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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) FEBRUARY 5, 1999
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GALAGEN INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 0-27976 41-1719104
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(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
1275 RED FOX ROAD
M-S 7420
ARDEN HILLS, MINNESOTA 55112
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(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (651) 634-4230
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ITEM 2. OTHER EVENTS
From time to time the Company may report through its press releases
and/or Securities and Exchange Commission filings, certain matters that would be
characterized as forward-looking statements that are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. Certain of these risks and uncertainties are beyond management's
control. Such risks and uncertainties may include, among other things, the
following items. (As used herein, "we," "us" and "our" refer to GalaGen Inc.)
RISK FACTORS
We are a nutritional products company whose mission is to become the
leading presence in foods, beverages and dietary supplements that help enhance
the immune system. To accomplish this mission, we are focusing our efforts
on channels that demand immune-enhancing benefits in certain segments of the
consumer food and beverage product markets and in certain segments of the
critical care nutrition products markets for patients who do not metabolize
food well. A critical factor for our success is our immune-enhancing
ingredient, which is derived from colostrum, the highly nutritious first milk
from a dairy cow, and which has been branded Proventra-TM- Brand Natural Immune
Components ("Proventra").
GENERAL
WORKING CAPITAL AND CAPITAL REQUIREMENTS
Our anticipated cash requirements for working capital depend on numerous
factors. These factors include:
- - our spending on marketing activities, including clinical marketing trials for
certain products acquired from NM Holdings, Inc. (formerly known as Nutrition
Medical, Inc.) ("NMI");
- - our progress in securing strategic alliances;
- - the willingness and ability of our partners in strategic alliances to provide
funding for product development and marketing;
- - our spending on product development programs;
- - the rate of technological advances in the production of our products;
- - our spending on developing manufacturing capabilities; and
- - the status of competitive products.
Our long-term ability to continue funding our planned operations beyond the
first quarter of 2000 depends on our ability to obtain additional funds through:
- - product revenues;
- - equity or debt financing;
- - strategic alliances;
- - license agreements; or
- - other financing sources.
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A lack of adequate funding could eventually result in our insolvency or
bankruptcy. At a minimum, if adequate funds are not available, we may be
required to delay or to eliminate expenditures for certain of our product
development efforts or to license to third parties the rights to commercialize
products or technologies that we would otherwise seek to develop ourselves.
Because of our significant long-term capital requirements, we may seek to raise
funds when conditions are favorable, even if we do not have an immediate need
for such additional capital at such time. If we have not raised funds prior to
when our needs for funding become immediate, we may be forced to raise funds
when conditions are unfavorable, which could result in significant dilution of
our current stockholders.
LOSS OF NASDAQ NATIONAL MARKET LISTING
Our Common Stock is currently listed on the Nasdaq National Market. On
August 22, 1997, the Securities and Exchange Commission (the "SEC") approved a
number of proposed changes to the Nasdaq listing requirements that became
effective February 22, 1998. Under these requirements, a company with a security
listed on the Nasdaq National Market must meet certain quantitative maintenance
criteria for continued listing of the security. Under "Maintenance Standard 1"
for the Nasdaq National Market, which is the maintenance standard most
applicable to our Common Stock, each of the following conditions must be
maintained:
- - our Common Stock must have a minimum bid price of $1 per share;
- - our Common Stock must have a public float of 750,000 shares;
- - the market value of the public float of our Common Stock must be over $5
million;
- - we must have net tangible assets of over $4 million
- - there must be a minimum of 400 round lot holders of our Common Stock; and
- - there must be at least two market makers in our Common Stock.
As of December 31, 1998, all of the requirements for continued listing of
our Common Stock on the Nasdaq National Market were being met. Failure to
maintain the continued listing requirements, or to file a plan acceptable to
Nasdaq for meeting those requirements, may result in the removal of our Common
Stock from listing on the Nasdaq National Market. If, trading privileges in our
Common Stock on the Nasdaq National Market were terminated, we would be required
to demonstrate compliance with the applicable requirements for initial inclusion
of a security on the Nasdaq National Market before our Common Stock would be
listed again on that exchange. The requirements for initial inclusion are more
stringent than those for continued listing. We cannot be sure that our Common
Stock will continue to be listed on the Nasdaq National Market. If we
anticipate that our Common Stock will not qualify for continued listing on the
Nasdaq National Market, we would apply to have its listing transferred to the
Nasdaq Small Cap Market. If the listing of our Common Stock is transferred from
the Nasdaq National Market to the Nasdaq Small
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Cap Market it may be more difficult for broker-dealers to sell our Common Stock.
