<PAGE>
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 June 30, 2000.
[ ] 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 (858) 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 July 31,
2000 was 44,533,714.
================================================================================
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
DURA PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
In thousands, except share amounts
-------------------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 137,172 $ 63,631
Short-term investments 157,910 210,782
Accounts and other receivables 48,675 44,632
Inventory 14,481 12,938
Other current assets 5,052 11,523
-------------------------------------------------------------------------------------------------------------------
Total current assets 363,290 343,506
License agreements and product rights 413,102 389,631
Property 92,288 93,333
Other assets 57,562 57,004
-------------------------------------------------------------------------------------------------------------------
Total $ 926,242 $ 883,474
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,947 $ 11,411
Accrued liabilities 86,359 74,305
Current portion of long-term obligations 1,931 1,865
-------------------------------------------------------------------------------------------------------------------
Total current liabilities 103,237 87,581
Convertible subordinated notes 287,500 287,500
Other long-term obligations 68,288 66,654
-------------------------------------------------------------------------------------------------------------------
Total liabilities 459,025 441,735
-------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, par value $.001, shares authorized - 5,000,000; no
shares issued or outstanding
Common stock, par value $.001, shares authorized - 200,000,000;
issued and outstanding - 44,389,324 and 44,239,660, respectively 44 44
Additional paid-in capital 581,538 579,929
Accumulated other comprehensive loss (1,056) (1,230)
Warrant subscriptions receivable (4,261) (6,057)
Accumulated deficit (109,048) (130,947)
-------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 467,217 441,739
-----------------------------------------------------------------------------------================================
Total $ 926,242 $ 883,474
================================
See accompanying notes to consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
DURA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands, except per share amounts
(Unaudited)
------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------------------------------------
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Sales $ 60,881 $ 51,321 $ 128,206 $ 106,402
Contract 20,649 16,685 39,103 32,850
------------------------------------------------------------------------------------------------------------------------
Total revenues 81,530 68,006 167,309 139,252
------------------------------------------------------------------------------------------------------------------------
Operating costs and expenses:
Cost of sales 11,905 10,379 26,076 20,870
Clinical, development and regulatory 16,475 12,474 30,811 23,965
Selling, general and administrative 34,978 28,654 72,956 61,068
Product rights amortization 5,526 4,933 10,916 9,809
------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 68,884 56,440 140,759 115,712
------------------------------------------------------------------------------------------------------------------------
Operating income 12,646 11,566 26,550 23,540
------------------------------------------------------------------------------------------------------------------------
Other:
Interest income 5,144 4,249 9,895 8,552
Interest expense (4,324) (4,308) (8,624) (8,372)
Other - net 7 (19) 3,450 (247)
------------------------------------------------------------------------------------------------------------------------
Total other 827 (78) 4,721 (67)
------------------------------------------------------------------------------------------------------------------------
Income before income taxes 13,473 11,488 31,271 23,473
Provision for income taxes 4,033 3,905 9,373 8,125
------------------------------------------------------------------------------------------------------------------------
Net income $ 9,440 $ 7,583 $ 21,898 $ 15,348
================================================================
Net income per share:
Basic $ 0.21 $ 0.17 $ 0.49 $ 0.35
Diluted $ 0.21 $ 0.17 $ 0.48 $ 0.34
Weighted average number of common shares:
Basic 44,389 44,085 44,389 44,092
Diluted 45,776 45,085 46,002 45,328
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
DURA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
(Unaudited)
----------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30,
--------------------------------
2000 1999
--------------------------------
<S> <C> <C>
----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 50,338 $ 43,283
----------------------------------------------------------------------------------------------------------
Investing activities:
Sales and maturities of short-term investments 87,257 189,435
Purchases of short-term investments (34,211) (161,565)
Product acquisitions (32,352) (24,024)
Capital expenditures (5,397) (12,249)
Proceeds from the sale of long-term investments 4,949 -
Other (56) (4,393)
----------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities 20,190 (12,796)
----------------------------------------------------------------------------------------------------------
Financing activities:
Issuance of common stock and warrants - net 1,216 2,176
Principal payments on long-term obligations 1,797 (1,000)
Repurchase of common stock - (831)
----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,013 345
----------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 73,541 30,832
Cash and cash equivalents at beginning of period 63,631 31,113
----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $137,172 $ 61,945
================================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 5,402 $ 5,112
Income taxes $ 186 $ 1,436
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE>
DURA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
We have prepared the accompanying unaudited consolidated financial statements 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 our opinion, necessary for a fair statement of the
results of the interim periods presented. These consolidated financial
statements and related notes should be read in conjunction with the audited
financial statements and related notes included in our annual report on Form
10-K/A for the year ended December 31, 1999. 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 our accounts and the accounts of
our 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 to the financial
statement presentation for the three months and six months ended June 30, 2000.
The preparation of financial statements in conformity with generally accepted
accounting principles requires us 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.
In December 1999, the SEC issued Staff Accounting Bulleting (SAB) No. 101,
"Revenue Recognition in Financial Statemetns." SAB 101 provides the SEC staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. We will be required to adopt SAB 101 in the fourth quarter
of the 2000 fiscal year. We do not expect the adoption of SAB 101 will have a
material effect on our financial position or results of operation.
