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 June 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 August 6, 1999:
Common Stock, $.0075 par value 22,828,243
Non-voting Common Stock, $.0075 par value 395,000
Total number of pages in document--21
<PAGE>
NaPro BioTherapeutics, Inc.
Table of Contents
Page
Part I Financial Information
Consolidated Financial Statements
Balance Sheet 3
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 20
Submission of Matters to a Vote of Security Holders 20
Other Information 20
Exhibits and Reports on Form 8-K 20
Signatures 21
1
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Part I. Financial Information
Item 1. Consolidated Financial Statements
NaPro BioTherapeutics, Inc.
Balance Sheet
Assets
June 30, December 31,
1999 1998
(unaudited)
Current assets:
Cash and cash equivalents $ 2,386,000 $ 7,244,000
Securities available for sale 197,000 197,000
Accounts receivable 1,237,000 403,000
Inventory 1,923,000 2,713,000
Restricted cash 300,000 1,320,000
Prepaid expense and other 911,000 343,000
-------------- ---------------
Total current assets 6,954,000 12,220,000
Property and equipment, net 11,018,000 11,558,000
Inventory 1,971,000 1,571,000
Other assets 317,000 317,000
-------------- --------------
Total assets $ 20,260,000 $ 25,666,000
============= =============
See accompanying notes
2
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NaPro BioTherapeutics, Inc.
Balance Sheet
Liabilities and Stockholders' Equity
June 30, December 31,
1999 1998
(unaudited)
Current liabilities:
Accounts payable $ 1,288,000 $ 1,317,000
Accrued payroll and payroll taxes 533,000 451,000
Notes payable--current portion 164,000 421,000
Senior convertible debt 1,360,000 -
Deferred revenue 668,000 2,910,000
------------- -------------
Total current liabilities 4,013,000 5,099,000
Notes payable--long term - 80,000
Senior convertible debt - 5,176,000
------------- ------------
Total liabilities 4,013,000 10,355,000
Minority interest 622,000 622,000
Senior convertible redeemable
preferred stock, Series C 2,825,000 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
1999 (unaudited), 21,138,164 shares
issued in and 17,902,407 in 1998 159,000 134,000
Additional paid-in capital 61,569,000 58,045,000
Deficit (47,147,000) (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 12,800,000 10,884,000
------------- -------------
Total liabilities and stockholders' equity $ 20,260,000 $ 25,666,000
============= =============
See accompanying notes
3
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NaPro BioTherapeutics, Inc.
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------ ------ ------ -----
<S> <C> <C> <C> <C>
Sales $ 1,950,000 $ 574,000 $ 3,987,000 $ 2,989,000
Expense:
Research, development and
cost of products sold 2,882,000 2,041,000 5,693,000 4,686,000
General and administrative 1,240,000 2,212,000 2,462,000 4,088,000
------------- ------------- ------------- ------------
4,122,000 4,253,000 8,155,000 8,774,000
------------- ------------- ------------- ------------
Operating loss (2,172,000) (3,679,000) (4,168,000) (5,785,000)
Other income (expense):
License fee 680,000 3,750,000 1,020,000 7,820,000
Interest income 44,000 170,000 119,000 263,000
Interest expense (142,000) (280,000) (318,000) (573,000)
------------- ------------- ------------- -------------
Income (loss) before extraordinary
item (1,590,000) (39,000) (3,347,000) 1,725,000
Extraordinary item--loss on early
extinguishment of debt --- --- (182,000) ---
------------------ ------------------ ------------- -------------
Net income (loss) $(1,590,000) $ (39,000) $(3,529,000) $ 1,725,000
============ ============= ============ ===========
Earnings (loss) per share:
Income (loss) before
extraordinary item $ (0.09) $ (0.01) $ (0.19) $ 0.12
Extraordinary item --- --- (0.01) ---
------------------ ------------------ ---------------- -------------
Net income (loss) $ (0.09) $ (0.01) $ (0.20) $ 0.12
=============== =============== =============== ===============
Earnings (loss) per share,
assuming dilution
Income (loss) before
extraordinary item $ (0.09) $ (0.01) $ (0.19) $ 0.11
Extraordinary item --- --- $ (0.01) ---
------------------ ------------------ --------------- -------------
Net income (loss) $ (0.09) $ (0.01) $ (0.20) $ 0.11
=============== =============== =============== ===============
Weighted average shares outstanding 19,239,884 14,074,373 18,456,012 13,813,316
============ ============ ============ ===========
Weighted average shares outstanding,
assuming dilution 19,239,884 14,074,373 18,456,012 15,795,390
============ ============ ============ ============
</TABLE>
See accompanying notes.
