<PAGE> 1
THERATECH, INC.
--------------
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 MARCH 31, 1998
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 APRIL 30, 1998:
<TABLE>
<CAPTION>
CLASSES OF COMMON STOCK NUMBER OF SHARES OUTSTANDING
----------------------- ----------------------------
<S> <C>
Common Stock, $0.01 par value 21,187,828
</TABLE>
<PAGE> 2
THERATECH, INC.
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INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements Page
----
Condensed Consolidated Statements of Operations --
Three months ended March 31, 1998 and 1997 ................................................ 3
Condensed Consolidated Balance Sheets --
March 31, 1998 and December 31, 1997 ...................................................... 4
Condensed Consolidated Statements of Cash Flows --
Three months ended March 31, 1998 and 1997 ................................................ 5
Notes to Condensed Consolidated Financial Statements ...................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............................................. 8
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Not applicable
</TABLE>
PART II - OTHER INFORMATION
<TABLE>
<S> <C>
Item 2. Changes in Securities and Use of Proceeds ................................................ 13
Item 6. Exhibits and Reports on Form 8-K ......................................................... 13
</TABLE>
Page 2 of 14
<PAGE> 3
THERATECH, INC.
-----------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenues:
Research, development and licensing
revenue under collaborative agreements $ 5,673,009 $ 5,559,487
Product sales 4,790,970 2,904,135
Interest and other 399,760 373,221
----------- -----------
Total revenues 10,863,739 8,836,843
Costs and expenses:
Research and development 5,015,054 4,435,033
Cost of products sold 3,057,961 2,152,549
General and administrative 1,510,514 1,226,085
Interest and other 196,165 236,330
----------- -----------
Total costs and expenses 9,779,694 8,049,997
----------- -----------
Net income $ 1,084,045 $ 786,846
=========== ===========
Net income per share - basic $ 0.05 $ 0.04
=========== ===========
Net income per share - diluted $ 0.05 $ 0.04
=========== ===========
</TABLE>
See accompanying notes.
Page 3 of 14
<PAGE> 4
THERATECH, INC.
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CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997(1)
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash, cash equivalents and short-term investments (2) $ 24,868,377 $ 24,377,413
Contracts and accounts receivable 5,447,394 4,847,106
Inventories 2,771,997 2,830,270
Prepaid expenses 517,123 66,095
------------ ------------
Total current assets 33,604,891 32,120,884
Investments in long-term securities (2) 3,007,983 3,001,938
Plant and equipment:
Plant 10,464,197 9,301,171
Equipment 15,640,237 15,039,772
Leasehold improvements 819,962 806,740
Construction in progress 1,245,626 2,395,759
------------ ------------
28,170,022 27,543,442
Less accumulated depreciation and amortization (8,903,801) (8,225,341)
------------ ------------
Net plant and equipment 19,266,221 19,318,101
Other assets:
Intangible assets, net 7,167,597 7,115,879
Other assets 420,846 304,008
------------ ------------
Total other assets 7,588,443 7,419,887
------------ ------------
Total assets $ 63,467,538 $ 61,860,810
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 3,803,108 $ 3,459,427
Current portion of notes payable and capital lease obligations 1,334,597 1,397,763
Unearned revenue 2,483,963 2,553,237
------------ ------------
Total current liabilities 7,621,668 7,410,427
Notes payable and capital lease obligations, less current portion 6,961,940 7,260,935
Other liabilities 3,420,000 3,420,000
Unearned revenue 212,000 212,000
Commitments and contingencies
Stockholders' equity:
Common stock 211,550 210,193
Additional paid-in capital 71,466,014 70,840,782
Accumulated deficit (26,126,369) (27,210,414)
Cumulative translation adjustment (299,265) (283,113)
------------ ------------
Total stockholders' equity 45,251,930 43,557,448
------------ ------------
Total liabilities and stockholders' equity $ 63,467,538 $ 61,860,810
============ ============
</TABLE>
See accompanying notes.
- ----------
(1) Derived from audited financial statements.