2. MERGER AGREEMENT WITH SPIROS DEVELOPMENT CORPORATION II, INC.
In March 2000 we entered into a merger agreement to acquire Spiros Corp. II.
Under the agreement, each holder of Spiros Corp. II's callable common stock will
receive $13.25 in cash and a warrant to purchase a fractional share of our
common stock for each share of callable common stock. The warrant will be
immediately exercisable at $17.94 per share, which represents a 25% premium over
the average closing price of our common stock for the ten trading days prior to
the date of the merger agreement, and will expire five years from the date the
merger is completed. The exact fraction of a share of our common stock
purchasable under the warrant will be determined based on the average closing
price of our common stock for the ten trading days prior to the vote of the
Spiros Corp. II stockholders on the merger and will result in a calculated
value, using the Black-Scholes option pricing model, for each warrant between
$3.22 and $1.81. We expect to pay a total of approximately $89.7 million in
cash, which includes expenses related to the merger. Closing of the transaction
is subject to Spiros Corp. II stockholder approval. We have received voting
agreements in favor of the merger from holders of approximately 22% of Spiros
Corp. II's outstanding callable common stock. A special
5
<PAGE>
committee of independent members of the Spiros Corp. II board, formed in
December 1999 to evaluate strategic alternatives for Spiros Corp. II, has
approved the merger agreement and is recommending that the Spiros Corp. II
stockholders approve the merger. A special meeting of the Spiros Corp. II
stockholders will be held on August 31, 2000 to vote on the proposed merger.
3. COMMITMENTS AND CONTINGENCIES
STOCKHOLDER CLASS ACTION LITIGATION - Commencing on January 27, 1999, several
class action suits were filed against us and a number of our current or former
officers and directors in the United States District Court for the Southern
District of California. The lawsuits, which have been consolidated into one
action, allege violations of the federal securities laws, and purport to seek
damages on behalf of a class of stockholders who purchased our common stock
during a defined period. We believe that the claims in the lawsuit are without
merit and intend to defend against them vigorously.
4. REPORTING COMPREHENSIVE INCOME
Comprehensive income includes net income and unrealized gains and losses on
investments. The accumulated balance of other comprehensive income (loss) is
disclosed as a separate component of stockholders' equity.
The following table summarizes information about our comprehensive income for
the three months and six months ended June 30, 2000 and 1999, in thousands:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net income $9,440 $7,583 $21,898 $15,348
Other comprehensive income (loss):
Unrealized income (loss) on
investments 249 (869) 174 (1,096)
-------- -------- ---------- ----------
Comprehensive income $9,689 $6,714 $22,072 $14,525
======== ======== ========== ==========
</TABLE>
5. SEGMENT INFORMATION
We operate in two business segments: (1) pharmaceutical products and (2)
research and development. The pharmaceutical products segment markets
prescription pharmaceutical products for the treatment of infectious diseases
and respiratory conditions . The research and development segment manages the
development of Spiros. Each of our segments operates solely within the United
States. Three wholesale customers accounted for 16%, 13% and 13% of
pharmaceutical product sales, respectively, for the six months ended June 30,
2000, and three wholesale customers accounted for 15%, 14% and 11% of
pharmaceutical product sales, respectively, for the same period in 1999.
6
<PAGE>
The following table summarizes information about our operating segments for the
three months and six months ended June 30, 2000 and 1999, in thousands:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------------------- -------------------------------------------------
PHARMACEUTICAL RESEARCH AND PHARMACEUTICAL RESEARCH AND
PRODUCTS DEVELOPMENT CONSOLIDATED PRODUCTS DEVELOPMENT CONSOLIDATED
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues 2000 $ 61,044 $ 20,486 $ 81,530 $ 128,492 $ 38,817 $ 167,309
1999 $ 51,588 $ 16,418 $ 68,006 $ 107,255 $ 31,997 $ 139,252
Operating income 2000 $ 9,674 $ 2,972 $ 12,646 $ 20,475 $ 6,075 $ 26,550
1999 $ 8,408 $ 3,158 $ 11,566 $ 17,806 $ 5,734 $ 23,540
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the consolidated
financial statements and the accompanying notes included in Item 1 of this
quarterly report, as well as the audited financial statements and accompanying
notes and Management's Discussion and Analysis of Financial Condition and
Results of Operations for the year ended December 31, 1999 contained in our 1999
annual report on Form 10-K/A. See "Risks and Uncertainties" below for trends and
uncertainties known to us that could cause reported financial information not to
be indicative of future results.
OVERVIEW
We are engaged in developing and marketing prescription pharmaceutical
products for the treatment of infectious diseases and respiratory conditions.
We execute our business strategy by (1) acquiring currently-marketed and/or
companies developing or marketing such pharmaceuticals to support our
presence in high-prescribing physicians' offices and the hospital market, and
(2) developing Spiros(R), a pulmonary drug delivery system for both topical
and systemic delivery of medications. We currently sell 10 prescription
product lines and also own a separate mail service pharmacy, Health Script
Pharmacy Services, Inc., which dispenses respiratory pharmaceuticals. Our
operations are divided into two business segments: (1) pharmaceutical
products and (2) research and development. The pharmaceutical products
segment markets prescription pharmaceutical products for the treatment of
infectious diseases and respiratory conditions. The research and development
segment manages the development of Spiros. Each of our segments operates
solely within the United States.
