<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, 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 CTY, 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, 1998
-------------
<TABLE>
<S> <C>
CLASSES OF COMMON STOCK NUMBER OF SHARES OUTSTANDING
----------------------------- ----------------------------
Common Stock, $0.01 par value 21,285,637
</TABLE>
<PAGE> 2
THERATECH, INC.
--------------
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements Page
----
<S> <C>
Condensed Consolidated Statements of Operations --
Three months ended June 30, 1998 and 1997, and six months ended June 30, 1998 and 1997..... 3
Condensed Consolidated Balance Sheets --
June 30, 1998 and December 31, 1997 ....................................................... 4
Condensed Consolidated Statements of Cash Flows --
Six months ended June 30, 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
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders....................................... 15
Item 6. Exhibits and Reports on Form 8-K ......................................................... 15
</TABLE>
Page 2 of 16
<PAGE> 3
THERATECH, INC.
-----------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------- ----------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Research, development and licensing
revenue under collaborative agreements $ 6,292,253 $ 5,152,211 $ 11,965,262 $ 10,711,698
Product sales 4,506,665 3,672,664 9,297,635 6,576,799
Interest and other 323,645 377,623 723,405 750,844
------------- ------------- ------------- -------------
Total revenues 11,122,563 9,202,498 21,986,302 18,039,341
Costs and expenses:
Research and development 4,388,855 3,630,365 9,403,909 8,065,398
Cost of products sold 3,167,965 2,657,633 6,225,926 4,810,182
General and administrative 2,030,072 1,335,134 3,540,586 2,561,219
Interest and other 100,083 257,957 296,248 494,287
------------- ------------- ------------- -------------
Total costs and expenses 9,686,975 7,881,089 19,466,669 15,931,086
------------- ------------- ------------- -------------
Net income $ 1,435,588 $ 1,321,409 $ 2,519,633 $ 2,108,255
============= ============= ============= =============
Net income per share - basic $ 0.07 $ 0.06 $ 0.12 $ 0.10
============= ============= ============= =============
Net income per share - diluted $ 0.07 $ 0.06 $ 0.12 $ 0.10
============= ============= ============= =============
</TABLE>
See accompanying notes.
Page 3 of 16
<PAGE> 4
THERATECH, INC.
-----------------
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997(1)
------------- -------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash, cash equivalents and short-term investments(2) $ 21,360,013 $ 24,377,413
Contracts and accounts receivable 5,470,463 4,847,106
Inventories 2,151,111 2,830,270
Prepaid expenses 394,461 66,095
------------- -------------
Total current assets 29,376,048 32,120,884
Investments in long-term securities(2) 2,005,908 3,001,938
Plant and equipment:
Plant 10,464,197 9,301,171
Equipment 15,890,954 15,039,772
Leasehold improvements 834,896 806,740
Construction in progress 1,264,325 2,395,759
------------- -------------
28,454,372 27,543,442
Less accumulated depreciation and amortization (9,656,622) (8,225,341)
------------- -------------
Net plant and equipment 18,797,750 19,318,101
Other assets:
Intangible assets, net 7,112,209 7,115,879
Other assets 417,065 304,008
------------- -------------
Total other assets 7,529,274 7,419,887
------------- -------------
Total assets $ 57,708,980 $ 61,860,810
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 3,167,893 $ 3,459,427
Current portion of notes payable and capital lease obligations 993,586 1,397,763
Unearned revenue 1,720,692 2,553,237
------------- -------------
Total current liabilities 5,882,171 7,410,427
Notes payable and capital lease obligations, less current portion 1,772,718 7,260,935
Other liabilities 3,040,000 3,420,000
Unearned revenue 212,000 212,000
Commitments and contingencies
Stockholders' equity:
Common stock 212,311 210,193
Additional paid-in capital 71,595,718 70,840,782
Accumulated deficit (24,690,781) (27,210,414)
Cumulative translation adjustment (315,157) (283,113)
------------- -------------
Total stockholders' equity 46,802,091 43,557,448
------------- -------------
Total liabilities and stockholders' equity $ 57,708,980 $ 61,860,810
============= =============
</TABLE>
See accompanying notes.
- -------------
(1) Derived from audited financial statements.
