<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1997
--------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission File Number: 0-20063
--------------
THERATECH, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 87-0420511
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
417 WAKARA WAY, SALT LAKE CITY, UTAH 84108
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(801) 588-6200
----------------------------------------------------
(Registrant's telephone number, including area code)
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
------- -------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. As of
July 31, 1997:
- -----------------------
<TABLE>
<S> <C>
CLASSES OF COMMON STOCK Number of shares outstanding
- -------------------------------- --------------------------------
Common Stock, $0.01 par value 20,911,155
</TABLE>
<PAGE> 2
THERATECH, INC.
--------------
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C> <C>
Item 1. Financial Statements Page
Condensed Consolidated Statements of Operations ___
Three months ended June 30, 1997 and 1996, and six months ended June 30, 1997 and 1996...... 3
Condensed Consolidated Balance Sheets ___
June 30, 1997 and December 31, 1996 ....................................................... 4
Condensed Consolidated Statements of Cash Flows ___
Six months ended June 30, 1997 and 1996 ................................................... 5
Notes to Condensed Consolidated Financial Statements ...................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............................................. 7
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Not applicable
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders........................................ 13
Item 6 Exhibits and Reports on Form 8-K........................................................... 13
</TABLE>
Page 2 of 15
<PAGE> 3
THERATECH, INC.
--------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Research and development $ 4,812,211 $ 5,916,508 $ 10,366,698 $ 8,768,853
Product sales 3,672,664 2,438,276 6,576,799 4,612,610
Licensing 340,000 135,000 345,000 985,000
Interest and other 377,623 332,740 750,844 808,389
------------ ------------ ------------ ------------
Total revenues 9,202,498 8,822,524 18,039,341 15,174,852
Costs and expenses:
Research and development 3,630,365 4,341,479 8,065,398 8,217,513
Cost of products sold 2,657,633 1,866,106 4,810,182 4,101,174
General and administrative 1,335,134 1,253,101 2,561,219 2,473,671
Interest and other 257,957 292,741 494,287 588,922
------------ ------------ ------------ ------------
Total costs and expenses 7,881,089 7,753,427 15,931,086 15,381,280
------------ ------------ ------------ ------------
Net income (loss) $ 1,321,409 $ 1,069,097 $ 2,108,255 $( 206,428)
============ ============ ============ ============
Net income (loss) per share $ 0.06 $ 0.05 $ 0.10 $( 0.01)
============ ============ ============ ============
Shares used in calculation of
net income (loss) per share 21,635,838 20,233,658 21,723,536 20,160,597
============ ============ ============ ============
</TABLE>
See accompanying notes.
Page 3 of 15
<PAGE> 4
THERATECH, INC.
--------------
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996 (1)
ASSETS ------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash, cash equivalents and short-term investments (2) $ 25,048,272 $ 23,214,410
Contracts and accounts receivable 5,410,547 4,726,112
Inventories 2,879,598 2,277,021
Prepaid expenses 336,389 36,127
------------ ------------
Total current assets 33,674,806 30,253,670
Investments in long-term securities (2) 1,999,736 2,000,468
Plant and equipment:
Plant 9,301,171 9,301,171
Equipment 14,134,728 11,950,618
Leasehold improvements 989,462 986,703
Construction in progress 1,718,645 2,929,228
------------ ------------
26,144,006 25,167,720
Less accumulated depreciation and amortization (7,088,166) (5,737,034)
------------ ------------
Net plant and equipment 19,055,840 19,430,686
Other assets 1,648,412 2,161,978
------------ ------------
Total assets $ 56,378,794 $ 53,846,802
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 3,683,834 $ 3,744,210
Current portion of notes payable and capital
lease obligations 1,599,695 1,609,587
Unearned revenue 3,274,563 2,597,942
------------ ------------
Total current liabilities 8,558,092 7,951,739
Notes payable and capital lease obligations,
less current portions 7,927,139 8,660,744
Unearned revenue 1,212,000 1,212,000
Commitments and contingencies
Stockholders' equity:
Common stock 206,858 205,634
Additional paid-in capital 69,642,548 69,116,551
Accumulated deficit (30,952,908) (33,061,163)
Cumulative translation adjustment (214,935) (238,703)
------------ ------------
Total stockholders' equity 38,681,563 36,022,319
------------ ------------
Total liabilities and stockholders' equity $ 56,378,794 $ 53,846,802
============ ============
</TABLE>
See accompanying notes.
