive income and its
components which, for Dura, includes net income and unrealized gains and
losses on investments. In accordance with SFAS 130, the accumulated balance
of other comprehensive income is disclosed as a separate component of
shareholders' equity. Prior year financial statements have been reclassified
to conform to the requirements of SFAS 130.
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For the three months ended March 31, 1997 and 1998, comprehensive income
consisted of (in thousands):
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Net income $8,787 $7,164
Other comprehensive income:
Unrealized gain(loss) on investments (465) 84
------ ------
Comprehensive income $8,322 $7,248
------ ------
------ ------
</TABLE>
3. COMMITMENTS AND CONTINGENCIES
On December 1, 1997, the Company terminated a merger agreement with
Scandipharm, Inc. ("Scandipharm") entered into on October 20, 1997. On
January 16, 1998, Scandipharm filed suit against the Company for breach of
contract. On January 19, 1998, the Company filed suit against Scandipharm
seeking a declaratory judgment that Dura's termination of the merger did not
breach the merger agreement and for damages against Scandipharm. The Company
believes that it had the right to terminate the merger agreement, and that
Scandipharm's claims for specific performance under the agreement or for
unspecified damages are without merit, and that outcome of this matter will
not have a material adverse effect on the Company's financial position or
results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This information should be read in conjunction with the consolidated
financial statements and the notes thereto included in Item 1 of this
Quarterly Report and the audited financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the year ended December 31, 1997 contained in the Company's
1997 Annual Report to Shareholders, which is incorporated by reference in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
See "Risks and Uncertainties" for a discussion of factors known to the
Company that could cause reported financial information not to be necessarily
indicative of future results, including discussion of the effects of
seasonality on the Company. The Company undertakes no obligation to release
publicly the results of any revisions to these forward-looking statements to
reflect events and circumstances arising after the date hereof.
RECENT DEVELOPMENTS
On February 22, 1998, the Company announced that it planned to begin expanding
its sales force immediately from approximately 270 representatives to over 450
representatives by the end of 1998 to increase the promotional activity of its
current products and to prepare for the launch, subject to
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receiving regulatory approval, of Albuterol Spiros-TM-. The Company expects
that the rapid expansion of its sales force will result in an increase in
fiscal 1998 in its selling, general and administrative expenses, both in
total and as a percentage of revenues, as compared to fiscal 1997.
RESULTS OF OPERATIONS
Total revenues for the three months ended March 31, 1998 were $48.8 million,
an increase of $7.9 million, or 19%, over the same period in 1997. Net
income for the three months ended March 31, 1998 was $7.2 million, or $0.15
per diluted share, a decrease of $1.6 million over the same period in 1997.
The principal factors causing these changes are discussed below.
Pharmaceutical sales for the three months ended March 31, 1998 were $35.9
million, an increase of $2 million, or 6%, over the same period in 1997.
This increase is due primarily to sales of Nasarel-Registered Trademark- and
Nasalide-Registered Trademark-, acquired in May 1997, partially offset by a
decrease in sales of certain of the Company's existing products.
Gross profit (pharmaceutical sales less cost of sales) for the three months
ended March 31, 1998 was $27.8 million, an increase of $1.8 million, or 7%,
as compared to the same period in 1997. This increase is due to the increase
in pharmaceutical sales discussed above. Gross profit as a percentage of
sales was 77% for the three months ended March 31, 1998 and 1997.
Contract revenues in the three months ended March 31, 1998 were $12.9
million, an increase of $5.9 million, or 85%, over the same period in 1997.
The Company, under agreements with several companies, conducts feasibility
testing and development work on various compounds for use with
Spiros-Registered Trademark-, a proprietary dry powder pulmonary drug
delivery system. Contract revenues from Spiros-related development and
feasibility agreements for the three months ended March 31, 1998 totaled
$12.6 million, including $10.4 million from Spiros Development Corporation
II, Inc. ("Spiros Corp. II"), as compared to $6.8 million, including $5.5
million from Spiros Development Corporation, for the same period in 1997.