RECENT DEVELOPMENTS
On July 24, 2000 we announced the implementation of a refocused strategy. We
intend to capitalize upon our strengths in sales and marketing and substantially
reduce and focus our research and development spending. Our strategic objective
is to continue to grow our core business, driven principally by our commercial
operations. We will continue to leverage our sales and marketing strengths
within specialty-focused markets to both grow our existing
7
<PAGE>
products and to position us to pursue and acquire additional marketed products.
In addition, we will immediately reduce overall development spending
substantially while increasing our commitment to our collaboration with Eli
Lilly & Company on the inhaled insulin program. We will also seek to establish
collaborative relationships to develop next generation, motorless Spiros
systems, which are designed to be smaller, lighter and significantly less costly
to manufacture. Near term, we plan to commit a targeted level of funding to the
next generation Spiros development program while we seek to attract
collaborators to complete development.
As part of our strategy, we will, upon the successful completion of the proposed
merger with Spiros Corp. II, discontinue the development of all motorized Spiros
cassette programs, including Beclomethasone Spiros(TM) and Budesonide
Spiros(TM). The decision to terminate these programs is based on the significant
advancements in the new next generation Spiros technology platform, the
substantial costs to complete the cassette programs and the normal clinical and
regulatory risks associated with pharmaceutical product development, all weighed
against our assessment of the U.S. oral inhaled steroid market in 2002 and
beyond, when these product candidates were targeted to reach the market.
As a result of the decision to discontinue development of all motorized Spiros
cassette programs, we expect to record a restructuring charge in the third
quarter of 2000 estimated to be between $13 - $16 million. The components of
this charge include severance costs for terminated employees, impairment of
research and manufacturing equipment utilized solely for motorized Spiros
cassette programs, and costs to satisfy contractual commitments associated with
these programs.
RESULTS OF OPERATIONS
The following table summarizes our results of operations, in thousands, except
per share amounts:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Total revenues $ 81,530 $ 68,006 $ 167,309 $ 139,252
Operating income $ 12,646 $ 11,566 $ 26,550 $ 23,540
Net income $ 9,440 $ 7,583 $ 21,898 $ 15,348
Earnings per share - diluted $ 0.21 $ 0.17 $ 0.48 $ 0.34
</TABLE>
NET INCOME
Net income for the three months ended June 30, 2000 was $9.4 million, or $0.21
per diluted share, compared to $7.6 million, or $0.17 per diluted share, for the
same period in 1999. Net income for the six months ended June 30, 2000 was $21.9
million, or $0.48 per diluted share, which included a $2.2 million after-tax
gain in other income from the sale of a long-term investment in the first
quarter. Excluding the net of tax impact of this gain, we would have reported
net income of $19.7 million, or $0.43 per diluted share, compared to $15.3
million, or
8
<PAGE>
$0.34 per diluted share, for the same period in 1999. Factors that affected net
income are discussed below.
SALES AND GROSS PROFIT
Sales for the three months ended June 30, 2000 increased $9.6 million, or 19%,
over the same period in 1999. This increase is primarily due to increased sales
of our hospital products, Maxipime(R) and Azactam(R), which had a combined
increase in sales of $7 million. Gross profit, or sales less cost of sales, for
the three months ended June 30, 2000 increased $8 million, or 20%, over 1999 as
a result of the increase in sales during the period. Sales for the six months
ended June 30, 2000 increased $21.8 million, or 20%, over the same period in
1999. This increase is due to increased sales of each of our promoted products,
Maxipime, Azactam, Ceclor(R) CD and Nasarel(R), which had a combined increase in
sales of $19.2 million. Gross profit for the six months ended June 30, 2000
increased $16.6 million, or 19%, over 1999 as a result of the increase in sales
during the period. Gross profit as a percentage of sales remained consistent at
80% for the three- and six-month periods ended June 30, 2000 and 1999.
CONTRACT REVENUE
Contract revenue relates primarily to amounts received by us for development
work we perform on our Spiros pulmonary drug delivery system, as well as
milestone and technology access payments, under agreements with Spiros Corp. II
and Eli Lilly & Company. Contract revenues for the three months ended June 30,
2000 were $20.6 million, of which $15.4 million was from Spiros Corp. II, as
compared to $16.7 million for 1999, of which $12.7 million was from Spiros Corp.
II. Contract revenues for the six months ended June 30, 2000 were $39.1 million,
of which $29.2 million was from Spiros Corp. II, as compared to $32.9 million
for 1999, of which $24.9 million was from Spiros Corp. II. Contract revenues may
fluctuate from period to period based on the level of research funding received
as well as the achievement of milestones and receipt of technology access
payments from our partners. The merger with Spiros Corp. II, if completed, will
result in a significant reduction of our contract revenue. See "Liquidity and
Capital Resources" below for discussion of our March 2000 definitive merger
agreement with Spiros Corp. II.
