FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report under Section 13 of the
Securities Exchange Act of 1934
Quarter ended September 30, 1999
Commission File Number 0-24320
NAPRO BIOTHERAPEUTICS, INC.
Incorporated in Delaware IRS ID No. 84-1187753
6304 Spine Road, Unit A
Boulder, CO 80301
(303) 530-3891
NaPro BioTherapeutics, Inc. ("NaPro" or "the Company") (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
The number of shares outstanding of each of the issuer's classes of common stock
as of October 29, 1999:
Common Stock, $.0075 par value 22,926,804
Non-voting Common Stock, $.0075 par value 395,000
Total number of pages in document--21
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NaPro BioTherapeutics, Inc.
Table of Contents
Page
Part I Financial Information
Consolidated Financial Statements
Balance Sheet3
Statement of Operations 5
Cash Flow Statement 6
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Quantitative and Qualitative Disclosures about Market Risk 18
Part II Other Information
Legal Proceedings 19
Changes in Securities 19
Defaults Upon Senior Securities 19
Submission of Matters to a Vote of Security Holders 19
Other Information 20
Exhibits and Reports on Form 8-K 20
Signatures 21
2
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Part I. Financial Information
Item 1. Consolidated Financial Statements
<TABLE>
<CAPTION>
NaPro BioTherapeutics, Inc.
Balance Sheet
Assets
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 2,257,000 $ 7,244,000
Securities available for sale 200,000 197,000
Accounts receivable 1,487,000 403,000
Inventory 2,598,000 2,713,000
Restricted cash - 1,320,000
Prepaid expense and other 707,000 343,000
---------- ----------
Total current assets 7,249,000 12,220,000
Property and equipment, net 10,711,000 11,558,000
Inventory 1,689,000 1,571,000
Other assets 314,000 317,000
---------- ----------
Total assets $19,963,000 $25,666,000
========== ==========
</TABLE>
See accompanying notes
3
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<TABLE>
<CAPTION>
NaPro BioTherapeutics, Inc.
Balance Sheet
Liabilities and Stockholders' Equity
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
Current liabilities:
<S> <C> <C>
Accounts payable $ 1,405,000 $ 1,317,000
Accrued payroll and payroll taxes 614,000 451,000
Notes payable--current portion 111,000 421,000
Deferred revenue 2,910,000
---------- ----------
Total current liabilities 2,130,000 5,099,000
Notes payable--long term 2,712,000 80,000
Senior convertible debt - 5,176,000
---------- ----------
Total liabilities 4,842,000 10,355,000
Minority interest 622,000 622,000
Senior convertible redeemable preferred stock, Series C - 3,805,000
Stockholders' equity Preferred stock, $.001 par value:
Authorized shares--2,000,000
Issued--none (unaudited in 1999) - -
Non-voting common stock, convertible on disposition
into voting common stock, $.0075 par value:
Authorized shares--1,000,000
Issued and outstanding shares--395,000 (unaudited
in 1999) 3,000 3,000
Common stock, $.0075 par value:
30,000,000 authorized
23,459,695 shares issued in 1999 (unaudited),
and 17,902,407 in 1998 176,000 134,000
Additional paid-in capital 65,303,000 58,045,000
Deficit (49,199,000) (43,618,000)
Treasury stock--539,867 shares in 1999 (unaudited)
and 1,114,525 shares in 1998 (1,784,000) (3,680,000)
---------- ----------
Total stockholders' equity 14,499,000 10,884,000
---------- ----------
Total liabilities and stockholders' equity $19,963,000 $25,666,000
========== ==========
</TABLE>
See accompanying notes
4
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<TABLE>
<CAPTION>
NaPro BioTherapeutics, Inc.
Statement of Operations
(Unaudited)
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 2,181,000 $ 732,000 $ 6,168,000 $ 3,721,000
Expense:
Research, development and cost of
products sold 3,479,000 2,089,000 9,172,000 6,775,000
General and administrative 1,974,000 1,044,000 4,436,000 5,131,000
Loss on retirement of assets - 581,000 - 582,000
---------- ---------- ---------- ----------
5,453,000 3,714,000 13,608,000 12,488,000
---------- ---------- ---------- ----------
Operating loss (3,272,000) (2,982,000) (7,440,000) (8,767,000)
Other income (expense):
License fee 1,300,000 2,950,000 2,320,000 10,770,000
Interest income 136,000 150,000 255,000 413,000
Interest expense (216,000) (248,000) (534,000) (821,000)
---------- ---------- ---------- ----------
Income (loss) before extraordinary
item (2,052,000) (130,000) (5,399,000) 1,595,000
Extraordinary item--loss on early
extinguishment of debt - - (182,000) -
---------- ---------- ---------- ----------
Net income (loss) $(2,052,000) $ (130,000) $(5,581,000) $ 1,595,000
========== ========== ========== ==========
Earnings (loss) per share:
Income (loss) before
extraordinary item $ (0.14) $ (0.01) $ (0.33) $ 0.10
Extraordinary item - - (0.01) -
---------- ---------- ---------- ----------
Net income (loss) $ (0.14) $ (0.01) $ (0.34) $ 0.10
========== ========== ========== ==========
Earnings (loss) per share,
assuming dilution
Income (loss) before
extraordinary item $ (0.14) $ (0.01) $ (0.33) $ 0.09
Extraordinary item - - $ (0.01) -
---------- ---------- ---------- ----------
Net income (loss) $ (0.14) $ (0.01) $ (0.34) $ 0.09
========== ========== ========== ==========
Weighted average shares outstanding 22,307,471 14,949,422 19,753,939 14,196,179
========== ========== ========== ==========
Weighted average shares outstanding,
assuming dilution 22,307,471 14,949,422 19,753,939 16,807,660
========== ========== ========== ==========
</TABLE>
See accompanying notes.