- --------------------
(1) Derived from audited financial statements.
(2) TheraTech's total cash position as of June 30, 1997 and December 31,
1996 was $27,048,008 and $25,214,878, respectively, which includes
cash, cash equivalents, and short- and long-term investments.
Page 4 of 15
<PAGE> 5
THERATECH, INC.
--------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------
1997 1996
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
Operating activities:
Net income (loss) $ 2,108,255 $ (206,428)
Adjustments to reconcile net income (loss) to net cash and cash equivalents
provided by (used in) operating activities:
Depreciation and amortization 1,370,914 1,147,713
Compensation expense related to the grant of stock options - 955
Changes in operating assets and liabilities:
Contracts and accounts receivable (684,435) (1,486,059)
Inventories (602,577) (104,150)
Prepaid expenses 13,823 65,625
Accounts payable and accrued liabilities (60,376) (1,432,631)
Unearned revenue 676,621 1,986,242
------------ ------------
Net cash provided by (used in) operating activities 2,822,225 (28,733)
Investing activities:
Decrease (increase) in investments, net (2,786,967) 586,839
Purchase of plant and equipment (976,286) (3,336,864)
Other assets 493,784 (90,309)
------------ ------------
Net cash used in investing activities (3,269,469) (2,840,334)
Financing activities:
Proceeds from issuance of notes payable and capital lease obligations - 300,000
Proceeds from issuance of common stock 527,221 797,367
Payments of notes payable and capital lease obligations (1,057,582) (1,287,162)
------------ ------------
Net cash used in financing activities (530,361) (189,795)
Effect of exchange-rate changes on cash and cash equivalents 23,768 (67,057)
------------ ------------
Net decrease in cash and cash equivalents (953,837) (3,125,919)
Cash and cash equivalents at beginning of period 19,116,991 14,554,352
------------ ------------
Cash and cash equivalents at end of period 18,163,154 11,428,433
Short-term investments 6,885,118 7,898,520
------------ ------------
Cash, cash equivalents and short-term investments at end of period $ 25,048,272 $ 19,326,953
============ ============
</TABLE>
See accompanying notes.
Page 5 of 15
<PAGE> 6
THERATECH, INC.
--------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1997
FINANCIAL STATEMENTS
In the opinion of management, the accompanying condensed consolidated financial
statements contain all normal recurring adjustments necessary to present fairly
the financial position of TheraTech, Inc. ("TheraTech" or the "Company") as of
June 30, 1997 and the results of its operations and cash flows for the interim
periods ended June 30, 1997 and 1996. The operating results for the interim
periods are not necessarily indicative of the results for a full year. For
further discussion of TheraTech's accounting policies, refer to the Company's
audited financial statements for the year ended December 31, 1996.
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of
TheraTech and its wholly-owned subsidiaries Nippon TTI K.K. ("TheraTech Japan")
and Natrapac, Inc. ("Natrapac"). All significant intercompany accounts and
transactions have been eliminated.
NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share". This statement replaces the previous standard Accounting
Principles Board ("APB") Opinion No. 15, "Earnings per Share". Effective for
periods ending after December 15, 1997, SFAS No. 128 requires companies to
report both "basic" and "diluted" earnings per share. "Basic" earnings per share
does not include the addition of common stock equivalents to the shares
outstanding. "Diluted" earnings per share requires the addition of common stock
equivalents to the shares outstanding. Average shares outstanding is the
denominator used in "basic" earnings per share calculations. Accordingly,
"basic" earnings per share will be higher than "diluted" earnings per share. For
TheraTech, "diluted" earnings per share under the new standard is approximately
equivalent to "primary" earnings per share under APB No. 15, which has
historically been reported. The impact of SFAS No. 128 on TheraTech's earnings
per share is not expected to be significant.