4
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<TABLE>
<CAPTION>
NaPro BioTherapeutics, Inc.
Cash Flow Statement
(Unaudited)
Six Months Ended
June 30,
1999 1998
------ -----
<S> <C> <C>
Operating activities
Net income (loss) $(3,529,000) $1,725,000
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation 783,000 946,000
Accretion of debt issue cost, warrant allocation
and conversion rights allocation 188,000 222,000
Compensation paid with common stock, options
and warrants 235,000 139,000
Interest expense paid with common stock 17,000 204,000
Loss on early extinguishment of debt 35,000 97,000
Changes in operating assets and liabilities:
Accounts receivable (836,000) 578,000
Inventory 389,000 146,000
Prepaid expense and other assets 333,000 164,000
Accounts payable (28,000) (1,868,000)
Accrued liabilities 83,000 39,000
Deferred revenue (2,242,000) 2,169,000
------------- ------------
Net cash provided (used) by operating activities (4,572,000) 4,561,000
Investing activities
Transfer of restricted cash 1,020,000 (1,949,000)
Additions to property and equipment (265,000) (306,000)
Proceeds from the sale of property and equipment 14,000 40,000
-------------- -------------
Net cash provided (used) by investing activities 769,000 (2,215,000)
Financing activities
Proceeds from notes payable 208,000 188,000
Preferred stock dividend (84,000) ---
Payments of notes payable (1,179,000) (1,098,000)
Proceeds from the sale of common stock, and exercise
of common stock warrants --- 42,000
------------------ --------------
Net cash used by financing activities (1,055,000) (868,000)
------------- --------------
Net increase (decrease) in cash and cash equivalents (4,858,000) 1,478,000
Cash and cash equivalents at beginning of period 7,244,000 8,102,000
------------- ------------
Cash and cash equivalents at end of period $ 2,386,000 $ 9,580,000
============ ============
</TABLE>
See accompanying notes.
NaPro BioTherapeutics, Inc.
5
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<TABLE>
<CAPTION>
Cash Flow Statement (continued)
(Unaudited)
Six Months Ended
June 30,
1999 1998
---- ----
Supplemental schedule of activity
<S> <C> <C>
Interest paid $ 173,000 $ 71,000
Noncash transactions:
Conversion of senior convertible debt to
common stock 3,668,000 1,497,000
Conversion of convertible preferred shares to
common stock 1,056,000 385,000
Accretion of convertible preferred stock conversion
rights valuation, offering cost and warrant valuation 76,000 277,000
Issuance of common stock as payment of dividends 5,000 126,000
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 899,000 ---
</TABLE>
See accompanying notes.
6
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NaPro BioTherapeutics, Inc.
Notes to Consolidated Financial Statements
June 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.
2. Inventory June 30, December 31,
1999 1998
Raw materials $ 68,000 $ 151,000
Work-in-process 232,000 930,000
Finished goods 1,623,000 1,632,000
---------- -----------
$1,923,000 $2,713,000
========== ==========
Non-current inventory
Raw materials $1,305,000 $ 833,000
Work-in-process 666,000 738,000
----------- -----------
$1,971,000 $1,571,000
========== ==========
3. Common Stock
In the June 1999 quarter NaPro issued 1,835,131 shares of common stock in
conversion of $2,606,000 of NaPro's senior convertible debt and issued 6,975
shares of common stock in payment of $10,000 interest on the senior convertible
debt. In the June 1999 quarter NaPro issued 209,257 shares of common stock in
conversion of 397 shares of NaPro's senior convertible preferred stock (the "C
Preferred") and issued 996 shares of common stock in payment of $2,000 in
dividends on the C Preferred.