(2) TheraTech's total cash position as of March 31, 1998 and December 31, 1997
was $27,876,360 and $27,379,351, respectively, which includes cash, cash
equivalents, and short- and long-term investments.
Page 4 of 14
<PAGE> 5
THERATECH, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------
1998 1997
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,084,045 $ 786,846
Adjustments to reconcile net income to net cash and cash equivalents
provided by (used in) operating activities:
Depreciation and amortization 904,869 662,461
Common stock issued for in-process technology 333,000 --
Changes in operating assets and liabilities:
Contracts and accounts receivable (600,288) (1,053,228)
Inventories 58,273 (908,212)
Prepaid expenses (451,028) (86,535)
Accounts payable and accrued liabilities 343,681 186,632
Unearned revenue (69,274) 806,953
------------ ------------
Net cash provided by operating activities 1,603,278 394,917
INVESTING ACTIVITIES:
Decrease (increase) in investments 2,992,094 (2,783,150)
Purchase of plant and equipment (713,104) (446,104)
Purchase of intangible assets (191,603) (106,652)
Other assets (116,838) 670,765
------------ ------------
Net cash provided by (used in) investing activities 1,970,549 (2,665,141)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 293,589 254,683
Payment of notes payable and capital lease obligations (362,161) (559,209)
------------ ------------
Net cash used in financing activities (68,572) (304,526)
Effect of exchange-rate changes on cash and cash equivalents (16,152) (55,327)
------------ ------------
Net increase (decrease) in cash and cash equivalents 3,489,103 (2,630,077)
Cash and cash equivalents at beginning of period 14,979,465 19,116,991
------------ ------------
Cash and cash equivalents at end of period 18,468,568 16,486,914
Short-term investments 6,399,809 6,881,366
------------ ------------
Cash, cash equivalents and short-term investments at end of period $ 24,868,377 $ 23,368,280
============ ============
</TABLE>
See accompanying notes.
Page 5 of 14
<PAGE> 6
THERATECH, INC.
-----------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
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
March 31, 1998 and the results of its operations and cash flows for the interim
periods ended March 31, 1998 and 1997. 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, 1997.
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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 1998
presentation. Licensing revenues, previously reported as a separate component of
revenue, have been included with research and development revenues.
COMPREHENSIVE INCOME
As of January 1, 1998, TheraTech adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." Statement 130 establishes
new rules for the reporting and display of comprehensive income and its
components. The adoption of this Statement had no material impact on the
Company's net income or stockholders' equity. Statement 130 requires unrealized
gains or losses on the Company's foreign currency translation adjustments, which
prior to adoption were reported separately in stockholders' equity, to be
included in other comprehensive income.
During the first quarter of 1998 and 1997, total comprehensive income amounted
to $1,067,893 and $731,519, respectively.
NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share:
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Numerator:
Net income -- Numerator for basic and diluted
net income per share $ 1,084,045 $ 786,846
=========== ===========
Denominator:
Denominator for basic net income per share -
weighted-average shares 21,107,288 20,591,790
Effect of dilutive securities:
Stock options 582,142 1,254,553
----------- -----------
Denominator for diluted net income per
share-adjusted weighted-average shares
and assumed conversions 21,689,430 21,846,343
=========== ===========
Net income per share - basic $ 0.05 $ 0.04
=========== ===========
Net income per share - diluted $ 0.05 $ 0.04
=========== ===========
</TABLE>
Page 6 of 14
<PAGE> 7
THERATECH, INC.
-----------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
(Continued)
INVENTORIES
At March 31, 1998, inventories are stated at the lower of cost or market and
consist of the following:
<TABLE>
<S> <C>
Raw materials $2,431,204
Work in process 227,734
Finished goods 113,059
----------
$2,771,997
==========
</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, which can include 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,
development and licensing revenues 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 generally
relates to advances on future product sales.