INVENTORIES
At June 30, 1997, inventories are stated at the lower of cost or market and
consists of the following:
<TABLE>
<S> <C>
Raw materials $2,708,212
Work in process 41,255
Finished goods 130,131
----------
$2,879,598
==========
</TABLE>
REVENUES
The Company has entered into various collaborative research and development,
product licensing and marketing agreements with certain pharmaceutical companies
("Collaborative Partners"). These agreements provide for TheraTech to receive
payments in various forms, including licensing fees and other payments upon
execution of an agreement, milestone payments upon achievement of certain
technical and regulatory goals, and periodic payments in the form of cost
reimbursements for product development and clinical evaluation of a specified
product, including a portion of general and administrative expenses. Research
and development revenues and licensing fees are recognized as earned based on
terms in the specific contracts. Milestone payments are included in revenues in
the period in which the applicable milestone is achieved.
TheraTech has also entered into various product supply agreements to manufacture
products for certain Collaborative Partners. These agreements include provisions
for TheraTech to recognize product sales and unearned revenue at the time
TheraTech ships product to the Collaborative Partner and/or at the time the
Collaborative Partner ships product to its customers. Unearned revenue relates
to advances on future revenues.
Page 6 of 15
<PAGE> 7
THERATECH, INC.
--------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1997
(Continued)
COMMITMENTS AND CONTINGENCIES
TheraTech has entered into a purchase commitment with a commercial supplier for
material used in its manufacturing process. Under this agreement, TheraTech has
agreed to purchase, at predetermined prices, fixed quantities over four years as
follows:
<TABLE>
<S> <C>
1995 $ 136,250
1996 2,725,000
1997 2,885,000
1998 3,060,000
-----------
$ 8,806,250
===========
</TABLE>
The 1995 and 1996 purchase commitments have been satisfied.
In the ordinary course of business, various suits and claims are filed by and
against TheraTech. In the past, TheraTech's liability claims have not been
significant. The Company is not a party to any litigation, other than legal and
arbitration proceedings incurred in the ordinary course of business.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Since its inception in January 1985, TheraTech has devoted substantially all of
its resources to drug delivery research and development programs. TheraTech
develops advanced, controlled release drug delivery products which administer
drugs through the skin, by oral delivery to the gastrointestinal tract, through
tissues in the oral cavity, by pulmonary and by other means. TheraTech's product
development activities have been conducted independently or pursuant to
collaborative research and development agreements generally with pharmaceutical
companies ("Collaborative Partners"). For independently developed products,
TheraTech has entered into licensing, marketing and distribution agreements
generally with pharmaceutical companies to market TheraTech manufactured
products, or has transferred the technology to other companies. TheraTech
continues to devote substantial resources to the development of drug delivery
technologies and product development programs.
The Company has entered into various product development, licensing, marketing,
manufacturing and supply agreements with Collaborative Partners. Product
development and licensing agreements generally provide for TheraTech to receive
payments in various forms, including licensing fees and other payments upon the
execution of an agreement, milestone payments upon achievement of certain
technical and regulatory goals, and periodic payments in the form of cost
reimbursements for product development and clinical evaluation of a specified
product, including a portion of general and administrative expenses.
Page 7 of 15
<PAGE> 8
THERATECH, INC.
--------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Manufacturing and supply agreements provide for TheraTech to manufacture and
transfer products to Collaborative Partners, which allows TheraTech to earn
product sales revenues in a variety of ways. In general, product sales represent
contract payments or sales to TheraTech's marketing partners for resale
purposes. Product sales may be recognized based on one or a combination of the
following: (i) TheraTech's fully burdened manufacturing cost; (ii) a fixed or
variable manufacturing profit; (iii) a royalty on the partners' product sales;
and/or (iv) a transfer of product where the price is based on a percentage of
the marketing partners' sales to their clients. Certain agreements also require
the marketing partner to meet certain production volumes or pay TheraTech's
fixed production costs. Accordingly, TheraTech's product sales do not
necessarily reflect the existing or future market demand for such products.
The Company's results of operations may vary significantly from quarter to
quarter and depend, among other factors, on the signing of new product
development agreements, the timing of fees and milestone payments made by
Collaborative Partners, the progress of clinical trials, product sales levels
and costs associated with the manufacturing processes. The timing of the
Company's research and development revenues may not match the timing of the
associated expenses. The amount of revenues in any given period is not
necessarily indicative of future revenues.