If our Common Stock is removed from listing on the Nasdaq National Market,
owners of shares of our Common Stock may have difficulty in selling such shares
in the future. Additionally if our Common Stock is removed from listing on
the Nasdaq National Market, it may become more difficult for us to raise
funds though the sale of Common Stock or securities convertible into Common
Stock.
PRODUCT LIABILITY AND INSURANCE RISKS
Our business involves exposure to potential product liability risks that
are inherent in the production, manufacture and distribution of consumer and
clinical food products that are designed to be ingested. We maintain a general
insurance policy that includes coverage for product liability claims up to an
aggregate amount of $2 million. We cannot be sure, however, that we will be able
to maintain such insurance on acceptable terms, that we will be able to secure
increased coverage as the commercialization of our products increases or that
any insurance will provide adequate protection against potential liabilities.
We are not currently a named defendant in any product liability lawsuit. The
successful assertion or settlement of any uninsured claim, a significant number
of insured claims, or a claim exceeding our insurance coverage could have a
material adverse effect on our business and financial condition.
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RELIABILITY OF MARKET DATA
We have obtained market and related data, which we may refer to from time
to time in our press releases or filings with the SEC, from Frost & Sullivan, a
competitive-market analysis firm. We have not independently verified the
accuracy of such information, and, in any event, the methodology typically used
in compiling market and related data means that such data is subject to inherent
uncertainties and estimations. As a result, we cannot be sure as to the
accuracy or completeness of such information. If we rely on inaccurate
market information, the result could have a material adverse effect on our
business and financial condition.
ADEQUATE PROVENTRA PRODUCTION
We believe that our current manufacturing facility will meet the
anticipated requirements for the production of Proventra for use in consumer and
clinical nutritional products through the year 2000. Further, we believe that
contract manufacturers would be available to increase our Proventra production
capacity quickly, if required. However, given our limited experience in
manufacturing Proventra, we cannot be sure that we will be successful in
producing acceptable Proventra on a commercial scale and at acceptable costs in
our pilot plant facility. Our Proventra will be regulated by the Minnesota
Department of Agriculture under the appropriate license. Our inability to
adequately produce Proventra could have a material adverse effect on our
business and financial condition.
SUCCESSFUL COLLABORATIONS
We anticipate that products containing Proventra will be introduced into
certain markets in the last half of 1999 through certain collaborations we have
established with other companies. Whether such products are introduced to test
market on schedule depends on our ability and our collaborators' ability to
accomplish the following:
- - successfully finalize market research;
- - successfully finalize product development;
- - establish product manufacturing;
- - initiate marketing, sales and distribution activities related to such
product; and
- - provide the funding necessary to accomplish such activities.
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Our or our collaborators' inability to bring certain products to market
in 1999 could have a material adverse effect on our business and financial
condition.
PRODUCT DEVELOPMENT COSTS AND TARGET CUSTOMERS
The amount of time it will take us, in conjunction with a strategic
partner, to develop consumer and clinical nutrition products and the
associated costs of such product development depends on, among other things,
results of our market research for consumer and clinical products and on our
discussions with certain end users or purchasers of the potential products.
Such market research and discussions may give us indications of potential
customers, what types of products they may desire and what clinical
information is necessary for effective marketing and sales. Our or our
partner's inability to obtain accurate marketing data, or to develop a
product responsive to the needs identified by such data, could have a
material adverse effect on our business and financial condition.
FUNCTIONAL FOOD AND NUTRACEUTICAL PRODUCTS
FAVORABLE PUBLIC PERCEPTION
We are highly dependent upon consumers' perception of the safety and
quality of our products as well as similar products distributed by other
companies. Thus, the mere publication of reports asserting that such products
may be harmful could have a material adverse effect on our business and
financial condition, regardless of whether such reports are scientifically
supported and regardless of whether the alleged harmful effects would be present
at the dosages recommended for such products.