Clinical, development and regulatory expenses for the three months ended
March 31, 1998 were $9.2 million, an increase of $3.4 million, or 59%, over
the same period in 1997. The increase reflects additional 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 three months ended March
31, 1998 were $23 million, an increase of $7 million, or 44%, over the same
period in 1997, and increased as a percentage of total revenues to 47% in the
three months ended March 31, 1998 from 39% in the first quarter of 1997. The
dollar and percentage increases are primarily due to increased costs incurred
to support the Company's sales and contract revenue growth, including costs
associated with expanding the Company's sales force (increase of $4.9
million), amortization of newly acquired product rights (increase of
$754,000), and increased operating costs related to general corporate
activities (increase of $1.2 million). On February 22, 1998, the Company
announced that it planned to begin expanding its sales force immediately from
approximately 270 representatives to over 450 representatives by the end of
1998 to increase the promotional activity
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of its current products and to prepare for the launch, subject to receiving
regulatory approval, of Albuterol Spiros-TM-. The Company expects that the
rapid expansion of its sales force will result in an increase in fiscal 1998
in its selling, general and administrative expenses, both in total and as a
percentage of revenues, as compared to fiscal 1997.
Interest income for the three months ended March 31, 1998 was $5.4 million,
an increase of $2 million, or 60%, as compared to the same period in 1997.
The increase is due to higher balances of cash and short-term investments
resulting primarily from the Convertible Subordinated Notes issued in the
third quarter of 1997 (see "Liquidity and Capital Resources" below), as well
as cash generated from operations.
Interest expense for the three months ended March 31, 1998 was $3.1 million
compared to $173,000 for the same period in 1997. The increase is primarily
due to interest expense on the Convertible Subordinated Notes (see "Liquidity
and Capital Resources" below).
The Company's effective tax rate for the three months ended March 31, 1998
was 34%, compared to 39% for the same period in 1997. This reduction is due
primarily to an increase in 1998 in income earned at foreign subsidiaries
which is taxed at lower rates. The Company records interim provisions for
income taxes based on the estimated effective combined tax rate to be
applicable for the fiscal year. This estimate is reevaluated by management
each quarter based on forecasts of income before income taxes for the year as
well as anticipated adjustments from statutory federal and state tax rates.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments increased by $10.6 million
to $395.8 million at March 31, 1998 from $385.2 million at December 31, 1997.
The increase is due primarily to cash generated from operations, partially
offset by capital expenditures. Working capital increased by $7.7 million to
$400.6 million at March 31, 1998 from $392.9 million at December 31, 1997.
In the third quarter of 1997, the Company issued $287.5 million principal
amount of 3 1/2% Convertible Subordinated Notes (the "Notes") due July 15,
2002 with interest payable semiannually. Proceeds from the offering of the
Notes are expected to 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 in areas related or otherwise
complementary to Dura's existing business; (ii) to fund product development
programs, including Spiros products; and (iii) for working capital and
facilities expansion. To date, no proceeds from the Notes have been used. The
Notes are convertible, at the option of the holder, into shares of Dura's
common stock at any time prior to maturity or redemption at a conversion
price of $50.635 per share. At March 31, 1998, in addition to the Notes, the
Company had outstanding an aggregate of $12.8 million in current and other
long-term obligations, of which $2.8 million is to be paid during the next 12
months. Also as of March 31, 1998, additional future contingent obligations
totaling $93 million relating to product acquisitions are due through 2004,
including $10 million due in 1998.
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The Company has entered into a loan agreement which provides for the
borrowing of up to $50 million on an unsecured basis through May 1, 1999. As
of March 31, 1998, no borrowings were outstanding under this agreement.
The Company anticipates that its existing capital resources, together with
cash expected to be generated from operations and available bank borrowings,
will be sufficient to finance its operations and working capital through at
least the next 12 months. Significant additional resources, however, may be
required in connection with product or company acquisitions or in-licensing
opportunities. There can be no assurance that such additional resources will
be available to the Company when needed or on terms acceptable to the
Company. At present, the Company is actively pursuing the acquisition of
rights to products and/or companies which may require the use of substantial
capital resources; however there are no present agreements or commitments
with respect to such acquisitions.