(2) TheraTech's total cash position as of June 30, 1998 and December 31,
1997 was $23,365,921 and $27,379,351, respectively, which includes cash,
cash equivalents, and short- and long-term investments.
Page 4 of 16
<PAGE> 5
THERATECH, INC.
-----------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------------
1998 1997
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,519,633 $ 2,108,255
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,777,140 1,370,914
Common stock issued for in-process technology 333,000
Changes in operating assets and liabilities:
Contracts and accounts receivable (623,357) (684,435)
Inventories 679,159 (602,577)
Prepaid expenses (328,366) 13,823
Accounts payable, accrued liabilities and other liabilities (671,534) (60,376)
Unearned revenue (832,545) 676,621
------------- -------------
Net cash provided by operating activities 2,853,130 2,822,225
INVESTING ACTIVITIES:
Decrease (increase) in investments 2,992,239 (2,786,967)
Purchases of plant and equipment (1,007,342) (976,286)
Purchases of intangible assets (245,777) (178,802)
Changes in other assets (113,057) 672,586
------------- -------------
Net cash provided by (used in) investing activities 1,626,063 (3,269,469)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 424,054 527,221
Payments of notes payable and capital lease obligations (5,892,394) (1,057,582)
------------- -------------
Net cash used in financing activities (5,468,340) (530,361)
Effect of exchange-rate changes on cash and cash equivalents (32,044) 23,768
------------- -------------
Net decrease in cash and cash equivalents (1,021,191) (953,837)
Cash and cash equivalents at beginning of period 14,979,465 19,116,991
------------- -------------
Cash and cash equivalents at end of period 13,958,274 18,163,154
Short-term investments 7,401,739 6,885,118
------------- -------------
Cash, cash equivalents and short-term investments at end of period $ 21,360,013 $ 25,048,272
============= =============
</TABLE>
See accompanying notes.
Page 5 of 16
<PAGE> 6
THERATECH, INC.
--------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 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
June 30, 1998 and the results of its operations and cash flows for the interim
periods ended June 30, 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.
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 Statement 130 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 three months ended June 30, 1998 and 1997, total comprehensive income
amounted to $1,419,696 and $1,400,504, respectively. During the six months ended
June 30, 1998 and 1997, total comprehensive income amounted to $2,487,589 and
$2,132,023, 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 June 30, Six Months Ended June 30,
---------------------------------- ----------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Numerator:
Net income -- Numerator for
basic and diluted net income per
share $ 1,435,588 $ 1,321,409 $ 2,519,633 $ 2,108,255
============= ============= ============= =============
Denominator:
Denominator for basic net
income per share - weighted-average
shares 21,191,116 20,647,453 21,148,380 20,620,693
Effect of dilutive securities:
Stock options 540,450 988,385 561,296 1,121,469
------------- ------------- ------------- -------------
Denominator for diluted net
income per share - adjusted
weighted-average
shares and assumed
conversions 21,731,566 21,635,838 21,709,676 21,742,162
============= ============= ============= =============
Net income per share - basic $ 0.07 $ 0.06 $ 0.12 $ 0.10
============= ============= ============= =============
Net income per share - diluted $ 0.07 $ 0.06 $ 0.12 $ 0.10
============= ============= ============= =============
</TABLE>
Page 6 of 16
<PAGE> 7
THERATECH, INC.
--------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
(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.
INVENTORIES
At June 30, 1998, inventories are stated at the lower of cost or market and
consist of the following:
<TABLE>
<S> <C>
Raw materials $1,913,074
Work in process 219,842
Finished goods 18,195
----------
$2,151,111
==========
</TABLE>
REVENUES
The Company has entered into various collaborative research and development,
product licensing and marketing agreements with certain pharmaceutical and other
companies ("Collaborative Partners"). These agreements provide for TheraTech to
receive payments in various forms which can include: (i) licensing fees and
other payments upon execution of an agreement; (ii) milestone payments upon
achievement of certain technical and regulatory goals; and (iii) periodic cost
reimbursements, which costs include a portion of general and administrative
expenses, for product development and clinical evaluation. Research, development
and licensing revenues are recognized as earned based on terms in the specific
contracts. Milestone payments are included in revenues during the period in
which the applicable milestone is achieved.