COMMITMENTS AND CONTINGENCIES
TheraTech entered into a purchase commitment with a commercial supplier for
material used in its manufacturing process. Under this agreement, TheraTech was
to purchase, at predetermined prices, fixed quantities over four years. Amounts
paid to the supplier under the commitment were approximately $875,000 in 1995,
$1,392,000 in 1996 and $2,516,000 in 1997. In 1998, TheraTech had the option of
purchasing quantities of material totaling $1,750,032, or paying a fee of
$800,000 to purchase no material. TheraTech exercised its option to purchase the
material.
TheraTech has entered into a manufacturing and supply agreement with a
commercial supplier to develop and manufacture certain material that is expected
to be used in the manufacturing process. Under this agreement, TheraTech will
pay approximately $300,000 per year for five years toward the development of the
material. Payments made during each year will be credited against the purchase
price for any developed material purchased in that year by TheraTech at
predetermined prices. Either party can terminate the agreement with not less
than two years prior written notice.
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 which are believed to be ordinary or routine litigation
incidental to its business.
Page 7 of 14
<PAGE> 8
THERATECH, INC.
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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 pharmaceutical and other products which
deliver drugs locally and into the bloodstream through the skin, oral cavity,
lungs, gastrointestinal tract, 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.
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, four research and development programs have resulted in commercialized
products. Two of these products are in the area of hormone replacement therapy
("HRT") and include: (i) the Androderm(R) testosterone transdermal system for
men in two dosage forms; and (ii) the Alora(R) estradiol transdermal system for
woman in three dosage forms. TheraTech's other two products include an
anti-wrinkle dermal patch and a nitroglycerin transdermal patch. The
commercialized products, including the applicable active drug, technology,
indication, marketing status, partners and territories are summarized in the
following table (the products shown below may have different brand names in
countries other than the United States):
Page 8 of 14
<PAGE> 9
THERATECH, INC.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
<TABLE>
<CAPTION>
PRODUCT TARGETED MARKETING AND APPROVAL PARTNERS AND
DESCRIPTION INDICATION STATUS TERRITORIES
----------- ---------- ------ -----------
<S> <C> <C> <C>
ANDRODERM(R) Male Launched in: U.S., SMITHKLINE BEECHAM (U.S., Canada,
2.5 and 5mg/day Hypogonadism U.K., Ireland, Denmark, Ireland and U.K.); CEPA (Spain);
(Testosterone - Finland, Sweden and So. LABORTERAPIA (Portugal); ASTRA
Transdermal Liquid Korea. (Scandinavia, Austria, Germany
Reservoir System and Switzerland); SCHWARZ PHARMA
("LRS") Approved in: certain (Italy, France, Benelux countries
European countries, and certain Eastern European
Australia and certain countries); WYETH-AYERST (Mexico,
countries in Central Central and South America);
and South America. SAMYANG (So. Korea)
ALORA(R) Female HRT Launched in U.S. PROCTER & GAMBLE (Worldwide,
.05, .075 and Osteoporosis Approved in Canada and except in certain Asian
.1mg/day the U.K. countries); SAMYANG (So. Korea)
(Estradiol -
Transdermal Matrix
("MTX")
FACE LIFT(TM) Wrinkle Launched in U.S. UNIVERSITY MEDICAL (Worldwide)
(Cosmetic -MTX Reduction
Patch)
NITROGLYCERIN Angina Launched in: France, LAVIPHARM (Worldwide, except
.2, .4 and .6mg/hr Pectoris Greece, Holland and So. Korea); SUB DISTRIBUTORS:
(Transdermal MTX) Italy. LAVIPHARM/SYNTHELABO (Greece);
WYETH-LEDERLE (Belgium);
NOVARTIS and KNOLL (Italy);
SYNTHELABO (France, Spain, and
Portugal); BRISTOL MYERS
SQUIBB (Switzerland); LOREX
SYNTHELABO (The Netherlands);
SAMYANG (So. Korea)
</TABLE>
TheraTech has received marketing clearances from the United States Food and Drug
Administration ("FDA") for the Androderm product and the Alora product, the
Company's first two commercial products approved in the United States. Both
marketing clearances were received within one year of their respective New Drug
Application ("NDA") submissions. The FDA also cleared for marketing the
Androderm 5mg product within six months of filing its supplemental New Drug
Application ("sNDA"). The nitroglycerin product has been approved in certain
European countries under various trade names through the efforts of TheraTech's
marketing partners. The anti-wrinkle dermal patch does not require FDA clearance
or similar regulatory approval in foreign countries.