To date, three research and development programs have resulted in approved
products. In late December 1996, TheraTech received marketing clearance from the
U.S. Food and Drug Administration ("FDA") for the Alora(R) Estradiol Transdermal
System for women, the Company's second commercial product approved in the U.S.
TheraTech's first commercial product in the U.S. was the Androderm(R)
Testosterone Transdermal System for men. Both marketing clearances were received
within one year of their respective initial submissions. The testosterone
transdermal system for men has also been approved in certain European countries
under different trade names. TheraTech also has a nitroglycerin transdermal
product which has been approved in certain European countries and has been
launched by TheraTech's marketing partners in France, Greece, Holland and Italy.
Worldwide marketing rights (excluding Asia) have been granted to Procter &
Gamble Pharmaceutical, Inc. ("P&G") for TheraTech's estradiol transdermal
product, and its estradiol/progestin combination product (which is currently in
Phase III clinical trials). TheraTech began commercial production of Alora in
December 1996 and made its initial shipments of this product to P&G in March
1997. The commercial launch of Alora commenced in the U.S. in May 1997.
TheraTech has negotiated marketing agreements for its testosterone transdermal
system with several partners covering various countries. These partners and
countries include: SmithKline Beecham in the U.S., Canada, Ireland and the
United Kingdom; Laboratories Fournier S.C.A. ("Fournier") in France and
French-speaking Africa; Compania Espanola de la Penicilina y Antibioticos, S.L.
("CEPA") in Spain; Laborterapia - Produtos Farmaceuticos, S.A. ("Laborterapia")
in Portugal; Astra AB ("Astra") in Scandinavia; Wyeth-Ayerst International, Inc.
("Wyeth-Ayerst") in Mexico, Central and South America, non- French-speaking
Africa and the Middle East; Grelan Pharmaceutical Co., Ltd. ("Grelan") in Japan
and Samyang Corporation ("Samyang") in South Korea.
In April 1997, TheraTech and SmithKline Beecham announced that TheraTech
reacquired the marketing rights to its male testosterone transdermal product in
the countries where SmithKline Beecham was not currently marketing the product.
SmithKline Beecham will continue to market in North America, Ireland and the
United Kingdom while giving up their rights to the rest of Europe, Australia and
New Zealand. TheraTech intends to assign marketing rights in these territories.
In May 1997, TheraTech and SmithKline Beecham announced that the FDA had cleared
the 5 milligram ("mg") Androderm patch for marketing in the U.S. The commercial
launch of this 5 mg Androderm patch by SmithKline Beecham occurred in the U.S.
in June 1997. The original Androderm product was a two-patch per day, 2.5 mg
system. The new 5 mg Androderm patch restores testosterone levels to a normal
range by continuous delivery of testosterone for 24 hours in a convenient one-
patch per day formulation.
Page 8 of 15
<PAGE> 9
THERATECH, INC.
--------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The 2.5 mg testosterone transdermal product has received approval and is
currently being marketed under the following trade names: Androderm, by
SmithKline Beecham in the U.S. and by Samyang in South Korea; Andropatch(TM), by
SmithKline Beecham in Ireland and the United Kingdom; and Atmos(R), by Astra in
Denmark, Finland and Sweden. TheraTech anticipates that marketing of the
testosterone transdermal product will commence during 1998 in Argentina, Brazil,
Columbia and Norway, for which regulatory approval has been obtained.
TheraTech was responsible for filing with the FDA the Alora New Drug Application
("NDA"), the Androderm 2.5 mg NDA and the Androderm 5 mg Supplemental New Drug
Application in the United States. In all other countries, TheraTech's partners
are responsible for filing and obtaining regulatory approvals to market these
products. The ability to market and the timing of a product launch in the
various countries is dependent, among other things, upon obtaining the necessary
regulatory approvals.
RESULTS OF OPERATIONS
For the three months ended June 30, 1997, TheraTech had net income of
$1,321,000, equal to $0.06 per share. This compares to net income of $1,069,000
or $0.05 per share during the three months ended June 30, 1996. The Company had
total revenues of $9,202,000 for the three months ended June 30, 1997 compared
to $8,823,000 for the respective period in 1996.