TheraTech has also entered into various 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 TheraTech's manufacturing process. Under this commitment,
TheraTech was to purchase, at predetermined prices, fixed quantities of material
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
$1,750,000, or paying a fee of $800,000 to purchase no material. TheraTech has
exercised its option and plans to purchase the material during 1998.
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 TheraTech's 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 16
<PAGE> 8
THERATECH, INC.
--------------
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. For independently developed products, TheraTech has entered into
licensing, marketing and distribution agreements with pharmaceutical and other
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: (i) licensing fees and other payments upon
the execution of an agreement; (ii) milestone payments upon achievement of
certain technical and regulatory goals; and (iii) periodic cost reimbursements,
which costs include a portion of general and administrative expenses, for
product development and clinical evaluation.
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
sales to TheraTech's marketing partners for resale purposes or contract
payments. 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 strengths; and (ii) the Alora(R) estradiol transdermal system
for women in three dosage strengths. 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 16
<PAGE> 9
THERATECH, INC.
--------------
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 5 mg/day Hypogonadism U.K., Ireland, Denmark, Ireland and U.K.); CEPA (Spain);
(Testosterone - Finland, Germany, LABORTERAPIA (Portugal); ASTRA
Transdermal Liquid Sweden and (Scandinavia, Austria, Germany
Reservoir System So. Korea. 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);
(Estradiol - SAMYANG (So. Korea)
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 5 mg 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
2.5 mg NDA and the Androderm 5 mg 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 six months ended June 30, 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 foreign
operations.
Page 9 of 16
<PAGE> 10
THERATECH, INC.
--------------
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 June 30, 1998, TheraTech had net income of $1,436,000
equal to $0.07 per share. This compares to net income of $1,321,000, or $0.06
per share during the three months ended June 30, 1997. The Company had total
revenues of $11,123,000 for the three months ended June 30, 1998 compared to
$9,202,000 for the respective period in 1997.
For the six months ended June 30, 1998, TheraTech had net income of $2,520,000
or $0.12 per share. This compares to net income of $2,108,000, or $0.10 per
share for the corresponding period in 1997. Total revenues year-to-date were
$21,986,000 compared to $18,039,000 for the corresponding period in 1997.
RESEARCH, DEVELOPMENT AND LICENSING REVENUES were $6,292,000 and $5,152,000 for
the three months ended June 30, 1998 and 1997, respectively. During the 1998
quarter, TheraTech entered into an agreement with Astra AB ("Astra") to use
TheraTech's novel oral transmucosal ("OTM") delivery technology to develop a new
pain medication. The product, which Astra plans to market worldwide, will
contain an undisclosed, proprietary peptide under development by Astra and
BioChem Pharma, of Montreal, Canada.
TheraTech earned revenues during the three months ended June 30, 1998 for: (i)
achieving a milestone associated with Phase II clinical trials on the female
testosterone transdermal product with Procter & Gamble Pharmaceuticals, Inc.
("Procter & Gamble"), and cost reimbursements for development activities on this
product; (ii) Phase III clinical and development activities on the
estradiol/progestin combination product for Procter & Gamble; (iii) product
improvements and on-going stability studies on the Alora product with Procter &
Gamble; (iv) preclinical research and development activities on the nicotine
lozenge for SmithKline Beecham Consumer Healthcare; (v) OTM development
activities on the new proprietary pain medication for Astra; and (vi) other
development programs with Collaborative Partners.
For the six months ended June 30, 1998 and 1997, research and development
revenues were $11,965,000 and $10,712,000, respectively. During the six months
ended June 30, 1998, TheraTech earned revenues for: (i) Phase II clinical and
development activities on the female testosterone transdermal product with
Procter & Gamble, which included a milestone payment and cost reimbursements;
(ii) Phase III development activities on the estradiol/progestin combination
product for Procter & Gamble; (iii) preclinical research and development
activities on the nicotine lozenge product under collaboration with SmithKline
Beecham Consumer Healthcare, which included a milestone payment and cost
reimbursements; (iv) a licensing milestone under a new territory testosterone
licensing agreement with Astra; (v) a licensing fee upon entering into an
agreement with Palatin Technologies, Inc. to develop OTM delivery systems for
several peptide products; (vi) preclinical research and development activities
on the OTM delivery technology with Eli Lilly and Company ("Lilly"); and (vii)
other development programs with Collaborative Partners. The milestone payment
received from Procter & Gamble is the primary reason for the increase in
research and development revenues in the 1998 periods.