INGREDIENT RISKS
Some of our products may contain innovative ingredients or combinations of
ingredients that do not have a long history of human consumption. While we
believe all of our products are safe when taken as we direct, there is
little long-term experience with human consumption of certain of these
innovative product ingredients or combinations thereof in concentrated form.
Although we perform research and/or tests the formulation and production of our
products, we will sponsor only limited clinical studies or rely on other outside
published data. If certain of our innovative ingredients produce unwanted
effects, we could be exposed to product liability claims and lose consumer
confidence, which could have a material adverse effect on our business and
financial condition.
COMPETITION IN NUTRITIONAL PRODUCTS MARKET
The nutritional products market is highly competitive with many large
nationally known manufacturers and many smaller manufacturers and marketers of
nutritional products. We currently know of no other company that is developing
or marketing a nutritional food or beverage product that incorporates Proventra
technology combined with active cultures and other ingredients. Potential
competitors, however, could be larger than we are, have greater access to
capital than we do and may be better able to withstand volatile market
conditions than we are. Moreover, because the nutritional products industry
generally has low barriers to entry, additional competitors could enter the
market at any time. Although the nutritional products industry to date has been
characterized by many relatively small participants, national or international
companies (which may include pharmaceutical companies or other suppliers to mass
merchandisers) may seek to enter or to increase their presence in or to
consolidate this industry. Increased competition in the industry could have a
material adverse effect on our business and financial condition.
CRITICAL CARE NUTRITION PRODUCTS
INCREASED SALES VOLUME
On December 23, 1998, we acquired certain critical care nutrition products
from NMI. The products purchased from NMI had annualized sales of approximately
$1.1 million at the time of the acquisition. Our ability to increase sales
levels of the acquired critical care enteral nutrition products depends on our
ability to successfully complete certain clinical marketing studies and the
ability of the sales and marketing group we hired from NMI to effectively
execute its operating sales and marketing plans. We may be materially adversely
affected if we do not complete certain clinical marketing studies or if the
sales and marketing personnel do not effectively execute their operating plans.
PRODUCT ACCEPTANCE AND PRICING
Our products, with the exception of Glutasorb-TM-, are designed to be
substantially equivalent to existing branded competitive products. Although we
believe that the quality and efficacy of our critical care nutrition products
are comparable to branded competitive products, no independent comparison
between our critical care nutrition products and competitive products has been
completed. We cannot be sure that the efficacy or quality of our critical care
nutrition products is, or will be, comparable to branded competitive products.
Furthermore, our name and our products are relatively unknown to large segments
of our target markets. We cannot be sure that our marketing efforts will
achieve sufficient name recognition of our company and of our critical care
nutrition products to significantly enhance revenues, which could have a
material adverse effect on our business and financial condition.
The principal advantage of our critical care nutrition products, with the
exception of Glutasorb, is cost effectiveness. Because these products were
recently acquired, we have not experienced any competitor lowering its prices to
offset any price advantage we may have. We are aware that
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while the products were owned by NMI, at least one competitor in the critical
care nutrition products market lowered prices to various customers of certain
branded products to levels that offset all or part of the price advantage held
by NMI. We believe that any selective price reductions by a competitor may
result in indeterminable lost sales of our competing products. Because much of
our marketing strategy is focused on the price advantage of our critical care
nutrition products, if a competitor selling competitive products reduces or
eliminates the price advantage of our products, we cannot be sure that we will
be able to compete successfully with such a competitor or operate profitably
under such conditions, which could have a material adverse effect on our
business and financial condition.
DEPENDENCE ON CONTRACT MANUFACTURERS
We engage contract manufacturers to produce our critical care nutrition
products according to our specifications. We rely on these manufacturers to
comply with all applicable government regulations and manufacturing guidelines.
We cannot be sure that contract manufacturers will consistently supply adequate
quantities of our products on a timely basis, that such manufacturers will
consistently comply with government regulations or that the quality of such
products will be consistently maintained. In the event of a sale of a defective
product, we would be exposed to product liability claims and could lose customer
confidence. In addition, minimum quantity order requirements imposed by
manufacturers may result in excess inventory levels, requiring additional
working capital and increasing exposure to losses from inventory obsolescence.