TheraTech was responsible for filing with the FDA the Alora NDA, the Androderm
2.5mg NDA and the Androderm 5mg sNDA in the United States. In all other
countries, TheraTech's partners are responsible for filing and obtaining
applicable 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.
The Company's anti-wrinkle cosmetic product is being supplied through Natrapac,
Inc., TheraTech's wholly-owned consumer products subsidiary. Natrapac has
granted a worldwide marketing license for its anti-wrinkle dermal patch to
University Medical Products, USA, Inc. ("University Medical"). University
Medical launched this product in the United States in January 1998. This
product, marketed under the trade name Face Lift(TM) - Vitamin C Anti-Wrinkle
Patch(TM), is a cosmetic product containing anti-oxidants for treatment of fine
wrinkles around the eyes and mouth and uses TheraTech's MTX technology.
To date, the Company's product sales, operating results and assets associated
with operations outside the United States have not been a significant portion of
the Company's consolidated business. For the three months ended March 31, 1998,
and for each of the years ended December 31, 1997, 1996 and 1995, less than 10
percent of the Company's total revenues, including product sales, licensing
fees, and research and development revenue, were attributable to export sales
and other revenues derived from foreign sources.
Page 9 of 14
<PAGE> 10
THERATECH, INC.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 1998
presentation. Licensing revenues, previously reported as a separate component of
revenue, have been included with research and development revenues.
RESULTS OF OPERATIONS
For the three months ended March 31, 1998, TheraTech had net income of
$1,084,000, equal to $0.05 per share. This compares to net income of $787,000 or
$0.04 per share during the three months ended March 31, 1997. The Company had
total revenues of $10,864,000 for the three months ended March 31, 1997 compared
to $8,837,000 for the respective period in 1997.
RESEARCH, DEVELOPMENT AND LICENSING REVENUES were $5,673,000 and $5,560,000 for
the three months ended March 31, 1998 and 1997, respectively. During the 1998
quarter, TheraTech entered into an agreement with SmithKline Beecham Consumer
Healthcare to develop and market TheraTech's proprietary oral nicotine
technology. The first product to be developed will be a nicotine lozenge for
smoking cessation. TheraTech also entered into a license and development
agreement with Palatin Technologies, Inc. ("Palatin") to develop oral
transmucosal ("OTM") delivery systems for several peptide products. The first
product to be developed will be PT-14, Palatin's investigational peptide for
treatment of erectile dysfunction.
During the 1998 quarter, TheraTech earned revenues for: (i) Phase III product
development activity cost reimbursements on the estradiol/progestin combination
product for Procter & Gamble Pharmaceuticals, Inc. ("Procter & Gamble"); (ii)
preclinical research and development activities on the nicotine lozenge under
collaboration with SmithKline Beecham Consumer Healthcare, which included a
milestone payment and cost reimbursements; (iii) a licensing fee upon entering
into the agreement with Palatin; (iv) a licensing milestone under the Astra AB
new territory licensing agreement; (v) Phase II clinical and development
activities on the female testosterone transdermal product with Procter and
Gamble; and (vi) other development programs with Collaborative Partners.
During the 1997 quarter, TheraTech earned revenues for: (i) estradiol
commercialization activities performed for Procter & Gamble, which included a
milestone payment and cost reimbursements; (ii) preclinical research and
development activities on the 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; (iii) Phase III
product development activities on the estradiol/progestin combination product
for Procter & Gamble; (iv) development activities on the 5mg testosterone
product for SmithKline Beecham and Wyeth-Ayerst; and (v) other collaborative
research and development activities.