In the six months ended June 1999 NaPro issued 2,576,666 shares of common stock
in conversion of $3,533,000 of NaPro's senior convertible debt and issued 11,912
shares of common stock in payment of $16,000 interest on the senior convertible
debt. In the period NaPro issued 656,212 shares of common stock in conversion of
1,056 shares of the C Preferred and issued 2,923 shares of common stock in
payment of $5,000 in dividends on the C Preferred.
4. Earnings per Share
The following table sets forth the computation of basic and diluted earnings
(loss) per share. In calculating diluted earnings per share for the period in
which a loss is reported, the impact of all additional shares is antidilutive,
and thus not included in the calculation.
7
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<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------ ------ ------ -----
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $(1,590,000) $ (39,000) $(3,529,000) $ 1,725,000
Preferred stock dividends (78,000) (61,000) (165,000) (118, 000)
-------------- ---------- ------------- -------------
Numerator for basic earnings (loss) per
share - income available to
common stockholders (1,668,000) (100,000) (3,694,000) 1,607,000
Effect of dilutive securities:
Senior convertible debt --- --- --- 34,000
Preferred stock dividends --- --- --- 19,000
----------------- ---------------- ----------------- -------------
Numerator for earnings (loss) per share, assuming dilution - income available
to common stockholders after assumed
conversions $(1,668,000) $ (100,000) $(3,694,000) $ 1,660,000
============ =========== ============ ===========
Denominator:
Denominator for earnings (loss) per share -
weighted average shares outstanding 19,239,884 14,074,373 18.456.012 13,813,316
------------ ----------- ============= ===========
Senior convertible debt --- --- --- 915,541
Convertible preferred stock --- --- --- 592,752
Non-voting common stock --- --- --- 395,000
Stock options and warrants --- --- --- 48,781
---------------- ---------------- ---------------- -------------
Dilutive potential common shares --- --- --- 1,952,074
---------------- ---------------- ---------------- -----------
Denominator for diluted earnings per share-
adjusted weighted average shares out-
standing and assumed conversions 19,239,884 14,074,373 18,456,012 15,765,390
============ =========== ============ ===========
Earnings (loss) per common share $ (0.09) $ (0.01) $ (0.20) $ 0.12
=============== ============== ============== ==============
Earnings (loss) per common share, assuming
dilution $ (0.09) $ (0.01) $ (0.20) $ 0.11
=============== -------------- ============== ===============
</TABLE>
5. Subsequent Events
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. NaPro has
licensed to Abbott its paclitaxel-related patents. Most primary decisions
related to the development program will be made by a joint NaPro-Abbott
Development Committee.
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,
8
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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 (FDA); 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.
Retirement of Convertible Securities
On August 2, 1999 NaPro redeemed for cash $2 million of shares of its C
Preferred at a cost of $2.8 million including redemption premiums and
outstanding accrued but unpaid dividends. Through that date all but $91,000 of
the shares of the C Preferred outstanding at December 31, 1998 had 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. During the period subsequent to June
30, 1999, all the remaining balance of $1.5 million principal of the notes was
converted into 1,020,493 shares of common stock; 7,322 shares of common stock
were issued in payment of $11,000 interest. 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 results of operations and financial condition. 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 IVAX Corporation (including its subsidiaries,
"IVAX") for the clinical development, sales, marketing and distribution of NaPro
paclitaxel. NaPro and IVAX entered into an agreement on March 20, 1998, (the
"Termination Agreement") terminating their development and marketing
relationship.