Although we believe we could find alternative manufacturers for our products,
any interruption in supply of any of our products could have a material adverse
effect on our business and financial condition.
CUSTOMER CONCENTRATION
Although our experience with our customer base is limited, our critical
care nutrition product sales may become concentrated with a few large
distributors and certain customers. We cannot be sure that orders from such
customers will continue or that our future orders will not significantly
decline, which could have a material adverse effect on our business and
financial condition.
LITIGATION INVOLVING COMPETITORS
Companies in the private label industry are commonly the subject of claims
and lawsuits brought by brand name competitors alleging that on of the private
label products have formulas, labeling or packaging similar to competing brand
name products. Certain of the critical care nutrition products we acquired from
NMI were the subject of a lawsuit alleging patent infringement. The suit was
favorably resolved before we acquired the products. Similar claims may be made
against us by competitors in the future. Competitors may also respond to our
marketing strategy by more aggressively seeking patents on their products to
limit our future product development efforts. If similar allegations are made
against us in the future, some of our current and
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future products may need to be reformulated or repackaged in order for us to
continue to market products that are comparable to competitors' patented
products. While we believe that reformulation of our products is generally
possible, we may be unable to effectively reformulate certain of our products.
We cannot be sure that a reformulated product would be deemed by customers to be
essentially equivalent to the patented product. Moreover, we cannot be sure
that any future lawsuits could be satisfactorily settled by reformulating,
relabeling or repackaging a product. Such litigation may require the commitment
of substantial management time and legal fees. Accordingly, such litigation may
have a material adverse effect on our business and financial condition.
COMPETITION
Our competitors in the critical care nutrition products market are
established companies that sell branded products that have achieved a high
level of customer awareness. Although we believe we are the only company
currently offering cost effective alternatives to the established brands,
other companies may enter this market. If a larger company with significant
financial resources were to compete directly with us in particular market
segments, we cannot be sure that we would be able to compete successfully or
operate profitably, which could have a material adverse effect on our
business and financial condition.
TRADEMARKS
We are in the process of registering existing trademarks, for the products
acquired from NMI, with the United States Patent & Trademark Office. As part of
NMI, the products were not registered but instead relied on NMI's common law
trademark rights. The lack of such registration may impair the ability of the
Company to successfully register the trademarks or to prosecute successfully an
infringement action against other users of these trademarks. We cannot be sure
that our marks do not or will not violate the proprietary rights of others, that
our proprietary rights in the marks would be upheld if challenged, or that we
would not be prevented from using the marks, any of which could have a material
adverse effect on our business and financial condition. In addition, we cannot
be sure that we will have the financial resources necessary to enforce or defend
our trademarks, which could also have a material adverse effect on our business
and financial condition.
GOVERNMENT REGULATION
Our critical care products and potential critical care products are, or
will be, subject to government regulation. Our current products are regulated
as food and medical food by the Food and Drug Administration (the "FDA") and are
subject to certain labeling requirements, current good manufacturing practice
regulations and certain other regulations designed to ensure the safety of the
products.
Claims we make in labeling and advertising our products are subject to
regulation by the FDA, the Federal Trade Commission and various state agencies
under their general
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authority to prevent false, misleading and deceptive trade practices. These
regulations involve stringent tracking, testing and documentation standards.
Failure to comply with such requirements can result in adverse regulatory
action, including injunctions, civil or criminal penalties, product recalls
or the relabeling, reformulation or possible termination of certain products.
Our current and potential products may become subject to further
governmental regulation in the future. The burden of such regulation could
add materially to the costs and risks of our development and marketing
efforts. There can be no assurance that we could obtain the required
approvals or comply with new regulations if our products are subject to
additional governmental regulation in the future. Our failure to obtain
necessary approvals or otherwise comply with government regulations could
have a material adverse effect on our business and financial condition.
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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 hereunto duly authorized.
GALAGEN INC.
Date: February 5, 1999 By /s/ GREGG A. WALDON
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Gregg A. Waldon
Vice President, Chief Financial Officer,
Treasurer and Secretary
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