CLINICAL, DEVELOPMENT AND REGULATORY EXPENSES
Clinical, development and regulatory expenses for the three months ended June
30, 2000 increased $4 million, or 32%, over the same period in 1999, and
increased $6.8 million, or 29%, for the six months ended June 30, 2000 over
1999. These increases are due to increased development activity conducted under
the agreements covering the use of various compounds with Spiros as discussed
above. We expect that clinical, development and regulatory expenses will decline
beginning in the second half of 2000 as we implement the refocused strategy
described above in "Recent Developments."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended June 30,
2000 increased $6.3 million, or 22%, over 1999 and increased as a percentage of
total revenues from 42% in 1999 to 43% in 2000. The dollar increase relates
primarily to an increase of in sales and
9
<PAGE>
marketing costs to promote our hospital products as we established our
hospital-based sales force in the second half of 1999. Selling, general and
administrative expenses for the six months ended June 30, 2000 increased $11.9
million, or 19%, over 1999 and remained consistent as a percentage of total
revenues at 44%. This dollar increase also relates primarily to an increase in
sales and marketing costs to promote our hospital products and establish our
hospital-based sales force.
PRODUCT RIGHTS AMORTIZATION
Product rights amortization for the three months ended June 30, 2000 increased
$590,000, or 12%, over 1999 and increased $1.1 million, or 11%, for the six
months ended June 30, 2000 over 1999. The dollar increases are due to the
amortization of specific product rights that increased due to additional
contingent product acquisition payments being made after June 30, 1999. Product
rights amortization decreased as a percentage of sales for the three months
ended June 30, 2000 from 10% in 1999 to 9% in 2000 due to the growth in product
sales as discussed above, but remained consistent at 9% for the six months ended
June 30, 2000 and 1999.
OTHER INCOME
Other income increased approximately $900,000 for the three months ended June
30, 2000 over 1999 due primarily to higher realized returns on our cash
equivalents and short-term investments in 2000 compared to 1999. Other income
increased $4.8 million for the six months ended June 30, 2000 over 1999 due
primarily to a $3.5 million pre-tax gain on the sale of a long-term investment
recognized in the first quarter of 2000.
PROVISION FOR INCOME TAXES
Our effective tax rate was 30% for the three months and six months ended June
30, 2000 compared to 34% and 35%, respectively, for the same periods in 1999.
This decrease is mainly attributable to an increase in the portion of
foreign-sourced taxable income, which is taxed at a lower rate, and an increase
in federal and state research credits.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments increased by $20.7 million
from $274.4 million at December 31, 1999 to $295.1 million at June 30, 2000.
This increase is due to cash provided by operating activities of $50.3 million,
partially offset by product acquisition payments and capital expenditures.
Working capital increased by $4.1 million from $255.9 million at December 31,
1999 to $260.1 million at June 30, 2000.
We have outstanding $287.5 million principal amount of notes due July 15, 2002
with interest payable semiannually at a coupon rate of 3.5%. The notes are
convertible, at the option of the holder, into shares of common stock at any
time prior to maturity or redemption at a conversion price of $50.635 per share.
In addition to the notes, as of June 30, 2000, we had outstanding an aggregate
of $61.5 million in current and other long-term obligations related to our
product acquisitions, of which $1.9 million is to be paid during the next 12
months. As of June 30, 2000, additional payments totaling
10
<PAGE>
approximately $165 million, estimated based on historical sales levels of the
related products, are contingent upon the levels of future sales of specified
products, and approximately $55 million are contingent upon the continued
absence of competing formulations of specified products as defined in the
respective acquisition and licensing agreements. These contingent amounts are
payable through 2004, including approximately $60 million contingently due
within the next 12 months.
We have entered into various agreements with Spiros Corp. II for the development
of Spiros with specified compounds including beclomethasone and budesonide. In
1997, we licensed the use of these and other compounds with Spiros to Spiros
Corp. II on an exclusive basis. Spiros Corp. II has engaged us to develop the
Spiros products under license from us. We record contract revenue for payments
from Spiros Corp. II for development costs we incur on its behalf and for
technology access fees. Contract revenues from Spiros Corp. II totaled $29.2
million for the six months ended June 30, 2000.
In March 2000 we entered into a merger agreement to acquire Spiros Corp II.
Under the agreement, each holder of Spiros Corp. II's callable common stock will
receive $13.25 in cash and a warrant to purchase a fractional share of our
common stock for each share of callable common stock. The warrant will be
immediately exercisable at $17.94 per share, which represents a 25% premium over
the average closing price of our common stock for the ten trading days prior to
the date of the merger agreement, and will expire five years from the date the
merger is completed. The exact fraction of a share of our common stock
purchasable under the warrant will be determined based on the average closing
price of our common stock for the ten trading days prior to the vote of the
Spiros Corp. II stockholders on the merger and will result in a calculated
value, using the Black-Scholes option pricing model, for each warrant between
$3.22 and $1.81. We expect to pay a total of approximately $89.7 million in
cash, which includes expenses related to the merger. Closing of the transaction
is subject to Spiros Corp. II stockholder approval. We have received voting
agreements in favor of the merger from holders of approximately 22% of Spiros
Corp. II's outstanding callable common stock. A special committee of independent
members of the Spiros Corp. II board, formed in December 1999 to evaluate
strategic alternatives for Spiros Corp. II, has approved the merger agreement
and is recommending that the Spiros Corp. II stockholders approve the merger. A
special meeting of the Spiros Corp. II stockholders will be held on August 31,
2000 to vote on the proposed merger.