5
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<TABLE>
<CAPTION>
NaPro BioTherapeutics, Inc.
Cash Flow Statement
(Unaudited)
Nine Months Ended
September 30,
------------------------
1999 1998
----- ----
Operating activities
<S> <C> <C>
Net income (loss) $ (5,581,000) $ 1,595,000
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation 1,174,000 1,894,000
Accretion of debt issue cost, warrant allocation
and conversion rights allocation 395,000 331,000
Compensation paid with common stock, options
and warrants 1,040,000 139,000
Interest expense paid with common stock 27,000 290,000
Loss on sales or retirement of assets - 582,000
Loss on early extinguishment of debt 35,000 127,000
Changes in operating assets and liabilities:
Accounts receivable (1,084,000) 1,079,000
Inventory 81,000 (781,000)
Prepaid expense and other assets 117,000 109,000
Accounts payable 89,000 (2,897,000)
Accrued liabilities 163,000 61,000
Deferred revenue (2,910,000) 1,778,000
----------- ----------
Net cash provided (used) by operating activities (6,454,000) 4,307,000
Investing activities
Transfer of restricted cash 1,320,000 (1,609,000)
Additions to property and equipment (435,000) (550,000)
Proceeds from the sale of property and equipment 14,000 40,000
----------- ----------
Net cash provided (used) by investing activities 899,000 (2,119,000)
Financing activities
Proceeds from notes payable 3,208,000 188,000
Debt issue cost (294,000) -
Payments of notes payable (1,232,000) (1,385,000)
Preferred stock dividend (98,000) -
Redemption of preferred stock (2,805,000) -
Proceeds from the sale of common stock, and exercise
of common stock warrants 2,083,000 42,000
Issue cost of common stock (294,000) -
----------- ----------
Net cash provided (used) by financing activities 568,000 (1,155,000)
----------- ----------
Net increase (decrease) in cash and cash equivalents (4,987,000) 1,033,000
Cash and cash equivalents at beginning of period 7,244,000 8,102,000
----------- ----------
Cash and cash equivalents at end of period $ 2,257,000 $ 9,135,000
=========== ==========
See accompanying notes.
</TABLE>
6
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<TABLE>
<CAPTION>
NaPro BioTherapeutics, Inc.
Cash Flow Statement (continued)
(Unaudited)
Nine Months Ended
September 30,
------------------------
1999 1998
----- ----
Supplemental schedule of activity
<S> <C> <C>
Interest paid in cash $ 151,000 $ 141,000
Noncash transactions:
Conversion of senior convertible debt to
common stock 4,958,000 2,141,000
Conversion of convertible preferred shares to
common stock 2,103,000 639,000
Accretion of convertible preferred stock conversion
rights valuation, offering cost and warrant valuation 298,000 323,000
Issuance of common stock as payment of dividends 11,000 182,000
Exchange of preferred shares of subsidiary for
common stock of parent - 1,951,000
Issuance of common stock for compensation
previously accrued - 40,000
Receipt of common stock into treasury - 1,768,000
Contribution of common stock from treasury to
retirement plan 479,000 -
Cashless exercise of warrants 62,000 -
</TABLE>
See accompanying notes.
7
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NaPro BioTherapeutics, Inc.
Notes to Consolidated Financial Statements
September 30, 1999
(Unaudited)
1. Basis of Presentation
The accompanying financial statements are unaudited. However, in the opinion of
management, the financial statements reflect all adjustments, consisting of only
normal recurring adjustments, necessary for fair presentation. Interim results
of operations are not indicative of results for the full year. These financial
statements should be read in conjunction with the NaPro Annual Report on Form
10-K for the year ended December 31, 1998.
<TABLE>
<CAPTION>
2. Inventory September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Raw materials $ 212,000 $ 151,000
Work-in-process 1,170,000 930,000
Finished goods 1,439,000 1,632,000
------------ ------------
$ 2,821,000 $ 2,713,000
============ ============
Non-current inventory
Raw materials $ 1,587,000 $ 833,000
Work-in-process 213,000 738,000
------------ ------------
$ 1,800,000 $ 1,571,000
============ ============
</TABLE>
3. Common Stock
In the September 1999 quarter NaPro issued 1,020,493 shares of common stock in
conversion of $1,528,000 of NaPro's senior convertible debt and issued 7,322
shares of common stock in payment of $11,000 interest on the senior convertible
debt. In the September 1999 quarter NaPro issued 642,873 shares of common stock
in conversion of 1,047 shares of NaPro's senior convertible preferred stock (the
"C Preferred") and issued 3,838 shares of common stock in payment of $6,000 in
dividends on the C Preferred.
In the nine months ended September 1999 NaPro issued 3,597,159 shares of common
stock in conversion of $5,061,000 of NaPro's senior convertible debt and issued
19,234 shares of common stock in payment of $27,000 interest on the senior
convertible debt. In the period NaPro issued 1,299,085 shares of common stock in
conversion of 2,103 shares of the C Preferred and issued 6,761 shares of common
stock in payment of $11,000 in dividends on the C Preferred.