The Company recognizes the need to ensure its operations will not be
adversely impacted by the inability of the Company's systems to process data
having dates on or after January 1, 2000 ("Year 2000"). Processing errors
due to software failure arising from calculations using the Year 2000 date
are a recognized risk. The Company is currently addressing the risk, with
respect to the availability and integrity of its financial systems and the
reliability of its operating systems, and is in the process of communicating
with suppliers, customers, financial institutions and others with whom it
conducts business to assess whether they are or will be Year 2000 compliant.
While the Company believes its planning efforts are adequate to address the
Year 2000 concerns, there can be no assurance that the systems of other
companies on which the Company's systems and operations rely will be
converted on a timely basis and will not have a material effect on the
Company. In addition, the potential impact of the Year 2000 on others with
whom the Company does business and any resulting effects on the Company
cannot be reasonably estimated at this time. The cost of the Company's Year
2000 initiatives is not expected to be material to the Company's results of
operations or financial position.
RISKS AND UNCERTAINTIES
FORWARD-LOOKING STATEMENTS. The Company cautions readers that the statements
in this Quarterly Report 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 below.
REDUCTION IN GROSS MARGINS. There is no proprietary protection for most of
the products sold by Dura and substitutes for such products are sold by other
pharmaceutical companies. Dura expects average selling prices for many of
its products to decline over time due to competitive and reimbursement
pressures. While Dura will seek to mitigate the effect of this decline in
average selling prices, there can be no assurance that Dura will be
successful in these efforts.
THIRD-PARTY REIMBURSEMENT; PRICING PRESSURES. The Company's commercial
success will depend in part on the availability of adequate reimbursement
from third-party healthcare payors,
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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
healthcare 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.
DEPENDENCE ON ACQUISITION OF RIGHTS TO PHARMACEUTICALS. Dura's strategy for
growth is dependent, in part, upon acquiring, in-licensing and co-promoting
pharmaceuticals to targeted physicians. Other companies, including those
with substantially greater resources, are competing with Dura for the rights
to such products. There can be no assurance that Dura will be able to
acquire, in-license or co-promote additional pharmaceuticals on acceptable
terms, if at all. The failure to acquire, in-license, co-promote, develop or
market commercially successful pharmaceuticals would have a material adverse
effect on the Company's business, financial condition and results of
operations. Furthermore, there can be no assurance that Dura, once it has
obtained rights to a pharmaceutical and committed to payment terms, will be
able to generate sales sufficient to create a profit or otherwise avoid a
loss on such product.
DEVELOPMENT RISKS ASSOCIATED WITH SPIROS-Registered Trademark-. Spiros will
require significant additional development efforts. 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
any Spiros product to be safe or efficacious or that any Spiros product will
receive regulatory approval in a timely manner, if at all. In addition,
regulatory approvals will have to be obtained for each drug to be delivered
through the use of Spiros prior to commercialization. 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 any Spiros product to receive timely regulatory approval and
achieve commercial success would have a material adverse effect on the
Company's business, financial condition or results of operations.
CUSTOMER CONCENTRATION; CONSOLIDATION OF DISTRIBUTION NETWORK. The
distribution network for pharmaceutical products is largely controlled by a
few large wholesale distributors, and, in recent years, the number of
independent and small chain drug stores has decreased. 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 Dura. Further
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consolidation or financial difficulties could also cause customers to reduce
their inventory levels or otherwise reduce purchases of Dura's products which
could result in a material adverse effect on Dura's business, financial
condition or results of operations.
Dura's principal customers are wholesale drug distributors and major drug
store chains. For the first quarter of 1998, one wholesale customer
(McKesson Corporation) accounted for 10% of sales. For the first quarter of
1997, four wholesale customers (Bergen Brunswig Corporation, Cardinal Health,
Inc., McKesson Corporation, and AmeriSource) individually accounted for 18%,
17%, 15%, and 14% of sales, respectively. For fiscal 1997, McKesson
Corporation and Cardinal Health, Inc. each individually accounted for 11% of
sales.