Following completion of the proposed merger, we expect that the discontinuation
of contract revenue from Spiros Corp. II will significantly reduce our earnings
as well as cash generated from operating activities. However, the reduction of
contract revenue is expected to be partially offset by a reduction in research
and development spending as discussed above in "Recent Developments." In
addition, we expect to record a significant charge for acquired in-process
technology in the period in which the merger is effected.
We anticipate that our existing capital resources and cash generated from
operations will be sufficient to finance our operations through at least the
next 12 months. Product or company acquisitions or in-licensing opportunities,
however, may require significant additional capital resources. Such additional
capital resources may not be available when needed or on terms acceptable to us.
We are actively pursuing the acquisition of rights to products and/or companies
that may require the use of substantial capital resources; however, there are no
present agreements or commitments for any such acquisitions.
11
<PAGE>
RISKS AND UNCERTAINTIES
FORWARD-LOOKING STATEMENTS. We caution 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.
WE FACE RISKS ASSOCIATED WITH THE PENDING MERGER OF SPIROS CORP. II.
THE MERGER WILL SIGNIFICANTLY REDUCE OUR CONTRACT REVENUES AND OPERATING INCOME
AND WILL LIKELY RESULT IN A MATERIAL CHARGE TO OUR EARNINGS IN THE PERIOD IN
WHICH THE MERGER OCCURS.
We record contract revenue for payments from Spiros Corp. II for development
costs we incur on Spiros Corp. II's behalf and for technology access fees.
Contract revenues from Spiros Corp. II totaled $29.2 million for the six months
ended June 30, 2000. The merger will result in a significant reduction of
contract revenue to us. In addition, we expect that a material charge for
acquired in-process technology will likely be recorded in the period in which
the acquisition is completed. Further, as a result of the decision to
discontinue development of all motorized Spiros cassette programs, we expect to
record a restructuring charge in the third quarter of 2000 estimated to be
between $13 - $16 million. The components of this charge include severance costs
for terminated employees, impairment of research and manufacturing equipment
utilized solely for motorized Spiros cassette programs, and costs to satisfy
contractual commitments associated with these programs.
THE FAILURE TO COMPLETE THE ACQUISITION MAY RESULT IN A DECREASE IN THE MARKET
VALUE OF OUR COMMON STOCK.
The acquisition is subject to a number of conditions, including approval by the
stockholders of Spiros Corp. II and other customary closing conditions. As a
result, the acquisition may not be completed. If the acquisition is not
completed for any reason, the trading price of our common stock may fall.
WE FACE RISKS ASSOCIATED WITH OUR OPERATIONS THAT WILL NOT BE REDUCED BY THE
MERGER.
BEFORE WE CAN MARKET ANY PRODUCT, INCLUDING ANY SPIROS PRODUCT, WE WILL HAVE TO
OBTAIN REQUIRED GOVERNMENTAL APPROVALS, WHICH IS A DIFFICULT AND TIME-CONSUMING
PROCESS AND IS NOT ASSURED.
The development, testing, manufacturing and marketing of pharmaceutical products
are subject to extensive regulation by governmental authorities, including the
FDA. The FDA must approve each Spiros product before that product can be
manufactured or marketed for commercial sale. The review and approval process
mandated by the FDA is very rigorous, requiring extensive preclinical and
clinical testing as well as determining manufacturing capability and product
performance. The FDA may never approve any of the Spiros products which may be
developed by us or in collaboration with third parties, and this may negatively
affect our revenues.
12
<PAGE>
ALTERNATIVE SUPPLIERS TO OUR THIRD-PARTY MANUFACTURERS MAY NOT BE AVAILABLE ON A
TIMELY BASIS, WHICH COULD IMPAIR OUR ABILITY TO MEET OUR SHIPPING REQUIREMENTS
AND RESULT IN A REDUCED PHARMACEUTICAL SALES.
We do not have the capability to manufacture the pharmaceutical products we
currently sell. As a result, we are dependent on third-party contract
manufacturers for the supply of all of our products. These products are supplied
under short-term and long-term supply agreements. If these manufacturers were
unable to supply product, it could be difficult for us to secure alternative
sources of supply in a timely manner. This would impair our ability to ship
product to our customers and would result in reduced pharmaceutical sales and
increased expenses associated with identifying and qualifying alternate
manufacturers.
WE INTEND TO CONTINUE TO PURSUE OUR STRATEGY OF ACQUIRING COMPLEMENTARY
PRODUCTS, WHICH, IF SUCCESSFUL, COULD REQUIRE THE USE OF CAPITAL RESOURCES.