PRODUCT SALES were $4,791,000 and $2,904,000 for the three months ended March
31, 1998 and 1997, respectively. During the 1998 quarter, TheraTech began
shipping initial supplies of the new "toned" Androderm product and initial
supplies of the anti-wrinkle patch. Revenues during the quarter also resulted
from shipments of Alora. For the quarter ended March 31, 1997, product sales
consisted primarily of initial shipments of Alora to Procter & Gamble in
preparation of product launch, along with revenues from sales of TheraTech's
testosterone transdermal systems.
INTEREST AND OTHER REVENUES were $400,000 and $373,000 for the three months
ended March 31, 1998 and 1997, respectively, and consisted primarily of interest
income of $378,000 and $318,000, respectively. Interest income during the 1998
quarter increased from the 1997 quarter due to higher average yields on higher
average balances in cash, cash equivalents and investments. Other revenues in
the 1998 quarter consisted primarily of a gain on the sale of an asset and a
refund of insurance premiums from a prior year, while the 1997 quarter consisted
primarily of intermediate materials sold to Collaborative Partners.
Page 10 of 14
<PAGE> 11
THERATECH, INC.
-----------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RESEARCH AND DEVELOPMENT EXPENSES for the three months ended March 31, 1998 and
1997 were $5,015,000 and $4,435,000, respectively. Research and development
programs during the 1998 period included the following: (i) continuing Phase III
product development activities on the estradiol/progestin combination product;
(ii) Phase II clinical trials and development activities continuing on the
female testosterone transdermal product; (iii) preclinical research and
development activities on the OTM drug delivery technology, including the Lilly
peptide; (iv) continuing support of the Alora product, including activities
necessary to obtain foreign regulatory approval; (v) development activities for
oxybutynin Phase II trials in the United States and development activities to
support the initiation of Meiji Milk Products Co. ("Meiji") oxybutynin Phase II
trials in Japan; (vi) initiation of preclinical trials with an OTM analgesic
(fentanyl) tablet to treat breakthrough cancer pain; (vii) research on a cell
targeted drug delivery program using drug conjugates to kill targeted cancer
cells without killing healthy cells; and (viii) various other collaboratively
and independently developed products and technologies. The increase in research
and development expenses resulted primarily from the completion of a milestone
event involving the dry powder inhaler technology, and the license of material
to be developed and used in the manufacturing process.
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) continuing estradiol development
activities necessary for foreign regulatory approval, along with stability
studies and clinical costs associated with the program; (iii) testosterone 5mg
development and commercialization activities; (iv) Phase II clinical and
development activities for the female testosterone transdermal product; (v)
Phase I development activities for the Meiji's oxybutynin product; (vi) Phase I
development activities for the nicotine oral lozenge product; and (vii) OTM
technology along with various other collaboratively and independently developed
products and technologies, including a payment for the acquisition of two
inhalation drug delivery technologies.
COST OF PRODUCTS SOLD for the three months ended March 31, 1998 and 1997 were
$3,058,000 and $2,153,000, respectively, which includes direct and indirect
manufacturing costs attributable, in the 1998 period primarily to the production
of Androderm and the anti-wrinkle patch, along with Alora, and in the 1997
period primarily to the production of Alora along with the testosterone
transdermal products. Gross margin on products sold improved to 36.2 percent for
the 1998 quarter, compared to 25.9 percent in the 1997 quarter. The improved
gross margin resulted from the mix of products being produced and shipped, along
with efficiencies realized from increased production volumes.
GENERAL AND ADMINISTRATIVE EXPENSES for the three months ended March 31, 1998
and 1997 were $1,511,000 and $1,226,000, respectively. This increase is
primarily due to the addition of a vice president of marketing and sales,
increased business development activities, and the amortization of marketing
rights costs.
INTEREST AND OTHER EXPENSES for the three months ended March 31, 1998 and 1997
were $196,000 and $236,000, respectively, and consisted primarily of interest
expense, which reflects monthly payments of principal and interest toward notes
payable and capital lease obligations.
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 March 31, 1998 and
December 31, 1997, TheraTech had cash, cash equivalents and investments totaling
$27,876,000 and $27,379,000, respectively. This increase was primarily the
result of cash provided by operating activities, partially offset with cash used
in investing activities (when adjusted for the decrease in short-term
investments) and financing activities as reflected in the Condensed Consolidated
Statements of Cash Flows.