8
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4. Earnings per Share
The following table sets forth the computation of basic and diluted earnings
(loss) per share. In calculating diluted earnings loss per share for the periods
in which a loss is reported, the impact of all additional shares is
antidilutive, and thus not included in the calculation.
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
1999 1998 1999 1998
---- ---- ---- ----
Numerator:
<S> <C> <C> <C> <C>
Net income (loss) $(2,052,000) $ (130,000) $(5,581,000) $ 1,595,000
Preferred stock dividends (236,000) (56,000) (401,000) (182,000)
Preferred stock redemption premium (805,000) - (805,000) -
---------- -------- ---------- ----------
Numerator for basic earnings (loss) per
share - income available to
common stockholders (3,093,000) (186,000) (6,787,000) 1,413,000
Effect of dilutive securities:
Senior convertible debt - - - 50,000
Preferred stock dividends - - - 27,000
---------- -------- ---------- ----------
Numerator for earnings (loss) per share,
assuming dilution - income available to
common stockholders after assumed
conversions $(3,093,000) $ (186,000) $(6,787,000) $ 1,490,000
========== ========== ========== ==========
Denominator:
Denominator for earnings (loss) per share -
weighted average shares outstanding 22,307,471 14,949,422 19,753,939 14,196,179
========== ========== ========== ==========
Senior convertible debt - - - 1,371,339
Convertible preferred stock - - - 796,996
Non-voting common stock - - - 395,000
Stock options and warrants - - - 48,146
---------- -------- ---------- ----------
Dilutive potential common shares - - - 2,611,481
---------- -------- ---------- ----------
Denominator for diluted earnings per share-
adjusted weighted average shares out-
standing and assumed conversions 22,307,471 14,949,422 19,753,939 16,807,660
Earnings (loss) per common share $ (0.14) $ (0.01) $ (0.34) $ 0.10
========== ========== ========== ==========
Earnings (loss) per common share, assuming
dilution $ (0.14) $ (0.01) $ (0.34) $ 0.09
========== ========== ========== ==========
</TABLE>
5. Development Agreement with Abbott Laboratories
On July 23, 1999 NaPro entered into a 20 year collaborative agreement (the
"Agreement") with Abbott Laboratories ("Abbott") to develop and commercialize
one or more formulations of paclitaxel for the treatment of a variety of cancer
indications. The exclusive agreement covers the United States and Canada.
NaPro will be responsible for supply of bulk drug and will jointly conduct
clinical trials with Abbott. Abbott will be responsible for the finishing,
regulatory filings, marketing and sale of the finished drug product. As part of
the Agreement, NaPro has licensed to Abbott its paclitaxel-related patents in
the United States and Canada. Most primary decisions related to the development
program will be made by a joint NaPro-Abbott Development Committee.
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NaPro has and will receive funding from Abbott in the form of development and
marketing milestone payments, a secured loan and an equity investment. On July
26, 1999 NaPro received $5 million, consisting of an initial $1 million
milestone payment, $2 million from the purchase by Abbott of NaPro common stock
at $5.00 per share, and a $2 million draw-down on a secured loan.
NaPro will have access to up to $20 million under a secured loan arrangement
with Abbott. The loan bears a primary interest rate of 6.5% and is due in full
on the earliest of: 1) the second anniversary of the first sale of finished
product by Abbott to a wholesaler or end-user customer following approval of
finished product by the U.S. Food and Drug Administration; 2) the termination of
the Agreement; or 3) January 1, 2007. The loan is limited to a borrowing base of
collateralized assets, recomputed monthly.
Under terms of the Agreement, Abbott will purchase bulk drug from NaPro. Once
the paclitaxel product is approved and commercialized, Abbott will pay a
percentage of its net paclitaxel sales to NaPro, less Abbott's payments to NaPro
for purchase of bulk drug.
6. Retirement of Convertible Securities
On August 2, 1999 NaPro redeemed for cash $2 million of shares of its Series C
Preferred at a cost of $2.8 million including redemption premiums and
outstanding accrued but unpaid dividends. Through September 30,1999 all of the
shares of the C Preferred outstanding at December 31, 1998 has been either
redeemed or converted into common stock. Through August 2, 1999, all of NaPro's
convertible debt outstanding at December 31, 1998 had been redeemed (in January,
1999) or was converted into common stock. Funding for the redemption of NaPro's
convertible debt and the C Preferred was provided by NaPro's current cash and
cash received from Abbott.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis provide information that NaPro's
management believes is relevant to an assessment and understanding of the
Company's financial condition and results of operations. This discussion should
be read in conjunction with the consolidated financial statements and notes
thereto appearing elsewhere herein as well as with the consolidated financial
statements, notes thereto and the related management's discussion and analysis
of financial condition and results of operations included in NaPro's Annual
Report on Form 10-K for the year ended December 31, 1998.
General
NaPro is a natural product pharmaceutical company that is focusing primarily on
the development, manufacture and commercialization of paclitaxel, a
naturally-occurring anti-cancer agent found in certain species of yew (Taxus)
trees.
NaPro has devoted its efforts primarily to the development and implementation of
its proprietary extraction, isolation and purification (EIPTM) technology and
the development of its proprietary semi-synthetic method for producing NaPro
paclitaxel. To advance the development and commercialization of NaPro
paclitaxel, NaPro entered into 20-year, exclusive agreements with F.H. Faulding
& Co., Ltd. ("Faulding") and Abbott Laboratories ("Abbott") for the clinical
development, sales, marketing and distribution of NaPro paclitaxel.