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 in 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 Dura's results of
operations in the past. While the growth and productivity of Dura's sales
force and the introduction by Dura of new products have historically
mitigated the impact of seasonality on Dura's results of operations, recent
product acquisitions by Dura, especially Keftab-Registered Trademark- and
Ceclor-Registered Trademark-CD, which are used to treat respiratory
infections, increase the impact of seasonality on Dura's results of
operations. No assurances can be given that Dura'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 or planned to be offered by Dura.
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 pulmonary drug delivery systems
aimed at the respiratory infection, allergy, cough and cold, and asthma and
chronic obstructive pulmonary disease ("COPD") markets will be based on,
among other things, product efficacy, safety, reliability, availability and
price.
There are at least 25 other companies in the U.S. that 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, individual dose and multiple dose. Individual dose
DPIs currently marketed in the U.S. include the Rotohaler-TM- (developed and
marketed by Glaxo Wellcome ("Glaxo")) and the Spinhaler-Registered Trademark-
(developed and marketed by Fisons Limited). The Turbuhaler-Registered
Trademark- (developed and marketed by Astra Pharmaceuticals, Inc. ("Astra")),
a multiple dose DPI, is the leading DPI in worldwide sales. In June 1997,
the Food and Drug Administration ("FDA") approved the first
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Turbuhaler product, the Pulmicort Turbuhaler, for marketing in the U.S.,
which Astra launched in early 1998. Recently the FDA also approved two
multiple dose DPIs developed by Glaxo.
DEPENDENCE ON THIRD PARTIES. Dura'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 Dura 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 Dura's competitors. Dura 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 Dura's
products is subject to Good Manufacturing Practice ("cGMP") regulations
prescribed by the FDA. Dura relies on a single manufacturer for each of its
products. There can be no assurance that Dura 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 Dura will be able to
enter into agreements for the manufacture of future products, including
Spiros products, with manufacturers whose facilities and procedures comply
with cGMP and other regulatory requirements. In the event that Dura is
unable to obtain or retain third-party manufacturing, it may not be able to
commercialize its products as planned. Dura's current dependence upon others
for the manufacture of its products may adversely affect future profit
margins on the sale of those products and Dura's ability to develop and
deliver products on a timely and competitive basis.
LIMITED MANUFACTURING EXPERIENCE. Dura's principal manufacturing facility 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 1998. Dura's manufacturing
facility must be registered with and licensed by various regulatory
authorities and must comply with current cGMP requirements prescribed by the
FDA and the State of California. Dura will need to significantly scale up
its current manufacturing operations and comply with cGMPs and other
regulations prescribed by various regulatory agencies in the U.S. and other
countries to achieve the prescribed quality and required levels of production
of such products to obtain marketing approval. Any failure or significant
delay in the validation of or obtaining a satisfactory regulatory inspection
of the new facility, failure to successfully scale up or failure to maintain
necessary regulatory approvals for such facilities could have a material
adverse effect on the ability of Dura to manufacture products in connection
with Spiros. Dura intends to utilize third parties to produce components of
and assemble the Spiros aerosol generator. Such third parties have only
produced limited quantities of components and assembled limited numbers of
generators and will be required to significantly scale up their activities
and to produce components on a timely and consistent basis and which meet
applicable specifications. There can be no assurance that such third parties
will be successful in attaining acceptable service levels or meeting cGMP
requirements. Any failure or delay in the scale up of
13
<PAGE>
aerosol generator manufacturing would have a material adverse effect on the
ability of Dura to commercialize Spiros products.