Page 11 of 14
<PAGE> 12
THERATECH, INC.
-----------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Net cash provided by operating activities for the three months ended March 31,
1998 was $1,603,000 compared to $395,000 for the three months ended March 31,
1997. Cash provided in the 1998 quarter was primarily a result of net income and
non-cash adjustments for depreciation and amortization, and common stock issued
for a milestone payment due on the purchase of in-process pulmonary technology,
partially offset by increases in contracts and accounts receivables and prepaid
expenses. Cash provided in the 1997 quarter was a result of net income, non-cash
adjustments for depreciation and amortization, and an increase in unearned
revenue, partially offset by increases in contracts and accounts receivable and
inventories.
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 amount and 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.
The Company's investing activities during the three months ended March 31, 1998
provided $1,971,000 compared to net cash used of $2,665,000 for the 1997
quarter. Cash provided in the 1998 quarter was primarily from the maturity and
sales of short-term investments. Cash used in the 1997 quarter was primarily
from the purchase of short-term investments. TheraTech evaluates its total cash
position by including all its investments. If the net effect of cash used for
the purchases and sales of investments were removed, investing activities would
have used $1,022,000 in the 1998 quarter and would have provided $118,000 in the
1997 quarter. Cash used in the 1998 quarter reflects primarily the purchase of
equipment and the costs to obtain patents. The Company also placed into service
additional production space within its commercial manufacturing facility. Cash
provided in the 1997 quarter reflects primarily the release of $750,000
previously restricted as part of a financing agreement covenant, partially
offset by the purchase of equipment.
Cash used in investing activities is generally 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 three months ended March 31, 1998
and 1997 was $69,000 and $305,000, respectively. Cash used in both the 1998 and
1997 quarters was 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. In April 1998,
TheraTech paid $5,244,000 to retire the note payable which financed its
commercial manufacturing facility. Based upon current expectations of operations
and capital expenditures for 1998, 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.
Page 12 of 14
<PAGE> 13
THERATECH, INC.
-----------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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 Company's future product development and
commercialization, product regulatory approval, operating cash flow and the
Company's liquidity for the future. 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 are those described
under the heading "Risk Factors" and elsewhere in the Company's Report on Form
10-K including, without limitation, the following: the need to continually
develop and commercialize new products; the expensive, time consuming and
uncertain FDA and foreign government approval processes; dependence on
third-party marketing efforts; uncertainty regarding TheraTech's product
development, commercialization opportunities and market acceptance; competitive
and technological factors such as new product or technology introductions by
rival manufacturers and price pressures; dependence on sole source suppliers;
limited history of large-scale manufacturing of newly approved products; and
exposure to product liability and infringement suits.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On February 4, 1998, TheraTech issued 38,961 shares of its Common Stock
to Innovative Devices, LLC ("IDL") in connection with the completion of
a milestone event involving the dry powder inhaler. The issuance was
made pursuant to a technology purchase agreement entered into between
TheraTech and IDL (the "IDL Agreement"). Pursuant to the IDL Agreement,
the shares were contemporaneously transferred to the three owners of
IDL. The stock was issued on the basis of $8.55 per share, the then
applicable fair market value of the Common Stock as determined under the
IDL Agreement. The sale was exempt from registration under the
Securities Act of 1933 by virtue of Section 4(2) thereof. There was no
underwriter involved in the foregoing transaction.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule for the three months ended March 31,
1998.
27.2 Restated Financial Data Schedule for the three months ended
March 31, 1997.
(b) No reports were filed on Form 8-K during the quarter.
Page 13 of 14
<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: May 13, 1998 By: DINESH C. PATEL
----------------------------------------
Dinesh C. Patel, Ph.D.
Chairman, President and
Chief Executive Officer
Date: May 13, 1998 By: ALEXANDER L. SEARL
----------------------------------------
Alexander L. Searl
Senior Vice President and
Chief Financial Officer
Page 14 of 14
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