NaPro will be responsible for supply of bulk drug and will jointly conduct
clinical trials with Abbott. Under the Agreement with Abbott, entered into on
July 23, 1999, Abbott will be responsible for the finishing,
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regulatory filings, marketing and sale of the finished drug product. As part of
the Agreement, NaPro has licensed to Abbott its paclitaxel-related patents in
the United States and Canada. Most primary decisions related to the development
program will be made by a joint NaPro-Abbott Development Committee. NaPro-Abbott
have begun recruiting sites and investigators for the next phase of pivotal
studies. Clinical studies to be pursued by NaPro-Abbott will investigate several
different cancers in a variety of populations. The exclusive agreement with
Abbott (The "Abbott Agreement") covers the United States and Canada.
NaPro has and will receive funding from Abbott in the form of development and
marketing milestone payments, a secured loan and an equity investment. On July
26, 1999 NaPro received $5 million, consisting of an initial $1 million fee, $2
million from the purchase by Abbott of NaPro common stock at $5.00 per share,
and a $2 million draw-down on a secured loan. In September 1999 NaPro received
another $1 million under the secured loan. NaPro incurred $300,000 of debt issue
cost and $300,000 of stock issue cost, which have been netted against the loan
proceeds and stock proceeds, respectively. In addition to payments already
received, NaPro may receive up to $6 million in the fourth quarter of 1999
consisting of another $1 million in fees, an additional $2 million equity
investment (both of which are subject to certain operating milestones) and
additional advances under the secured loan of up to $3 million.
Contingent upon NaPro's successful achievement of all development milestones and
including all payments expected in 1999, NaPro could receive up to $48 million
from Abbott consisting of $38 million in development fees and $10 million for
the purchase of 2 million shares of NaPro common stock. In addition, NaPro also
will have access to up to $20 million under the secured loan with Abbott. The
loan bears a primary interest rate of 6.5% and is due in full on the earlier of:
1) the second anniversary of the first sale of finished product by Abbott to a
wholesaler or end-user customer following approval of finished product by the
U.S. Food and Drug Administration ("FDA"); 2) the termination of the Abbott
Agreement; or 3) January 1, 2007. The loan is limited to a borrowing base of
collateralized assets, recomputed monthly.
Contingent upon achieving certain commercial sales thresholds over several years
after regulatory approval is received, NaPro may receive additional milestone
payments from Abbott of up to $57 million. No assurance can be given that
regulatory approval will be received or sales thresholds will be achieved.
Under terms of the Abbott Agreement, Abbott will purchase bulk drug from NaPro.
Once the paclitaxel product is approved and commercialized, Abbott will pay a
percentage of its net paclitaxel sales to NaPro, less Abbott's payments to NaPro
for purchase of bulk drug.
In 1992 NaPro formed a strategic alliance through an exclusive agreement with
Faulding. Pursuant to this agreement, Faulding Agreed to fund and, with NaPro's
input, undertake the clinical trials to obtain regulatory approvals for
commercializing NaPro's paclitaxel in its territory. NaPro is responsible for
supplying Faulding with NaPro's paclitaxel for clinical trials and commercial
purposes and Faulding is required to purchase all of its paclitaxel requirements
from NaPro. Faulding pays a fixed price for non-commercial sales and a
substantial share of gross revenue for NaPro's paclitaxel sold commercially.
There can be no assurance that Faulding will succeed in obtaining further
regulatory approvals to market NaPro's paclitaxel within its territory.
Furthermore, if such approvals are gained, there can be no assurance that
Faulding will market NaPro's paclitaxel successfully in these additional
countries.
NaPro is in discussions with a number of international pharmaceutical companies
to assist NaPro in developing and marketing NaPro paclitaxel in various other
parts of the world. NaPro is currently dependent for revenue exclusively on
sales of NaPro paclitaxel and on royalties and payments related to licensed
technology.
11
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NaPro has initiated and is co-managing with Abbott clinical studies exploring
the use of its patented formulation of paclitaxel using its patented method of
administration. NaPro anticipates that information gained in such studies will
be useful in the filing of a New Drug Application with the FDA for NaPro
paclitaxel. The cost of such studies is increasing and will be significant.
Through September 30, 1999, NaPro's production of paclitaxel was limited
primarily to research and small-scale production, and much of NaPro's product
sales and production were for use in clinical trials and for research and
development purposes. Accordingly, NaPro has generated only limited revenue from
such activities and has incurred significant losses, including operating losses
of $13.4 million, $13.8 million and $7.1 million for the years ended December
31, 1998, 1997 and 1996, respectively. For the nine months ended September 30,
1999, NaPro recorded an operating loss of $7.4 million. The accumulated deficit
at September 30, 1999 was $49.2 million. NaPro expects that it will continue to
have a high level of operating expense and will be required to make significant
up-front expenditures in connection with its clinical trials, product
development, biomass procurement, and other research and development activities.
NaPro anticipates that losses will continue until such time, if ever, as NaPro
is able to generate sufficient revenue to support its operations.