MANAGING GROWTH OF BUSINESS. Dura has experienced significant growth as
total revenues increased 102% in 1996, 74% in 1997, and 19% for the first
quarter of 1998 as compared to prior periods, primarily as a result of the
acquisition and in-licensing of additional respiratory pharmaceutical
products. Due to Dura's emphasis on acquiring and in-licensing respiratory
pharmaceutical products, Dura anticipates that the integration of the
recently acquired products, as well as any future acquisitions, will require
significant management attention and expansion of its sales force. On
February 22, 1998, the Company announced that it planned to begin expanding
its sales force immediately from approximately 270 representatives to over
450 representatives by the end of 1998 to increase the promotional activity
of its current products and to prepare for the launch, subject to receiving
regulatory approval, of Albuterol Spiros. Dura's ability to achieve and
maintain profitability is based on management's ability to manage its
changing business effectively.
UNCERTAINTY OF PROFITABILITY; NEED FOR ADDITIONAL FUNDS. Dura has
experienced significant operating losses in the past and at March 31, 1998,
Dura's accumulated deficit was $156.5 million. The acquisition and
in-licensing of products, the expansion and maintenance of Dura's sales force
in response to acquisition, in-licensing, and enhanced promotion of products
and planned introduction of Spiros products, the upgrade and expansion of its
facilities, continued pricing pressure on its pharmaceutical products, or the
exercise of the Stock Purchase Option or Product Options (defined below) will
require the commitment of substantial capital resources and may also result
in significant impairment of profits, or losses. Depending upon, among other
things, the acquisition and in-licensing opportunities available, Dura may
need to raise additional funds for these purposes. Adequate funds for these
purposes may not be available when needed or on terms acceptable to Dura.
Insufficient funds may require Dura to delay, scale back or suspend some or
all of its product acquisition, in-licensing and promotional programs, the
upgrade and expansion of its facilities, or the potential exercise of the
Stock Purchase Option and/or the Product Options. Dura anticipates that its
existing capital resources, together with cash expected to be generated from
operations and available bank borrowings, should be sufficient to finance its
current operations and working capital requirements through at least the next
12 months.
EFFECT OF EXERCISE OF THE STOCK PURCHASE OPTION AND THE PRODUCT OPTIONS;
DILUTION. Dura has a purchase option with respect to the outstanding shares
of callable common stock of Spiros Corp. II which expires on December 31,
2002 ("Stock Purchase Option"). If Dura exercises the Stock Purchase Option,
it will be required to make a substantial cash payment or to issue shares of
Dura common stock, or both. A payment in cash would reduce Dura's capital
resources. A payment in shares of Dura common stock would result in a
decrease in the percentage ownership of Dura's shareholders at that time.
The exercise of the Stock 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 Stock Purchase Option prior to its
expiration, Dura's rights in and to Spiros with respect to certain compounds
will terminate.
14
<PAGE>
As part of Dura's contractual relationship with Spiros Corp. II, Dura
received options to purchase certain rights to the use of Spiros with
albuterol and with an additional product other than albuterol ("Product
Options"). If Dura exercises either of the Product Options, it will be
required to make a significant cash payment which could have an adverse
effect on its capital resources. Dura may not have sufficient capital
resources to exercise the Product Options, which may result in Dura's loss of
valuable rights.
GOVERNMENT REGULATION; NO ASSURANCE OF FDA APPROVAL. Development, testing,
manufacturing and marketing of pharmaceutical products including drug
delivery systems are subject to extensive regulation by numerous governmental
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 product must undergo rigorous
preclinical and clinical testing and an extensive regulatory approval process
mandated by the FDA. Such regulatory review includes the determination of
manufacturing capability and product performance. Marketing of drug delivery
systems also requires FDA approval, which can be costly and time consuming to
obtain. A separate regulatory approval will need to be obtained for each
Spiros drug delivery system. There can be no assurance that the
pharmaceutical products currently in development by Dura or those products
acquired or in-licensed will be approved by the FDA. In addition, there can
be no assurance that all necessary approvals will be granted for future
products or that FDA review or actions will not involve delays caused by the
FDA's request for additional information or testing that could adversely
affect the time to market and sale of the products. For both currently
marketed products and future products of Dura, 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.