As part of our business strategy, we intend to continue to pursue the
acquisition of complementary products. These acquisitions could require the use
of a large amount of our available capital resources. For example, in December
1998, we acquired Maxipime(R) IV/IM (cefepime HCI) and Azactam(R) IV/IM
(aztreonam) from Bristol-Myers Squibb Company for an initial payment of $60
million, a payment of $70 million due in 2003 and additional contingent payment
amounts. Depending on the acquisition opportunities available and our use of
existing funds to satisfy existing capital and operating needs, we may need to
raise additional funds to finance these transactions. If adequate funds are not
available when needed on terms acceptable to us, our ability to complete
acquisitions could be limited. Further, reimbursement from third-party payors
may not be available to enable us to achieve market acceptance of any products
we may acquire or to maintain price levels sufficient to realize an appropriate
return on our investment in these products.
WE MAY NOT BE SUCCESSFUL IN ATTRACTING COLLABORATORS TO DEVELOP OUR NEXT
GENERATION MOTORLESS SPIROS SYSTEM.
We intend to develop our next generation, motorless Spiros system solely through
collaborative partnerships with third parties. If we are not successful in
attracting collaborative partners, the development of the next generation,
motorless Spiros system will be impaired.
WE COULD HAVE DIFFICULTY COMMERCIALIZING THE SPIROS PRODUCTS IF EITHER WE OR THE
THIRD-PARTY MANUFACTURERS WE RELY ON DO NOT SUCCESSFULLY EXPAND OUR
MANUFACTURING CAPABILITY AND COMPLY WITH GOVERNMENTAL REGULATIONS.
We will need to significantly expand our current manufacturing operations and
comply with regulations prescribed by various regulatory agencies to achieve the
quality and required levels of production of Spiros products to be commercially
successful. In addition, our manufacturing facility must be registered with and
licensed by various regulatory authorities and must comply with current good
manufacturing practice requirements prescribed by the FDA and other governmental
authorities. We intend to utilize third parties to produce components of and to
assemble the Spiros inhaler. Those third parties have only produced limited
quantities of components and assembled limited numbers of inhalers. The third
parties will be required to significantly scale up their activities and to
produce components which meet applicable
13
<PAGE>
specifications on a timely and consistent basis. Those third parties may not be
successful in attaining acceptable service levels or meeting regulatory
requirements which would have an adverse effect on our ability to commercialize
the Spiros products.
IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED PERSONNEL
AS NECESSARY, IT COULD IMPAIR OUR OPERATIONS AND DELAY OUR PRODUCT DEVELOPMENT
PROGRAMS.
Our success depends on the principal members of our scientific and management
staff. If we lose the services of one or more of these people, we may be unable
to achieve our development objectives.
None of our employees, other than Cam L. Garner, our chairman and chief
executive officer, Robert S. Whitehead, our president and chief operating
officer and David S. Kabakoff, Ph.D., president, Dura Technologies, are
currently employed under an employment contract. Each of Mr. Garner, Mr.
Whitehead and Dr. Kabakoff are employed under separate letter agreements with
expiration dates of May 31, 2001, July 1, 2000 and April 30, 2001, respectively.
Each contract automatically renews for successive one-year periods. In
connection with the refocused strategy announced by us on July 24, 2000, Dr.
Kabakoff will terminate his employment with us, effective upon consummation of
the proposed merger.
We may not be able to recruit and retain management and qualified scientific
personnel to perform research and development work in the future due to intense
competition for personnel among pharmaceutical and other technology-based
businesses, universities and research institutions, particularly in the San
Diego area. Recruiting and retaining experienced sales personnel is equally
difficult but essential to the success of our operations. As of June 30, 2000,
we had approximately 1,000 employees, of whom 224 were in research and
development and 575 were in sales and marketing.
OUR HOSPITAL SALES FORCE IS NEW AND MAY NOT BE ABLE TO EFFECTIVELY MARKET
MAXIPIME AND AZACTAM DIRECTLY TO HOSPITALS, WHICH COULD RESULT IN REDUCED SALES
OF THESE PRODUCTS.
Effective January 1, 1999, we acquired the rights to Maxipime and Azactam, our
first acquisition of products used in hospitals. Under a co-promotion agreement
with Bristol-Myers Squibb Company, Bristol-Myers Squibb Company's hospital sales
force promoted the products during 1999, while we built our hospital sales
force. Beginning in 2000, we assumed full responsibility for promoting these
products. We have no previous experience promoting and selling hospital
products. We may not be able to generate the same volume of sales with respect
to these products as Bristol-Myers Squibb Company. If we are not able to
effectively promote these products solely through our own hospital sales force,
our pharmaceutical sales could be reduced.
WE MAY HAVE TO REFINANCE OUR $287.5 MILLION OF OUTSTANDING NOTES ON TERMS THAT
MAY NOT BE ATTRACTIVE.
We issued $287.5 million principal amount of 3 1/2% convertible subordinated
notes due July 2002. We may desire to refinance the notes at a time when we are
not able to do so or on terms that are not attractive to us. Any inability to
refinance the notes on attractive terms would increase our borrowing costs and
reduce our earnings, or result in significant dilution to our stockholders and
decrease the market value of our common stock.