During the six months ended June 30, 1997, TheraTech earned revenues from the
following: (i) Phase III product development activities on the
estradiol/progestin combination product for Procter & Gamble; (ii) preclinical
research and development activities on the OTM delivery technology with Lilly
under the multi-product agreement signed in January 1997, which also included a
milestone payment and cost reimbursements; (iii) completing Phase III
development activities, interactions with regulatory authorities and
preparations for commercial launch of the estradiol product; (iv) development
activities on the 5 mg testosterone product for SmithKline Beecham and
Wyeth-Ayerst; and (v) other collaborative research, development and licensing
activities.
Page 10 of 16
<PAGE> 11
THERATECH, INC.
--------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
PRODUCT SALES for the three months ended June 30, 1998 were $4,507,000 compared
to $3,673,000 for the 1997 quarter. During the 1998 quarter, TheraTech shipped
pre-launch quantities of the 2.5 mg Androderm to Astra for the commercial launch
of this product in Germany, which occurred in early July 1998. Product sales in
the quarter also included shipments of Androderm to SmithKline Beecham,
shipments of the Face Lift anti-wrinkle product to University Medical; and sales
of the nitroglycerin product in certain European countries reported by
Lavipharm.
During the 1997 quarter, TheraTech continued shipping to Procter & Gamble
initial supplies of Alora, which was launched in May 1997. Also in May 1997,
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 reported by Lavipharm.
Product sales for the six months ended June 30, 1998 were $9,298,000 compared to
$6,577,000 during the corresponding period in 1997. Product sales in the 1998
period consisted primarily of Androderm, including initial supplies of the new
"toned" patch and launch quantities of Androderm for the German market. Product
sales also included the sale of Face Lift, Alora and nitroglycerin. In the 1997
period, product sales consisted primarily of the launch quantities of Alora,
along with Androderm (which included the initial supplies of the 5 mg system)
and nitroglycerin.
INTEREST AND OTHER REVENUES were $324,000 and $378,000 for the three months
ended June 30, 1998 and 1997, respectively, and consisted primarily of interest
income of $309,000 and $374,000, respectively. In April 1998, TheraTech paid
$5,244,000 to retire the note payable which financed its commercial
manufacturing facility. As a result of lower average balances in cash, cash
equivalents and investments, interest income during the 1998 quarter decreased
when compared to the 1997 quarter.
Interest and other revenues for the six months ended June 30, 1998 and 1997 were
$723,000 and $751,000, respectively, and primarily consisted of interest income
totaling $687,000 and $692,000, respectively. Other revenues in the 1998 period
consisted primarily of a gain on the sale of an asset and a refund of insurance
premiums from a prior year, while the 1997 period consisted primarily of
intermediate materials sold to Collaborative Partners.
RESEARCH AND DEVELOPMENT EXPENSES for the three months ended June 30, 1998 and
1997 were $4,389,000 and $3,630,000, respectively. Research and development
expenses for the six months ended June 30, 1998 and 1997 were $9,404,000 and
$8,065,000, respectively.
In June 1998, reports on the results of three studies involving TheraTech's
transdermal testosterone delivery systems were presented at The Endocrine
Society's national conference. Dr. Norman Mazer, TheraTech's Vice President of
Clinical Research, reported on a Phase I study that demonstrated the feasibility
of using transdermal patches to restore testosterone levels to the normal range
in surgically menopausal women. Dr. Steven K. Grinspoon, Assistant Professor of
Medicine at Harvard Medical School and Massachusetts General Hospital, reported
that in his Phase II study of the effects of transdermal testosterone
replacement in the treatment of AIDS wasting in HIV positive women, the patches
were well tolerated, and that a significant weight gain and overall improvement
in several aspects of the patients' quality of life were observed. Dr. Shalender
Bhasin, Professor of Medicine at UCLA and at the Charles R. Drew University of
Medicine and Science, reported that his Phase II study utilizing Androderm(R) to
restore testosterone to normal levels in HIV positive hypogonadal men
demonstrated that testosterone replacement can be safely achieved in these
patients and that on average the patients experienced a three pound weight gain
in lean body mass, a decrease in body fat and an increase in red blood cells.