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 DESI program and will determine which drugs are considered "new drugs"
requiring approval through a NDA for marketing. A Policy Guide (CPG 440.100)
issued by the FDA indicates that the FDA will implement procedures to
determine whether the new drug provisions are applicable to existing
products. This 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 final determination is made that a particular drug
required 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 products must be removed
from the market. Dura believes that nine of its prescription pharmaceutical
products may be covered by paragraph B of the Policy Guide and is aware that
one of its products may be considered to be similar or related to a DESI
drug. Also, Dura is not aware of evidence to substantiate that three of its
products have the same formulation or conditions for use as products marketed
before November 13, 1984. There can be no assurance as to which regulatory
course the FDA will follow, if any, with respect to many of Dura's
pharmaceutical products or whether Dura will be
15
<PAGE>
able to obtain any approvals that the FDA may deem necessary. If any
negative actions are taken by the FDA, such actions could have a material
adverse effect on business of Dura. Dura's Health Script Pharmacy Services,
Inc. ("Health Script") subsidiary 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.
PATENTS AND PROPRIETARY RIGHTS. Dura'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 six of the pharmaceuticals currently marketed by Dura are covered by
patents. Dura 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
Dura, they will be enforceable or will provide substantial protection from
competition or be of commercial benefit to Dura or that Dura 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. 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 Dura will also depend upon avoiding the infringement of
patents issued to competitors and upon maintaining the technology licenses
upon which certain of Dura's current products are, or any future products
under development might be, based. Litigation, which could result in
substantial cost to Dura, may be necessary to enforce Dura's patent and
license rights or to determine the scope and validity of proprietary rights
of third parties. If any of Dura's products are found to infringe upon
patents or other rights owned by third parties, Dura 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 Dura on commercially reasonable terms, if at all. If Dura 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
is not possible. Dura 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.
PRODUCT LIABILITY AND RECALL. Dura 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 Dura 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. Dura
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
16
<PAGE>
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 Dura.
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 corporate 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.
TERMINATION OF MERGER AGREEMENT WITH SCANDIPHARM, INC. On December 1, 1997,
the Company terminated a merger agreement with Scandipharm, Inc.
("Scandipharm") entered into on October 20, 1997. On January 16, 1998,
Scandipharm filed suit against the Company for breach of contract. On
January 19, 1998, the Company filed suit against Scandipharm seeking a
declaratory judgment that Dura's termination of the merger did not breach the
merger agreement, and for damages against Scandipharm. The Company believes
that it had the right to terminate the merger agreement and that
Scandipharm's claims for specific performance under the agreement or for
unspecified damages are without merit, and that outcome of this matter will
not have a material adverse effect on the Company's financial position or
results of operations.
CHANGE IN CONTROL. Certain provisions of Dura's charter documents and terms
relating to the acceleration of the exercisability of certain warrants and
options in the event of a change in control may have the effect of delaying,
deferring or preventing a change in control of Dura, thereby possibly
depriving shareholders of receiving a premium for their shares of the Dura
common stock. In addition, upon a Change in Control (as defined), Dura will
be required to offer to purchase for cash all of the outstanding 31/2%
Convertible Subordinated Notes (the "Notes") at a purchase price of 100% of
the principal amount thereof, plus accrued but unpaid interest through the
Change in Control Purchase Date (as defined). The Change in Control purchase
features of the Notes may in certain circumstances have an anti-takeover
effect. If a Change in Control were to occur, there can be no assurance that
Dura would have sufficient funds to pay the Change in Control Purchase Price
(as defined) for all Notes tendered by the holders thereof and to repay other
indebtedness that may become due as a result of any Change in Control.
VOLATILITY OF DURA STOCK PRICE. The market prices for securities of emerging
companies, including Dura, have historically been highly volatile. Future
announcements concerning Dura or its competitors may have a significant
impact on the market price of the Dura common stock. Such announcements
might include financial results, the results of testing, regulatory
developments, 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 Dura's products.