NaPro believes that its ability to generate revenue depends primarily on its
ability to obtain regulatory approval in the United States or another major
market for the commercial sale of NaPro paclitaxel, on its ability to obtain
partners, on its ability to obtain regulatory approval for its manufacturing
facilities and on its ability to construct manufacturing facilities that produce
quantities of NaPro paclitaxel sufficient to supply its strategic partners'
requirements for commercial sales. Moreover, NaPro's future growth and
profitability will depend on the success of its strategic partners in fostering
acceptance in the oncological market for NaPro paclitaxel as a preferred dosing
regimen of taxane chemotherapy to be used alone or in combination with other
chemotherapeutic agents.
In January 1995, Faulding received approval to market NaPro paclitaxel
commercially in Australia under the trade name ANZATAX(TM). Faulding's
effectiveness in marketing NaPro paclitaxel in Australia and other markets will
continue to have a significant affect on NaPro's operations.
Prior to March 1998 NaPro had an agreement with IVAX Corporation ("IVAX") for
the clinical development, sales, marketing and distribution of NaPro paclitaxel.
In February 1997, Bristol-Myers Squibb Company ("Bristol") submitted a
Supplemental New Drug Application with orphan drug designation for paclitaxel
for the treatment of Kaposi's sarcoma ("KS") before the filing by IVAX of a New
Drug Application ("NDA") for the same indication. The Bristol application was
approved by the FDA in August 1997. Under the Orphan Drug Act of 1983, this
approval resulted in IVAX/NaPro being denied marketing approval for the KS
indication for seven years.
In February 1998, due to the delay in receiving marketing approval for NaPro
paclitaxel, NaPro underwent a restructuring to decrease overall cost. As part of
the restructuring NaPro temporarily closed its British Columbia manufacturing
facility and suspended construction of its commercial scale manufacturing
facility in Boulder, Colorado. Completion of the Boulder facility will require
additional financing, which NaPro intends to seek at such time, if ever, as
NaPro anticipates sufficient product demand to warrant completion of the
facility.
In March 1998, NaPro and IVAX terminated their development and marketing
relationship. That termination left NaPro free to seek regulatory approvals and
market NaPro
12
<PAGE>
paclitaxel under the Abbott Agreement and to seek an international partner or
partners with which to pursue regulatory approvals and marketing of NaPro
paclitaxel outside the territory contractually allocated to Faulding. There can
be no assurance that NaPro will be able to secure such approvals or form new
long-term relationships for the approval, marketing, and distribution of NaPro
paclitaxel in these areas, or that NaPro, Abbott or international partners, if
found, will be able to effectively market NaPro paclitaxel.
Results of Operations
Quarter ended September 30, 1999, compared to the quarter ended September 30,
1998 Sales for the 1999 quarter were $2.2 million, an increase of $1.5 million
from the 1998 quarter. The increase related primarily to an increase in product
shipments to Faulding, as well as inclusion in the 1999 quarter of final
shipment to IVAX. While shipments to Faulding have increased for the year, NaPro
cannot be assured of an increased level of sales for future years. Shipments to
strategic partners will vary significantly on a quarter-to-quarter basis
depending on a number of factors including changes in market demand, changes in
approved markets, and the level of inventory carried by the strategic partners.
This quarter-to-quarter variability will continue until stable commercial demand
has been established for the product in a major market.
Research and development and cost of products sold expense for the 1999 quarter
was $3.5 million, an increase of $1.4 million from the 1998 quarter. The
increase resulted primarily from an increase in the level of cost of product
sold because of higher sales volume.
General and administrative expense for the 1999 quarter was $2 million, an
increase of $1 million from the 1998 quarter. The increase was primarily
attributable to bonuses and retroactive pay increases made after closing of the
Abbott Agreement.
License fee income for the 1999 quarter was $1.3 million, a decrease of $1.7
million from the 1998 quarter. The 1999 amount included $1 million in license
fees under the Abbott Agreement. The 1998 amount included $2.6 million in
license fees under the IVAX termination agreement upon the issue of a European
patent. License fees and milestone payments are unusual and may be
non-recurring. No further payments are expected under the IVAX termination.
Nine months ended September 30, 1999, compared to the nine months ended
September 30, 1998 Sales for the 1999 period were $6.2 million, an increase of
$2.5 million from the 1998 period. The increase related primarily to an increase
in product shipments to Faulding.
Research and development and cost of products sold expense for the 1999 period
was $9.2 million, an increase of $2.4 million from the 1998 period. The increase
resulted primarily from an increase in the level of cost of products sold
because of higher sales volume, increased clinical trial expense and increased
semi-synthesis development expense.
General and administrative expense for the 1999 period was $4.4 million, a
decrease of $700,000 from the 1998 period. The decrease was primarily
attributable to the cost associated with the IVAX termination and decreased
legal fees.
License fee income for the 1999 period was $2.3 million, a decrease of $8.5
million from the 1998 period. This income related to a license fee paid by IVAX
in conjunction with the termination agreement, except for $1 million received in
1999 relating to the Abbott Agreement.
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<PAGE>
Interest income for the 1999 period was $300,000, a decrease of $100,000 from
the 1998 period. This decrease was primarily due to a decrease in invested cash.
Interest and other expense for the 1999 period was $500,000, a decrease of
$300,000 from the 1998 period. The decrease was attributable largely to a
smaller balance due on the senior convertible debt.
Extraordinary item for the 1999 period was $200,000. There was no similar amount
in the 1998 period. This item was a loss on early extinguishment of debt
resulting from the early redemption of a portion of the senior convertible debt.
Liquidity and Capital Resources
NaPro's capital requirements have been and will continue to be significant. At
September 30, 1999, NaPro had a working capital balance of $5.1 million. This
compared to a working capital balance of $7.1 million as of December 31, 1998.