For the six months ended June 30, 1997, TheraTech had net income of $2,108,000,
or $0.10 per share. This compares to a net loss of $206,000, or $0.01 per share
for the corresponding period in 1996. Total revenues year-to-date were
$18,039,000 compared to $15,175,000 for the corresponding period in 1996.
RESEARCH AND DEVELOPMENT REVENUES were $4,812,000 and $5,917,000 for the three
months ended June 30, 1997 and 1996, respectively. With the commercial launch of
Alora in May 1997, major development activities for this product were being
completed. As a result, research and development revenues for this product were
less in the 1997 quarter than those reported during the 1996 quarter. This
reduction was partially offset by several of TheraTech's other funded product
development activities.
For the six months ended June 30, 1997 and 1996, research and development
revenues were $10,367,000 and $8,769,000, respectively. The revenue increase in
the 1997 period over the 1996 period was primarily from the following: (i)
preclinical research and development activities on the oral transmucosal ("OTM")
delivery technology under the multi-product collaboration with Eli Lilly and
Company ("Lilly") signed in January 1997, which also included a milestone
payment and cost reimbursements; (ii) Phase III product development activity
cost reimbursements on the estradiol/progestin combination product for P&G;
(iii) development activities on the 5 mg testosterone product for SmithKline
Beecham and Wyeth-Ayerst; and (iv) other collaborative research and development
activities. Milestone payments received from Lilly and P&G along with revenue
from new and advancing collaborative programs are the principal reasons for the
increase in research and development revenues in the 1997 period over the 1996
period.
During the six months ended June 30, 1996, TheraTech earned revenues from P&G
for estradiol commercialization activities and for Phase II studies on the
estradiol/progestin combination product. TheraTech also earned revenues from
Grelan, SmithKline Beecham and Meiji Milk Products Co. ("Meiji") during the 1996
period.
Page 9 of 15
<PAGE> 10
THERATECH, INC.
--------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
PRODUCT SALES for the three months ended June 30, 1997 were $3,673,000 compared
to $2,438,000 for the 1996 quarter. Product sales for the six months ended June
30, 1997 were $6,577,000 compared to $4,613,000 during the corresponding period
in 1997. TheraTech began shipping initial supplies of Alora to P&G in March
1997, and retail distribution and promotion to physicians by P&G began in May
1997. Also in May, TheraTech began shipping initial supplies of the new
Androderm 5 mg product to SmithKline Beecham. Retail distribution and promotion
to physicians of this product by SmithKline Beecham began in June 1997.
TheraTech also recorded sales of the Nitroglycerin product in certain European
countries reported by Lavipharm. As a result, product sales increased in both
the 1997 second quarter and the year-to-date period. For the three month and six
month periods ended June 30, 1996, product sales consisted of the 2.5 mg
testosterone transdermal systems.
Although product sales have increased in the periods discussed above, product
sales have decreased when compared to the fourth quarter of 1996. This decrease
is due to SmithKline Beecham adjusting its inventory levels of the Androderm 2.5
mg product in anticipation of the commercial introduction of the Androderm 5 mg
product, and revenue from a one-time packaging contract with a Natrapac client
in 1996 that was not renewed for 1997. TheraTech believes that product sales in
1997 will increase over 1996 levels primarily as a result of the commercial
launch of Alora and the Androderm 5 mg product in the U.S. and through expected
continued expansion of the transdermal testosterone market in the U.S. and
foreign countries.
LICENSING REVENUES were $340,000 and $135,000 for the three months ended June
30, 1997 and 1996, respectively. During the 1997 quarter, TheraTech earned
licensing revenues for the achievement of milestones from Wyeth-Ayerst under
their testosterone product licensing agreement, and from Samyang under their
estradiol product licensing agreement. During the 1996 quarter, TheraTech
received payments for the achievement of milestones from Astra under their
testosterone product licensing agreement and from Samyang under their
estradiol/progestin combination product licensing agreement.