14
<PAGE>
SEASONALITY AND THE TIMING AND SEVERITY OF THE WINTER COLD AND FLU SEASON CAN
HAVE AN ADVERSE EFFECT ON OUR OPERATING RESULTS.
Historically, as a result of the winter cold and flu season, industry-wide
demand for respiratory products such as those sold by us 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 our results of operations in the past and may influence
them again in the future. For example, the short flu season during the first
quarter of 2000 negatively impacted sales of Ceclor(R) CD.
COMPETITION FOR THE ACQUISITION OF RIGHTS TO NEW PRODUCTS AND TECHNOLOGIES MAY
PREVENT US FROM ACHIEVING TARGETED GROWTH RATES.
Our strategy for growth is dependent, in part, on our ability to continue to
acquire rights to new products and technologies such as the December 1998
acquisition of exclusive distribution rights to Maxipime and Azactam. The
failure to successfully acquire, develop or market new products or technologies
would limit the future growth of our business. Other companies, including those
with substantially greater resources, are competing with us for the rights to
such products. We may not be able to acquire additional products or technologies
on acceptable terms, or at all.
GROSS MARGINS ON PHARMACEUTICAL PRODUCTS MAY DECREASE AS A RESULT OF COMPETITIVE
PRESSURES.
We do not have proprietary protection for several of the products we sell, and
other pharmaceutical companies sell substitutes for such products. In addition,
the average selling prices for many of our products may decline over time due to
competitive and reimbursement pressures. We may not be successful in any efforts
we take to mitigate the effect of a decline in average selling prices. Our
commercial success will depend in part on the price that third-party healthcare
payors, such as government and private health insurers and managed care
organizations, are willing to pay for our products. Third-party payors
continually challenge the pricing of medical products and services. Many managed
care organizations limit the number of pharmaceutical products they approve for
reimbursement. The competition between pharmaceutical companies to get their
products approved for reimbursement may also result in downward pricing pressure
in the industry. Any of these factors causing a decline in our average selling
prices would also reduce the gross margins we achieve and negatively impact our
business.
OUR INABILITY TO OBTAIN PATENTS AND PROTECT OUR PROPRIETARY RIGHTS COULD HAVE A
DETRIMENTAL EFFECT ON OUR COMMERCIAL SUCCESS.
Our ability to obtain patents on current or future products or technologies,
defend our patents, maintain trade secrets and operate without infringing upon
the proprietary rights of others, both in the U.S. and abroad, is uncertain.
Patents may never issue from the applications we have filed. Even if issued or
licensed to us, patents may not be enforceable, provide substantial protection
from competition or be of commercial benefit to us. Even if all these are true,
we may not possess the financial resources necessary to enforce or defend any
patent rights we obtain. Our commercial success will also depend upon avoiding
the infringement of patents issued to competitors and upon maintaining the
technology licenses upon which certain of our products
15
<PAGE>
are based. Litigation, which is costly, may be necessary to enforce our patent
and license rights or to determine the scope and validity of proprietary rights
of third parties. If any of our products or technologies are found to infringe
upon patents or other rights owned by third parties, we could be required to
obtain a license to continue to manufacture or market such products or
technologies. Licenses to such patent rights may not be available to us on
commercially reasonable terms, or at all. If we do not obtain such licenses, we
could encounter delays in marketing affected products or technologies or we
could find that the development, manufacture or sale of products requiring such
licenses is not possible.
WE ARE INVOLVED IN A LAWSUIT AND CANNOT PREDICT THE ULTIMATE OUTCOME OR POSSIBLE
LOSS THAT COULD RESULT FROM THE LAWSUIT.
In January 1999, several class action suits were filed against us and a number
of our current or former officers and directors in the United States District
Court for the Southern District of California. The lawsuits, which have been
consolidated into one action, allege violations of the federal securities laws,
and purport to seek damages on behalf of a class of stockholders who purchased
our common stock during a defined period. The ultimate outcome of this lawsuit
and any other suits in which we may become involved cannot be predicted. An
adverse outcome in any of these actions could require us to make a significant
cash payment and could reduce our earnings.
IF WE BECOME SUBJECT TO PRODUCT LIABILITY CLAIMS, IT MAY RESULT IN REDUCED
DEMAND FOR ITS PRODUCTS OR DAMAGES THAT EXCEED OUR INSURANCE COVERAGE.
We face an inherent business risk of exposure to product liability claims in the
event that the use of our products or technologies is alleged to have resulted
in adverse effects. Such liability might result from claims made directly by
healthcare institutions, contract laboratories or others selling or using such
products. We currently maintain product liability insurance coverage of $30
million; however, any product liability claim in excess of our insurance
coverage would have to be paid out of our cash reserves which would reduce our
capital resources. The level or breadth of any insurance coverage that we
currently maintain may not be sufficient to fully cover potential claims. We
currently have no plans to expand or increase our product liability insurance
coverage. Adequate insurance coverage may not be available in the future at
acceptable costs, if at all, or sufficient amounts to protect us against any
such liability.
WE FACE RISKS ASSOCIATED WITH OUR MARKET.