To date, the funding of NaPro's capital requirements has been dependent
primarily on the net proceeds of public offerings of its common stock of
approximately $21.1 million, on private placements of its equity securities of
approximately $38.5 million, on the exercise of warrants and options of $5.9
million, and on net borrowings of $2.8 million.
On July 23, 1999, NaPro entered into the Abbott Agreement, which is expected to
be a significant ongoing capital source. See "General".
NaPro's existing capital, anticipated 1999 sales, and proceeds from transactions
with Abbott are expected to provide adequate capital to fund NaPro's necessary
operations and capital expenditures in the near future. Pharmaceutical
development is, however, a costly and time consuming process. NaPro is actively
pursuing additional partners for international marketing territories to assist
in the development and marketing of its products, and may seek other forms of
long-term financing should such financing become available on acceptable terms.
In June 1997, NaPro privately placed $10.3 million of senior convertible debt,
which bore interest at 5% payable in cash or in common stock at NaPro's option.
The notes were convertible into common stock at a 10% discount from the lowest
market price of the common stock during specified periods prior to conversion.
In the September 1999 quarter NaPro issued 1,020,493 shares of common stock in
conversion of $1.5 million principal of the notes, and 7,322 shares of common
stock in payment of $11,000 interest on the notes. In the nine months ended
September 1999 NaPro issued 3,597,159 shares of common stock in conversion of
$5.1 million principal of the notes, and 19,234 shares of common stock in
payment of $27,000 interest on the notes. None of the senior convertible debt
remained outstanding at September 30, 1999.
In December 1997, NaPro privately placed 5,000 shares of its Senior Convertible
Redeemable Preferred Stock Series C (the "C Preferred") for an aggregate
issuance amount of $5 million. The C Preferred accrued dividends at 5% per year
payable in common stock or cash at NaPro's option. The C Preferred was
convertible into common stock at a 5% discount from the market price during
specified periods prior to the conversion date. In the September 1999 quarter
NaPro issued 642,873 shares of common stock in conversion of $1 million of
shares of the C Preferred and 3,838 shares of common stock in payment of $6,000
of dividends on the C Preferred. In the nine months ended September 1999 NaPro
issued 1,299,085 shares of common stock in conversion of $2.1 million of shares
of the C Preferred and 6,761 shares of common stock in payment of $11,000 of
dividends on the C Preferred. In August 1999 NaPro exercised its right to redeem
14
<PAGE>
$2 million of C Preferred for $2.8 million including premium and accrued
dividends. No C Preferred shares remained outstanding at September 30, 1999
Under terms of the termination agreement with IVAX, IVAX received a
royalty-free, limited, non-exclusive license to one of NaPro's patents (the
"Patent") in the United States, Europe and certain other world markets. In
return, NaPro received a cash payment of $6 million, $2 million of which was
placed in escrow to be released as remaining product was delivered. In April,
1998, IVAX returned approximately 1.1 million shares of NaPro common stock. In
addition, upon the issuance of the Patent in various countries, IVAX made
additional payments of $6.4 million. NaPro manufactured a fixed amount of
paclitaxel for delivery to IVAX periodically through August 1999. In the
September 1999 quarter NaPro received the final $300,000 of the escrow. NaPro
will receive no further payment under the IVAX termination agreement.
Working Capital and Cash Flow Cash and cash equivalents decreased $4.9 million
to $2.3 million for the nine months ended September 30, 1999 from $7.2 million
at December 31, 1998. During the 1999 period net cash used by operations was
$6.5 million. Investing activity provided cash of $900,000 while financing
activity provided $600,000. Prior to closing the Abbott Agreement NaPro had
typically obtained cash in relatively large amounts and thus at times, such as
December 31, 1998, had carried relatively large balances of cash. As discussed
above, the Abbott Agreement includes a $20 million secured loan arrangement.
Within the terms of the Agreement NaPro will draw cash on the loan as and when
needed.
Accounts receivable increased $1.1 million to $1.5 million at September 30, 1999
from $400,000 at December 31, 1998. The increase was primarily attributable to
the timing of sales to Faulding.
Capital Expenditures NaPro expended $400,000 during the first nine months of
1999 for capital projects, primarily for plantation cost.
Since the FDA's determination that NaPro paclitaxel could not be marketed in the
U.S. for KS during Bristol's period of exclusivity under the Orphan Drug Act,
NaPro significantly reduced the scope of its operations and reduced or delayed
capital expenditures. The recent execution of the Abbott Agreement (see above)
may significantly change NaPro's planned capital expenditures.
The amount and timing of future capital expenditures will depend upon numerous
factors, including the receipt or non-receipt of regulatory approval for the
sale of NaPro paclitaxel in a major market, the establishment of additional
strategic relationships, the progress of NaPro's research and development
programs, the magnitude and scope of these activities, the cost of preparing,
filing, prosecuting, maintaining and enforcing patent claims and other
intellectual property rights, competing technological and marketing
developments, changes in or terminations of existing strategic relationships and
the cost of manufacturing scale-up. NaPro may seek additional long-term
financing to fund capital expenditures should such financing become available on
terms acceptable to NaPro.
Year 2000 Issue Until recently many computer programs used only the last two
digits to refer to a year. Such programs do not properly recognize a year that
begins with "20" instead of the familiar "19". If not corrected, many computer
applications could fail or create erroneous results. This matter is commonly
referred to as the Year 2000 issue or Y2K.