For the six months ended June 30, 1997 and 1996, licensing revenues were
$345,000 and $985,000, respectively. During the 1997 period, TheraTech earned
licensing revenues by achieving milestones under product licensing agreements
with Wyeth- Ayerst and Samyang as described above, and received a payment from a
Collaborative Partner for the use of a product trade name. During the 1996
period, TheraTech earned licensing revenues by achieving milestones under
product licensing agreements with Wyeth-Ayerst, Astra and Samyang.
INTEREST AND OTHER REVENUES were $378,000 and $333,000 for the three months
ended June 30, 1997 and 1996, respectively, and consisted primarily of interest
income of $374,000 and $303,000, respectively. Interest income increased during
the 1997 quarter from the 1996 quarter due to higher average balances in cash,
cash equivalents and investments, not withstanding lower average yields. Other
revenues in both the 1997 and 1996 quarters primarily consisted of intermediate
materials sold to Collaborative Partners.
Interest and other revenues for the six months ended June 30, 1997 and 1996 were
$751,000 and $808,000, respectively, and primarily consisted of interest income
totaling $692,000 and $637,000, respectively.
RESEARCH AND DEVELOPMENT EXPENSES for the three months ended June 30, 1997 and
1996 were $3,630,000 and $4,341,000, respectively. Research and development
expenses for the six months ended June 30, 1997 and 1996 were $8,065,000 and
$8,218,000, respectively. During 1996, resources were devoted to the commercial
development of the matrix production process, and specifically the estradiol
transdermal product. These development activities focused, among other things,
on methods transfer from development to manufacturing, manufacturing process
validation and preparations for a pre-approval inspection by the FDA. Although
research and development activities increased on other projects, certain of
these activities were not repeated in 1997 and certain expenses associated with
the production of Alora are now included in the cost of goods sold. As a result,
research and development expenses have decreased during both periods.
Page 10 of 15
<PAGE> 11
THERATECH, INC.
--------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Research and development programs during the 1997 period included the following:
(i) estradiol/progestin combination product development activities, including
certain Phase III clinical costs; (ii) preclinical research and development
activities on the OTM delivery technology; (iii) testosterone 5 mg development
and commercialization activities including interactions with the FDA; (iv)
continuing estradiol development activities necessary for foreign regulatory
approval, along with stability studies and clinical costs associated with the
program; (v) Phase II clinical and development activities for the female
testosterone transdermal product; (vi) Phase I development activities for the
Meiji product; (vii) Phase I development activities for the nicotine oral
lozenge product; and (viii) various other collaboratively and independently
developed products and technologies.
COST OF PRODUCTS SOLD for the three months ended June 30, 1997 were $2,658,000,
compared to $1,866,000 for the 1996 quarter. Cost of products sold for the six
months ended June 30, 1997 were $4,810,000, compared to $4,101,000 for the 1996
period. These include direct and indirect manufacturing costs attributable, in
the 1997 period to the production of Alora and the testosterone transdermal
products, and in the 1996 periods to the production of Androderm. Cost of
products sold as a percentage of product sales improved to 73 percent for the
six months ended June 30, 1997, compared to 89 percent for the same period in
1996. This decrease resulted from improved production efficiencies and increased
revenues recognized on a Collaborative Partner's shipments of products to its
customers.
GENERAL AND ADMINISTRATIVE EXPENSES for the three months ended June 30, 1997 and
1996 were $1,335,000 and $1,253,000, respectively. For the six months ended June
30, 1997 and 1996, general and administrative expenses were $2,561,000 and
$2,474,000, respectively.
INTEREST AND OTHER EXPENSES for the three months ended June 30, 1997 and 1996
were $258,000 and $293,000, respectively, and consisted primarily of interest
expense. The Company incurred interest expense of $228,000 and $273,000 for the
three months ended June 30, 1997 and 1996, respectively, which reflects monthly
payments of principal and interest toward notes payable and capital lease
obligations.
Interest and other expenses for the six months ended June 30, 1997 and 1996 were
$494,000 and $589,000, respectively, which consisted primarily of interest
expense totaling $464,000 and $555,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, TheraTech has funded its operations primarily through
equity and debt financing, collaborative research and development agreements,
product sales, licensing fees and other revenues. As of June 30, 1997 and
December 31, 1996, TheraTech had cash, cash equivalents and investments totaling
$27,048,000 and $25,215,000, respectively. This increase was the result of cash
provided by operating activities, partially offset with cash used in investing
activities (excluding the increase in short-term investments) and financing
activities as reflected in the Condensed Consolidated Statements of Cash Flows.