9
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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. NaPro has
licensed to Abbott its paclitaxel-related patents. Most primary decisions
related to the development program will be made by a joint NaPro-Abbott
Development Committee. Under the Agreement 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.
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 addition to payments at
closing, NaPro expects to receive up to $7 million in the remainder 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 loan commitment of up to $4 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
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 a secured loan arrangement 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; 2) the termination of the 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, NaPro may receive additional milestone payments from Abbott of up to $57
million dollars. No assurance can be given that regulatory approval or sales
thresholds will be achieved.
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.
NaPro is in discussions with a number of international pharmaceutical companies
to assist NaPro in developing and marketing NaPro paclitaxel in various 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.
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.
10
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Through June 30, 1999, NaPro's production of paclitaxel was limited primarily to
research and pilot-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
approximately $13.4 million, $13.8 million and $7.1 million for the years ended
December 31, 1998, 1997 and 1996, respectively. For the six months ended June
30, 1999, NaPro recorded an operating loss of approximately $4.2 million. The
accumulated deficit at June 30, 1999 was $47.1 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,
biomass procurement, product development, 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 the
ability to obtain regulatory approval in the U. S. or another major market for
the commercial sale of NaPro paclitaxel, on NaPro's ability to obtain partners,
on NaPro's ability to obtain regulatory approval for its manufacturing
facilities and on NaPro's ability to construct manufacturing facilities that
produce quantities of NaPro paclitaxel sufficient to supply NaPro's 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.
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 entered into the Termination Agreement. The
termination of the IVAX Agreement leaves NaPro free to seek regulatory approvals
and market NaPro 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
11
<PAGE>
Quarter ended June 30, 1999, compared to the quarter ended June 30, 1998 Sales
for the 1999 quarter were $2 million, an increase of $1.4 million from the 1998
quarter. The increase related primarily to an increase in product shipments to
Faulding. 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 may vary significantly on a quarter-to-quarter basis
depending on a number of factors including 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 $2.9 million, an increase of $900,000 from the 1998 quarter. The increase
resulted primarily from an increase in the level of cost of product sold because
of higher sales volume and increased clinical trial expense.
General and administrative expense for the 1999 quarter was $1.2 million, a
decrease of $1.0 million from the 1998 quarter. The decrease was primarily
attributable to one-time cost associated with the IVAX termination and legal
fees incurred in 1998.
License fee income for the 1999 quarter was $700,000, a decrease of $3.1 million
from the 1998 quarter. This income related to a license fee paid by IVAX in
conjunction with the Termination Agreement. NaPro expects to record up to an
additional $300,000 in license fee income in August 1999 associated with the
Termination Agreement, and additional fees under the Abbott Agreement in both
the third and fourth 1999 quarters. License fees and milestone payments are
unusual and may be non-recurring. No further payments are expected under the
Termination Agreement beyond August 1999.
Interest income for the 1999 quarter was $100,000, a decrease of $100,000 from
the 1998 quarter. This decrease was primarily due to a decrease in invested cash
balances.
Interest and other expense for the 1999 quarter was $100,000, a decrease of
$200,000 from the 1998 quarter. The decrease was attributable to a smaller
balance due on the senior convertible debt. (See Liquidity and Capital
Resources.)
Six months ended June 30, 1999, compared to the six months ended June 30, 1998
Sales for the 1999 period were $4 million, an increase of $1 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 $5.7 million, an increase of $1 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 and increased clinical trial expense.
General and administrative expense for the 1999 period was $2.5 million, a
decrease of $1.6 million 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 $1 million, a decrease of $6.8
million from the 1998 period. This income related to a license fee paid by IVAX
in conjunction with the Termination Agreement.
Interest income for the 1999 period was $100,000, a decrease of $200,000 from
the 1998 period. This decrease was primarily due to a decrease in invested cash
balances.