Two years ago NaPro implemented a review of its systems and other assets which
could be subject to Y2K. NaPro has completed the review of its primary systems
and has brought all of the systems into Y2K compliance.
15
<PAGE>
NaPro is assessing its secondary systems and other assets, including
microprocessor-controlled equipment, and expects to complete that assessment no
later than November 1999. The potential for significant interruption from
secondary systems exists, although NaPro believes that the likelihood of
interruption caused by Y2K failures in secondary systems is small.
In addition to its internal systems NaPro is evaluating potential impact on
NaPro of Y2K issues with its vendors and customers. NaPro cannot directly
control Y2K compliance by its vendors and customers. NaPro is communicating with
its key vendors and customers regarding this matter. NaPro knows of no vendor or
customer that has Y2K issues that have a potential of interrupting NaPro in a
manner that could significantly adversely affect NaPro's operations. However,
NaPro uses a number of vendors that NaPro believes to be the best or the only
qualified source of a particular good or service. Sales to NaPro's customers
potentially could be interrupted by customers' Y2K issues. Should a significant
customer incur Y2K problems with its testing, release or other systems, NaPro's
sales could be materially affected. NaPro will continue to monitor the level of
Y2K compliance with respect to its key vendors and customers and will further
develop contingency plans to cover the failure of a key vendor, including
identification and qualification of alternative suppliers. Management believes
that exposure to vendor or customer Y2K issues creates no material risk to
NaPro. However, no assurance can be given with certainty that Y2K issues with
vendors or customers will not significantly affect NaPro.
NaPro's Y2K effort has caused no significant deferral of other information
technology projects.
NaPro's Y2K contingency plan includes completion of the evaluation and
remediation process discussed above, including communication with its key
vendors and customers regarding potential for Y2K issues; identification of the
best alternative vendor for sensitive goods and services; coordination and
planning with such alternative vendors.
Management believes that Y2K issues related to both internal and external
systems will have no material effect on NaPro's business, results of operations
or financial condition, and that NaPro's Y2K risk is not material. However, no
such assurance can be given with certainty. The cost of addressing Y2K has not
been material; management believes that the cost of completing Y2K compliance
will not be material.
Special Note Regarding Forward-looking Statements
Certain statements in this Report constitute "forward-looking statements" within
the meaning of the federal securities laws, including the Private Securities
Reform Act of 1995. In addition, NaPro or persons acting on its behalf sometimes
make forward-looking statements in other written and oral communications.
Forward-looking statements can be identified by the use of words such as
"believes", "intends", "may", "should", "anticipates, "expected" or comparable
terminology or by discussions of strategies or trends. Such forward-looking
statements may also include, among other things:
statements concerning NaPro's plans, objectives and future economic
prospects, such as matters relative to seeking and obtaining additional
strategic partners;
the prospects for and timing of regulatory approvals;
the completion of clinical trials and regulatory filings;
the timing and likelihood of the receipt of payments from the strategic
partners;
16
<PAGE>
the availability of patent and other protection for its intellectual
property;
the need for and availability of additional capital;
the amount and timing of capital expenditures;
the timing of product introductions and revenue;
the availability of raw materials;
prospects for future operations; and
other statements of expectations, beliefs, future plans and strategies,
anticipated events or trends and similar expressions concerning matters
that are not historical facts.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of NaPro, or industry results, to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things,
the effectiveness of NaPro paclitaxel and other pharmaceuticals
developed by NaPro in treating disease;
the results of clinical studies;
the business abilities and judgment of NaPro's management and other
personnel;
competition from Bristol and other existing and new producers of
paclitaxel and other drugs;
the results of research and development activities;
technological advances in cancer treatment and drug development;
the ability to obtain and enforce patents;
the ability to obtain raw materials and commercialize manufacturing
processes;
the ability to obtain rights to technology;
the effect of capital market conditions and other factors on capital
availability for NaPro and other biopharmaceutical companies;
the availability of qualified personnel;
the ability of Abbott and Faulding to perform their obligations under
their existing agreements with NaPro;
17
<PAGE>
the ability of NaPro to establish relationships with capable strategic
partners to develop and market NaPro paclitaxel in the territories not
covered by the Abbott and Faulding agreements;
changes in and compliance with governmental regulations;
the effect on NaPro's revenue, cash flow and earnings from foreign
exchange rate fluctuations;
adverse economic and general business conditions;
any Y2K issues of NaPro, its customers or vendors;
and other factors described or referenced in this Report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Following the final delivery of product to IVAX in August 1999 under the IVAX
termination agreement, sales of NaPro paclitaxel to Faulding will constitute
substantially all of NaPro's revenue until NaPro begins making sales to Abbott
under the Abbott Agreement. Faulding purchases NaPro paclitaxel at a price which
varies in proportion to the price at which Faulding sells the product.
Faulding's sales are made in the currencies of each of the countries in which it
sells NaPro paclitaxel. As a result, NaPro's revenue from sales of NaPro
paclitaxel is affected by fluctuations in the value of these various foreign
currencies relative to the U.S. dollar. Faulding's largest single market is
Australia, accounting for approximately 39% of Faulding's commercial sales
during the year ended March 1999. If changes in foreign currency markets cause a
decrease in the price per gram NaPro receives from Faulding, there could be a
material adverse effect on NaPro's earnings and cash flow. For example, during
the year ended March 1999, NaPro's revenue attributable to sales of NaPro
paclitaxel to be resold commercially by Faulding totaled $2.2 million. Had there
been negative pressure on the relevant exchange rates such that the price had
been reduced by 20%, NaPro's revenue for the year ended March 1999 would have
been reduced by approximately $400,000 and NaPro would have experienced
materially reduced cash flow. While sales to Faulding will continue to have a
significant impact on NaPro's revenue in the near term, NaPro's future revenue
and success will be dependent upon obtaining regulatory approvals and on
Abbott's success in marketing NaPro paclitaxel, of which there can be no
assurance.