Net cash provided by operating activities for the six months ended June 30, 1997
was $2,822,000 compared to net cash used in operating activities of $29,000 for
the six months ended June 30, 1996. Cash provided in the 1997 period was
primarily a result of net income as compared to a net loss in the 1996 period,
partially offset by increases in contracts and accounts receivable and
inventories. Cash used in the 1996 period was primarily due to the net operating
loss along with increases in accounts receivable and decreases in accounts
payable and accrued liabilities, partially offset by an increase in unearned
revenue.
Net cash provided by operating activities in the current period is not
necessarily indicative of future levels. As a result of changing levels of
product sales and production costs, the timing of milestone payments and
licensing fees, and the timing of expenditures for new and existing product
development programs, net income and accordingly the levels of net cash from
operations will vary from period to period.
Page 11 of 15
<PAGE> 12
THERATECH, INC.
--------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Company's investing activities during the six months ended June 30, 1997
used $3,269,000 compared to $2,840,000 for the 1996 period. Cash used in the
1997 period was primarily for the purchase of short-term investments and for the
purchase of equipment. TheraTech evaluates its total cash position which
includes all investments. If the effect of cash used for the purchase of
short-term investments were removed, investing activities would have only used
$483,000. The use of cash in investing activities was partially offset by the
release of $750,000 previously restricted as part of a financing agreement
covenant. In comparison, cash used in investing activities during the 1996
period was primarily for the purchase of equipment for the commercial
manufacturing facility, along with additional research and development and
office equipment.
Cash used in investing activities is primarily a function of capital
expenditures. The Company's future capital expenditure requirements will depend
upon numerous factors, including the progress of research and development
activities, the resources that the Company devotes to the independent
development of products and technologies, and the need for additional
manufacturing plant and equipment due to the demand for its other products, if
and when approved.
Net cash used in financing activities for the six months ended June 30, 1997 was
$530,000 compared to $190,000 for the six months ended June 30, 1996. Cash used
in both the 1997 and 1996 periods were primarily for payments on notes payable
and capital lease obligations partially offset by proceeds from the issuance of
stock in both the employee stock purchase plan and the employee stock option
plan. The 1996 period also included a short-term note with a client company.
Based upon current expectations of operations and capital expenditures for 1997,
the Company anticipates that its available cash, cash equivalents and
investments plus anticipated revenues from collaborative agreements, product
licensing and sales, interest income and bank financing should be sufficient to
fund its current capital requirements and operating activities.
RISK FACTORS AFFECTING EARNINGS AND STOCK PRICE
The statements contained in this Report on SEC Form 10-Q that are not purely
historical are "forward looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All forward looking statements involve various
risks and uncertainties. Forward looking statements contained in this Report
include statements regarding the assignment of marketing rights to the male
testosterone transdermal product in certain territories, the commencement of
marketing such product in Argentina, Brazil, Columbia and Norway, 1997 product
sales, expansion of the transdermal testosterone market, and the Company's
ability to fund capital requirements and operating activities. Such forward
looking statements are included under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations." All forward looking
statements included in this Report are made as of the date hereof, based on
information available to TheraTech as of such date, and TheraTech assumes no
obligation to update any forward looking statement. It is important to note that
such statements may not prove to be accurate, and that the Company's actual
results and future events could differ materially from those anticipated in such
statements. Among the factors that could cause actual results to differ
materially include, without limitation, the following: the need to identify
marketing partners in foreign markets and to establish and maintain acceptable
contractual arrangements with these partners; dependence on third-party
marketing efforts; uncertainty regarding TheraTech's commercialization
opportunities and market acceptance; competitive and technological factors such
as new product or technology introductions by rival manufacturers and price
pressures; FDA and foreign governmental regulation; limited history of
large-scale manufacturing of newly approved products; and exposure to product
liability and infringement suits. Other factors are described under the heading
"Risk Factors Affecting Earnings and Stock Price" and elsewhere in the Company's
Report on Form 10-K, as filed with the Securities and Exchange Commission.