17
<PAGE>
ABSENCE OF DIVIDENDS. The Company has never paid any cash dividends on its
common stock. In accordance with a bank loan agreement, Dura is prohibited
from paying cash dividends without prior bank approval. Dura 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.
YEAR 2000 COMPLIANCE CONSIDERATIONS. The Company recognizes the need to
ensure its operations will not be adversely impacted by the inability of the
Company's systems to process data having dates on or after January 1, 2000
("Year 2000"). Processing errors due to software failure arising from
calculations using the Year 2000 date are a recognized risk. The Company is
currently addressing the risk, with respect to the availability and integrity
of its financial systems and the reliability of its operating systems, and is
in the process of communicating with suppliers, customers, financial
institutions and others with whom it conducts business to assess whether they
are or will be Year 2000 compliant. While the Company believes its planning
efforts are adequate to address the Year 2000 concerns, there can be no
assurance that the systems of other companies on which the Company's systems
and operations rely will be converted on a timely basis and will not have a
material effect on the Company. In addition, the potential impact of the Year
2000 on others with whom the Company does business and any resulting effects
on the Company cannot be reasonably estimated at this time. The cost of the
Company's Year 2000 initiatives is not expected to be material to the
Company's results of operations or financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO.
11 Statements re Computations of Net Income Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
On January 5, 1998, the Company filed a Current Report on Form 8-K dated
December 19, 1997.
18
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
DURA PHARMACEUTICALS, INC.
DATE MAY 6, 1998 /S/ JAMES W. NEWMAN
--------------------------
(JAMES W. NEWMAN)
Senior Vice President,
Finance & Administration
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
19
<PAGE>
EXHIBIT INDEX
TO
FORM 10-Q
DURA PHARMACEUTICALS, INC.
EXHIBIT NO. DESCRIPTION
11 Statements re Computations of Net Income Per Share
27 Financial Data Schedule
<PAGE>
EXHIBIT 11
DURA PHARMACEUTICALS, INC.
STATEMENTS RE COMPUTATIONS OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1997 1998
-------------------------
<S> <C> <C>
(UNAUDITED)
NET INCOME PER SHARE - BASIC
Net Income...................................... $8,786,698 $ 7,164,010
---------- -----------
---------- -----------
Weighted Average Number of Common and Common
Equivalent Shares:
Common stock................................ 43,351,112 45,974,948
Stock options...............................
Warrants....................................
---------- -----------
Total..................................... 43,351,112 45,974,948
---------- -----------
---------- -----------
Net Income per Share............................ $ 0.20 $ 0.16
---------- -----------
---------- -----------
NET INCOME PER SHARE - DILUTED
Net Income...................................... $8,786,698 $7,164,010
---------- -----------
---------- -----------
Weighted Average Number of Common and Common
Equivalent Shares Assuming Issuance of All
Dilutive Contingent Shares:
Common stock............................... 43,351,112 45,974,948
Stock options.............................. 1,174,639 833,354
Warrants................................... 2,714,066 1,714,750
---------- -----------
Total.................................... 47,239,817 48,523,052
---------- -----------
---------- -----------
Net Income per Share............................ $ 0.19 $ 0.15
---------- -----------
---------- -----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998, AND THE RELATED
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND THE NOTES THERETO, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 91,634
<SECURITIES> 304,162
<RECEIVABLES> 30,620
<ALLOWANCES> 0
<INVENTORY> 13,835
<CURRENT-ASSETS> 440,251
<PP&E> 53,257
<DEPRECIATION> 0
<TOTAL-ASSETS> 775,264
<CURRENT-LIABILITIES> 39,670
<BONDS> 287,500
0
0
<COMMON> 46
<OTHER-SE> 438,073
<TOTAL-LIABILITY-AND-EQUITY> 775,264
<SALES> 0
<TOTAL-REVENUES> 48,766
<CGS> 8,093
<TOTAL-COSTS> 32,104
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,142
<INCOME-PRETAX> 10,857
<INCOME-TAX> 3,693
<INCOME-CONTINUING> 7,164
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,164
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.15
</TABLE>