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<PAGE>
Interest and other expense for the 1999 period was $300,000, representing 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
June 30, 1999, NaPro had a working capital balance of $2.9 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 $27.8 million, on the exercise of warrants and options of $5.7
million, on net borrowings of $12 million, and on loans and advances from its
stockholders and strategic partners.
On July 23, 1999, NaPro entered into the Abbott Agreement, which is expected to
be a significant ongoing capital source. See Management's Discussion and
Analysis-General.
NaPro's existing capital, anticipated 1999 sales, and proceeds from transactions
with Abbott are expected to provide adequate capital to fund its 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 the
conversion. In the June 1999 quarter NaPro issued 1,835,131 shares of common
stock in conversion of $2.6 million principal of the notes, and 6,975 shares of
common stock in payment of $10,000 interest on the notes. In the six months
ended June 1999 NaPro issued 2,576,666 shares of common stock in conversion of
$3.5 million principal of the notes, and 11,912 shares of common stock in
payment of $16,000 interest on the notes. During the period subsequent to June
30, 1999, all the remaining balance of $1.5 million principal of the notes was
converted into 1,020,493 shares of common stock; 7,322 shares of common stock
were issued in payment of $11,000 interest.
In December 1997, NaPro privately placed 5,000 shares of C Preferred for an
aggregate issuance price of $5 million. The C Preferred accrues dividends at 5%
per year payable in common stock or cash at NaPro's option. The C Preferred is
convertible into common stock at a 5% discount from the market price during
specified periods prior to the conversion date. In the June 1999 quarter NaPro
issued 209,257 shares of common stock in conversion of $400,000 of shares of the
C Preferred and 996 shares of common stock in payment of $2,000 of dividends on
the C Preferred. In the six months ended June 1999 NaPro issued 656,212 shares
of common stock in conversion of $1.1 million of shares of the C Preferred and
2,923 shares of common stock in payment of $5,000 of dividends on the C
Preferred. Subsequent to June 30, 1999, NaPro issued 596,346 shares of common
stock in conversion of $1 million of shares of the C Preferred and 2,923 shares
of common stock in payment of $5,000 of dividends on the C Preferred.
13
<PAGE>
Subsequent to June 30, 1999 NaPro exercised its right to redeem $2 million of C
Preferred for $2.8 million including premium and accrued dividends, leaving a
balance after conversion of $91,000 outstanding at August 5, 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 is 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 second
1999 quarter NaPro received $680,000 of the escrow. NaPro expects to receive the
remaining $300,000 in the third 1999 quarter.
Working Capital and Cash Flow Cash and cash equivalents decreased $4.8 million
to $2.4 million for the six months ended June 30, 1999 from $7.2 million at
December 31, 1998. During the 1999 period net cash used by operations was $4.6
million. Investing activity provided cash of $800,000 while financing activity
used $1.1 million.
Inventory decreased $400,000 to $3.9 million at June 30, 1999 from $4.3 million
at December 31, 1998. The amount of work-in-progress inventory and finished
goods inventory is dependent on a number of factors, including the shipping
requirements of NaPro's strategic partners and NaPro's production planning for
meeting those needs. $2 million of the June 30, 1999 inventory is long-term.
Inventory balances may vary significantly during product development and launch
periods.
Capital Expenditures NaPro expended $300,000 during the first six 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 has 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, maintain ing 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.
14
<PAGE>
Two years ago NaPro implemented an assessment of its systems and other assets
which could be subject to Y2K. NaPro has completed the assessment of its primary
systems and has brought all of the systems into Y2K compliance.