Page 11 of 16
<PAGE> 12
THERATECH, INC.
--------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Research and development activities conducted during the quarter ended June 30,
1998 were generally a continuation of on-going programs. Research and
development programs during the 1998 period included the following: (i) Phase II
clinical trials and development activities on the female testosterone
transdermal product; (ii) Phase III product development activities on the
estradiol/progestin combination product; (iii) preclinical research and
development activities on the OTM drug delivery technology, including
preclinical trials with a fentanyl tablet to treat breakthrough cancer pain and
Lilly peptides; (iv) continuing support of the Alora product, including on-going
stability studies and product improvements; (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) research on a cell targeted drug delivery program using
drug conjugates to kill targeted cancer cells without killing healthy cells; and
(vii) various other collaboratively and independently developed products and
technologies. The increase in research and development expenses resulted
primarily from commercial scale up activities on the estradiol/progestin
combination product, the completion of a milestone event involving the dry
powder inhaler technology, and a licensing agreement to develop and use a
material in TheraTech's 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) 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, 1998 were $3,168,000,
compared to $2,658,000 for the 1997 quarter. Cost of products sold for the six
months ended June 30, 1998 were $6,226,000, compared to $4,810,000 for the 1997
period. These include direct and indirect manufacturing costs attributable: (i)
in the 1998 periods primarily to the production of Androderm, including initial
supplies of the new "toned" patch and launch quantities for the German market,
along with the production of Face Lift and Alora; and (ii) in the 1997 periods
primarily to the launch quantities of Alora, along with Androderm which included
the initial supplies of the 5 mg system. Gross margin on products sold improved
to 30 percent for the 1998 quarter, compared to 28 percent in the 1997 quarter;
and improved to 33 percent in the 1998 year-to-date period, compared to 27
percent in the corresponding 1997 period. The increase in gross margin, when
compared with the 1997 periods, is primarily due to efficiencies realized from
increased production volumes and the mix of products being produced and shipped.
TheraTech anticipates fluctuations in its gross margin depending on the timing,
mix and volume of products sold to Collaborative Partners.
GENERAL AND ADMINISTRATIVE EXPENSES for the three months ended June 30, 1998 and
1997 were $2,030,000 and $1,335,000, respectively. For the six months ended June
30, 1998 and 1997, general and administrative expenses were $3,541,000 and
$2,561,000, respectively. The increase in expenses, in both the quarter and
year-to-date periods, is primarily due to legal fees associated with business
development activities, the addition of a vice president of marketing and sales,
and the amortization of marketing rights costs.
INTEREST AND OTHER EXPENSES for the three months ended June 30, 1998 and 1997
were $100,000 and $258,000, respectively, and consisted primarily of interest
expense. In April 1998, TheraTech retired the note payable which financed its
commercial manufacturing facility. As a result, interest expense in the current
period decreased in comparison to the prior period. The Company incurred
interest expense of $88,000 and $228,000 for the three months ended June 30,
1998 and 1997, respectively.
Interest and other expenses for the six months ended June 30, 1998 and 1997 were
$296,000 and $494,000, respectively, which consisted primarily of interest
expense totaling $283,000 and $464,000, respectively.
Page 12 of 16
<PAGE> 13
THERATECH, INC.
--------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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, 1998 and
December 31, 1997, TheraTech had cash, cash equivalents and investments totaling
$23,366,000 and $27,379,000, respectively. This decrease was primarily the
result of cash used to retire the note payable which financed TheraTech's
commercial manufacturing facility, along with cash used in investing activities
(when adjusted for the decrease in short-term investments), partially offset
with cash provided by operating activities as reflected in the Condensed
Consolidated Statements of Cash Flows.
Net cash provided by operating activities for the six months ended June 30, 1998
was $2,853,000 compared to $2,822,000 for the six months ended June 30, 1997.