MANY POTENTIAL COMPETITORS WHO HAVE GREATER RESOURCES AND EXPERIENCE THAN US MAY
DEVELOP PRODUCTS AND TECHNOLOGIES THAT MAKE OUR PRODUCTS AND TECHNOLOGIES
OBSOLETE.
Many companies, including large pharmaceutical firms with financial and
marketing resources and development capabilities substantially greater than
ours, are developing, marketing and selling products that compete with those
that we offer or plan to offer. Our current competitors include Bristol-Myers
Squibb Company, Schering Plough, Hoffman LaRoche, American Home Products and
Glaxo Wellcome. Our failure to effectively respond to the competitive pressures
of our industry would have an adverse effect on our business and results of
operations. 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 our current or future products.
16
<PAGE>
The industry is characterized by rapid technological change, and competitors may
develop their products more rapidly than we do. Competitors may also be able to
complete the regulatory process sooner, and therefore, may begin to market their
products in advance of our products.
SOME OF OUR CHARTER AND OTHER CONTRACTUAL PROVISIONS MAY PREVENT A CHANGE OF
CONTROL THAT COULD BE BENEFICIAL TO OUR STOCKHOLDERS.
Some provisions of our charter documents, outstanding securities, including
warrants, options and our notes, our specified contracts, including the
executive severance agreements, and our stockholder rights plan could make it
more difficult for a third party to acquire us without approval of our board of
directors. As a result of these provisions, we could delay, deter or prevent a
takeover attempt or third party acquisition that our stockholders consider to be
in their best interests, including a takeover attempt that results in a premium
over the market price for the shares held by our stockholders.
OUR STOCK PRICE HISTORICALLY HAS BEEN VOLATILE, WHICH MAY MAKE IT MORE DIFFICULT
FOR YOU TO RESELL OUR COMMON STOCK WHEN YOU WANT AT PRICES YOU FIND ATTRACTIVE.
The market prices for securities of emerging companies, including ours, have
historically been highly volatile. For example, from May 1998 to June 2000, our
common stock has closed as high as $28.50 per share and as low as $8.19 per
share. Factors contributing to this volatility have included:
- our financial results,
- the results of clinical testing of our or our competitors' products,
- regulatory developments for us or our competitors' products,
- technological innovations for us or our competitors' products,
- new commercial products introduced by our competitors,
- changes to government regulations,
- regulatory decisions on commercialization of products,
- developments concerning proprietary rights; and
- our failure to achieve securities analysts' expectations concerning
our earnings per share or revenues.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest our excess cash and short-term investments in U.S. government and
corporate debt securities with high quality credit ratings and maturities of
less than two years. These investments are not held for trading or other
speculative purposes. Changes in interest rates affect the investment income we
earn on our investments and, therefore, impact our cash flows and results of
operations. At June 30, 2000, we had outstanding subordinated notes totaling
$287.5 million that mature in July 2002. The notes have a fixed interest rate of
3 1/2 percent. Accordingly, while changes in interest rates may affect the fair
market value of the notes, they do not impact our cash flows or results of
operations. As of June 30, 2000, the notes had a fair market value of $241.5
million. We are not exposed to risks for changes in foreign currency exchange
rates, commodity prices, or any other market rates.
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See note 3 to the consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 24, 2000, our Annual Meeting of Stockholders was held at the offices of
the Company for the following purposes:
(a) The following four directors were elected to serve two-year terms to
expire at the 2002 Annual Meeting of Stockholders:
<TABLE>
<CAPTION>
FOR WITHHELD
--- --------
<S> <C> <C>
James C. Blair 38,234,382 1,816,679
Joseph C. Cook, Jr. 38,235,587 1,815,474
Cam L. Garner 38,211,328 1,839,733
David F. Hale 38,225,847 1,825,214
</TABLE>
The following directors had terms of office as a director which continued
after the meeting:
Herbert J. Conrad
F. Richard Nichol
Gordon V. Ramseier
Charles G. Smith
(b) The stockholders approved the 2000 Employee Stock Purchase Plan. The total
number of votes cast for, against and abstained was 39,038,063, 801,592
and 211,406, respectively.
(c) The stockholders approved the amendment to our 1992 Stock Option Plan to
increase the number of authorized shares of Common Stock available for
issuance under the Plan. The total number of votes cast for, against and
abstained was 32,932,984, 6,864,837 and 253,240, respectively.
(d) The stockholders ratified the appointment of Deloitte & Touche LLP as our
independent public accountants for the year ending December 31, 2000. The
total number of votes cast for, against and abstained was 39,901,251,
55,393 and 94,417, respectively.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<S> <C> <C>
1) 10.1 Dura Pharmaceuticals, Inc. 1992 Stock Option Plan, as amended
and restated
11 Statements re Computations of Net Income Per Share
27 Financial Data Schedule
</TABLE>
18
<PAGE>
1) Incorporated by reference to the Company's Registration Statement on
Form S-8 (No. 333-39778) filed June 21, 2000.
(b) Reports on Form 8-K
None.
19
<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 AUGUST 11, 2000 /s/ MICHAEL T. BORER
------------------------------------
(MICHAEL T. BORER)
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
20