Prior to July 1999, NaPro's fixed rate indebtedness was represented by its
senior convertible debt, all of which had either been converted, repurchased or
redeemed by July 26, 1999. During the third quarter 1999, NaPro borrowed $3
million from Abbott under a credit facility under which, subject to certain
conditions, it may borrow up to $20 million. As this loan bears interest at a
fixed rate of 6.5%, NaPro's indebtedness under this loan will not be sensitive
to market rate fluctuations. NaPro currently does not use derivative financial
instruments to manage its interest rate risk and has no cash flow exposure due
to general interest rate changes for its fixed interest rate debt.
Part II--Other Information
Item 1. Legal Proceedings
There were no material developments in NaPro's legal proceedings in the
September 1999 quarter. See discussion in the June 30, 1999
18
<PAGE>
Form 10-Q.
Item 2. Changes in Securities
In the September 1999 quarter, NaPro issued 1,020,493 shares of common stock in
conversion of $1.5 million of NaPro's convertible debt and issued 7,322 shares
of common stock in payment of $11,000 interest on the convertible debt. In the
September 1999 quarter, NaPro issued 642,873 shares of common stock in
conversion of 1,047 shares of NaPro's C Preferred and issued 3,838 shares of
common stock in payment of $6,000 in dividends on the C Preferred. The issuance
of shares of common stock upon conversion of the convertible debt and C
Preferred was exempt from registration under section 3(a)(9) of the Securities
Act of 1933, as amended (the "Securities Act"). The issuance of shares of common
stock in the payment of interest and dividends was exempt as a private placement
to sophisticated investors under section 4(2) of the Securities Act and
Regulation D thereunder.
On July 23, 1999, NaPro issued 400,000 shares of common stock to Abbott for
$2,000,000. The issuance of these shares of common stock was exempt as a private
placement to a sophisticated investor under section 4(2) of the Securities Act.
On October 4, 1999, NaPro issued 5,000 shares of common stock to the former C
Preferred shareholder for $10,000 upon exercise of warrants. The issuance of
shares of common stock upon exercise of these warrants was exempt from
registration under section 4(2) of the Securities Act and Regulation D
thereunder.
Item 3. Defaults upon Senior Securities. None.
Item 4 Submission of Matters to a Vote of Securities Holders.
At the Annual Meeting of Stockholders held on October 28, 1999 (the "Annual
Meeting"), the following proposals were adopted by the margins indicated:
1. The election of one Class III directors to hold office until the 2002
annual meeting of stockholders:
Number of Shares
----------------------
Nominee For Withheld
------- --- --------
Sterling K. Ainsworth 21,324,694 321,949
In addition, the terms for the following members of the Board of Directors
continued after the Annual Meeting although no vote was taken: Leonard P.
Shaykin, Patricia A. Pilia, Ph.D., Arthur H. Hayes, Jr., M.D., Stanley Knowlton,
and Seth Rudnick, M.D.
2. Approval of an amendment to NaPro's 1994 Long-Term Performance
Incentive Plan increasing the number of shares of common stock issuable
thereunder:
Number of Shares
----------------
For 18,800,796
Against 2,049,513
Abstain 796,334
19
<PAGE>
3. The ratification of the selection by the Board of Directors of Ernst &
Young LLP as NaPro's independent auditors for the year ending December
31, 1999.
Number of Shares
----------------
For 21,603,128
Against 30,033
Abstain 13,482
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K
NaPro filed a Current Report on Form 8-K dated July 23, 1999 reporting the
agreement with Abbott Laboratories for the clinical development, sales,
marketing and distribution of NaPro paclitaxel.
Exhibit
Number Description of Exhibit
10.1 Development, License and Supply Agreement, dated as of July 23, 1999,
by and between NaPro and Abbott, incorporated herein by reference to
NaPro's Current Report on Form 8-K dated July 23, 1999 (File No.
0-243201)
10.2 Stock Purchase Agreement, dated as of July 23, 1999, by and between
NaPro and Abbott, incorporated herein by reference to NaPro's Current
Report on Form 8-K dated July 23, 1999 (File No. 0-243201)
10.3 Loan and Security Agreement, dated as of July 23, 1999, by and between
NaPro and Abbott, incorporated herein by reference to NaPro's Current
Report on Form 8-K dated July 23, 1999 (File No. 0-243201)
27.1 Financial Data Schedule.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, NaPro has
duly caused this report to be signed on its behalf.
NaPro BioTherapeutics, Inc.
November 12, 1999 /s/ Leonard P. Shaykin
----------------------
Leonard P. Shaykin
Chairman of the Board
Chief Executive Officer
November 12, 1999 /s/ Gordon Link
----------------------
Gordon Link
Vice President
Chief Financial Officer
(Principal Financial Officer)
November 12, 1999 /s/ Robert L. Poley
----------------------
Robert L. Poley
Controller
(Principal Accounting Officer)
20
<PAGE>
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