Cash provided in the 1998 period was primarily a result of net income, a
decrease in inventory 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 receivable and prepaid expenses, and decreases in
accounts payable, accrued liabilities, other liabilities and 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 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 six months ended June 30, 1998
provided $1,626,000 compared to net cash used of $3,269,000 for the 1997 period.
Cash provided in the 1998 period was primarily from the maturity and sales of
short-term investments. Cash used in the 1997 period was primarily for 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
purchase and sales of investments were removed, investing activities would have
used $1,366,000 in the 1998 period and $483,000 in the 1997 period. Cash used in
the 1998 period 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 used in the 1997 period
reflects primarily the purchase of equipment and the costs to obtain patents,
partially offset by the release of $750,000 previously restricted as part of a
financing agreement covenant.
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 six months ended June 30, 1998 was
$5,468,000 compared to $530,000 for the six months ended June 30, 1997. Cash
used in the 1998 period primarily reflects the $5,244,000 payment to retire the
note payable which financed TheraTech's commercial manufacturing facility. Cash
used in the 1997 period was primarily for payments on notes payable and capital
lease obligations. In both the 1998 and 1997 periods, cash payments were
partially offset by proceeds from the issuance of stock in the employee stock
purchase plan and the employee stock option plan. 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 13 of 16
<PAGE> 14
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.
Page 14 of 16
<PAGE> 15
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 27, 1998, the
stockholders elected as directors the following:
<TABLE>
<CAPTION>
Name For Withheld
---- --- --------
<S> <C> <C>
Dinesh C. Patel, Ph.D. 17,675,199 1,245,728
Gary L. Crocker 17,686,630 1,234,297
Jay J. Pisik 17,682,154 1,238,773
James T. O'Brien 17,688,629 1,232,298
Boyd J. Poulsen, Ph.D. 17,685,080 1,235,847
Robert K. deVeer, Jr. 17,685,204 1,235,723
Charles D. Ebert, Ph.D. 17,686,580 1,234,347
</TABLE>
In addition, the proposal to ratify and approve an amendment to the TheraTech,
Inc. 1992 Amended and Restated Employees' Stock Option Plan, was passed by the
stockholders (with 9,446,816 votes for, 5,565,451 votes against, 99,992 votes
abstained and 3,808,668 broker non-votes).
At the same meeting, the stockholders ratified the appointment of Ernst & Young
LLP as the Company's independent auditors for 1998 (with 18,484,193 votes for,
395,668 votes against, 41,066 votes abstained).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule for the six months ended June 30, 1998.
27.2 Restated Financial Data Schedule for the six months ended June 30,
1997.
(b) No reports were filed on Form 8-K during the quarter.
Page 15 of 16
<PAGE> 16
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 12, 1998 By: DINESH C. PATEL
------------------
Dinesh C. Patel, Ph.D.
Chairman, President and
Chief Executive Officer
Date: August 12, 1998 By: ALEXANDER L. SEARL
---------------------
Alexander L. Searl
Senior Vice President and
Chief Financial Officer
Page 16 of 16
<PAGE> 17
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
No. Description
- -------- -----------
<S> <C>
27.1 Financial Data Schedule for the six months ended June 30, 1998.
27.2 Restated Financial Data Schedule for the six months ended June
30, 1997.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
THERATECH, INC. CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS FOR THE
SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 13,958,274
<SECURITIES> 7,401,739
<RECEIVABLES> 5,470,463
<ALLOWANCES> 50,000
<INVENTORY> 2,151,111
<CURRENT-ASSETS> 29,376,048
<PP&E> 28,454,372
<DEPRECIATION> 9,656,622
<TOTAL-ASSETS> 57,708,980
<CURRENT-LIABILITIES> 5,882,171
<BONDS> 1,772,718
0
0
<COMMON> 212,311
<OTHER-SE> 46,589,780
<TOTAL-LIABILITY-AND-EQUITY> 57,708,980
<SALES> 9,297,635
<TOTAL-REVENUES> 21,986,302
<CGS> 6,225,926
<TOTAL-COSTS> 19,170,421
<OTHER-EXPENSES> 12,784
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 283,464
<INCOME-PRETAX> 2,519,633
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,519,633
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,519,633
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 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 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>