Page 12 of 15
<PAGE> 13
THERATECH, INC.
--------------
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on May 28, 1997, the
stockholders elected as directors the following:
<TABLE>
<CAPTION>
Name For Withheld
---- --- --------
<S> <C> <C>
Dinesh C. Patel, Ph.D 16,809,016 471,301
William I. Higuchi, Ph.D 16,810,716 469,601
Gary L. Crocker 16,810,066 470,251
Jay J. Pisik 16,810,716 469,601
James T. O'Brien 16,809,991 470,326
Boyd J. Poulsen, Ph.D 16,810,716 469,601
</TABLE>
In addition, the proposal to amend the Company's Restated Certificate of
Incorporation to provide for the division of the Board of Directors into three
classes, each class to serve staggered three year terms, was not passed by the
stockholders (with 8,134,480 votes for, 5,469,882 votes against, 9,216 votes
abstained and 3,666,739 broker non-votes). This proposal required a majority of
all shares available to vote at the annual meeting in order to be approved.
At the same meeting, the stockholders ratified the appointment of Ernst & Young
LLP as the Company's independent auditors for 1997 (with 16,460,574 votes for,
11,867 votes against, 8,174 votes abstained and 799,702 broker non-votes).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
11 Statement regarding computation of per share earnings.
27.1 Financial Data Schedule for the six months ended
June 30, 1997.
(b) No reports were filed on Form 8-K during the quarter.
Page 13 of 15
<PAGE> 14
THERATECH, INC.
--------------
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.
THERATECH, INC.
(Registrant)
Date: August 8, 1997 By: /s/ DINESH C. PATEL
----------------------------------
Dinesh C. Patel, Ph.D.
President and
Chief Executive Officer
Date: August 8, 1997 By: /s/ ALEXANDER L. SEARL
----------------------------------
Alexander L. Searl
Senior Vice President and
Chief Financial Officer
Page 14 of 15
<PAGE> 15
THERATECH, INC.
--------------
INDEX TO EXHIBITS
NUMBER
11 Statement regarding computation of per share earnings.
27.1 Financial Data Schedule for the six months ended June 30, 1997.
Page 15 of 15
<PAGE> 1
EXHIBIT 11
THERATECH, INC.
-----------------
STATEMENT OF COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
Six Months Ended June 30, 1997
1997 1996
------------ ------------
<S> <C> <C>
Primary:
Weighted average shares of common stock 20,620,693 20,160,597
Common equivalent shares attributable to stock options 1,102,843 --
------------ ------------
Weighted average common and dilutive
common equivalent shares 21,723,536 20,160,597
============ ============
Net income (loss) $ 2,108,255 $ (206,428)
============ ============
Net income (loss) per share $ 0.10 $ (0.01)
============ ============
Fully Diluted:
Weighted average shares of common stock 20,620,693 20,160,597
Common equivalent shares attributable to stock options 1,138,325 --
------------ ------------
Weighted average common and dilutive
common equivalent shares 21,759,018 20,160,597
============ ============
Net income (loss) $ 2,108,255 $ (206,428)
============ ============
Net income (loss) per share $ 0.10 $ (0.01)
============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
THERATECH, INC. CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS FOR THE
SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 18,163,154
<SECURITIES> 6,885,118
<RECEIVABLES> 5,410,547
<ALLOWANCES> 91,034
<INVENTORY> 2,879,598
<CURRENT-ASSETS> 33,674,806
<PP&E> 26,144,006
<DEPRECIATION> 7,088,166
<TOTAL-ASSETS> 56,378,794
<CURRENT-LIABILITIES> 8,558,092
<BONDS> 7,927,139
0
0
<COMMON> 206,858
<OTHER-SE> 38,474,705
<TOTAL-LIABILITY-AND-EQUITY> 56,378,794
<SALES> 6,576,799
<TOTAL-REVENUES> 18,039,341
<CGS> 4,810,182
<TOTAL-COSTS> 15,436,799
<OTHER-EXPENSES> 30,260
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 464,027
<INCOME-PRETAX> 2,108,255
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,108,255
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,108,255
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