NaPro is assessing its secondary systems and other assets, including
microprocessor-controlled equipment, and expects to complete that assessment no
later than October 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 availability of patent and other protection for its intellectual
property;
15
<PAGE>
the completion of clinical trials and regulatory filings;
the prospects for and timing of regulatory approvals;
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,
adverse economic and general business conditions;
competition from Bristol and other existing and new producers of paclitaxel
and other drugs; technolog ical advances in cancer treatment and drug
development;
the ability to obtain rights to technology;
the ability to obtain and enforce patents;
the ability to obtain raw materials and commercialize manufacturing
processes;
the effectiveness of NaPro paclitaxel and other pharmaceuticals developed
by NaPro in treating disease;
the results of clinical studies;
the results of research and development activities;
the business abilities and judgment of NaPro's management and other
personnel;
the availability of qualified personnel generally;
changes in and compliance with governmental regulations;
the effect of capital market conditions and other factors on capital
availability for NaPro and other biopharmaceutical companies;
16
<PAGE>
the ability of Abbott and Faulding to perform their obligations under their
existing agreements with NaPro;
the effect on NaPro's revenue, cash flow and earnings from foreign exchange
rate fluctuations;
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;
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
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 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.
NaPro's fixed rate indebtedness was represented by its senior convertible debt.
All of the debt had either been converted, repurchased or redeemed by July 26,
1999. On July 26, 1999, NaPro borrowed $2 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
Two opposition proceedings have been instituted in the European Patent Office
against NaPro's European patent relating to stabilization of paclitaxel. One
notice of opposition was filed on April 30, 1999 by BASF
17
<PAGE>
Aktiengesellshaft, and the other notice was filed on May 5, 1999 by Bernard
Frohwitter. Both opposition notices allege that the NaPro European patent is
invalid. These opposition proceedings are still in very early stages and the
timing of resolution of these proceedings is uncertain.
On May 14, 1997, Bristol was issued a European patent relating to certain
methods of treatment with paclitaxel. On the same day, NaPro instituted
revocation proceedings in the United Kingdom against this European patent as
issued in the U.K. and a separate but related British patent also owned by
Bristol. The revocation action was not in response to any lawsuit or allegations
of infringement against NaPro relating to the patents, but Bristol subsequently
sued NaPro and Baker Norton Pharmaceuticals, Inc., a subsidiary of IVAX ("BNP")
in the United Kingdom, alleging patent infringement with respect to clinical
trials carried out in the United Kingdom involving paclitaxel. NaPro and BNP
counter-claimed to revoke the patent as invalid. The outcome of the trial of
that action, concerning EP (UK) Patent Number 0,584,001 (the "Bristol Patent")
(GB Patent Number 2,269,319 was surrendered by Bristol), was a judgement
rendered by the English High Court on October 1, 1998. The judge held that the
Bristol Patent was invalid on the basis of lack of novelty and obviousness.
Bristol has lodged a Notice of Appeal dated November 1998 from the High Court'
decision. It is NaPro's belief that this appeal will be heard in April 2000. In
view of the minimal activity, if any, by NaPro in the United Kingdom, NaPro
believes that the risk of an award of substantial damages against NaPro, in the
event of an unfavorable Court of Appeal ruling, to be very low. In addition, BNP
is required to indemnify NaPro for any damages (not including payment of
attorneys' fees) suffered as a result of this legal action. However, litigation
is an uncertain process, and an adverse result of the appeal could have a
material adverse effect on NaPro.
NaPro is not currently engaged in any other material legal proceedings.
Item 2. Changes in Securities
In the June 1999 quarter, NaPro issued 1,835,131 shares of common stock in
conversion of $2.6 million of NaPro's convertible debt and issued 6,975 shares
of common stock in payment of $10,000 interest on the convertible debt. In the
June 1999 quarter, NaPro issued 209,257 shares of common stock in conversion of
397 shares of NaPro's C Preferred and issued 996 shares of common stock in
payment of $2,000 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.
Certain provisions of the C Preferred may limit the ability of NaPro to pay
dividends on its common stock and to repurchase shares of its common stock.
Item 3. Defaults upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Securities Holders. None.
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K
18
<PAGE>
NaPro filed a Current Report on Form 8-K dated June 22, 1999 reporting an
amendment to the C Preferred agreements.
Exhibit
Number Description of Exhibit
4.1 Letter Agreement dated as of June 22, 1999, by and between NaPro and
Advantage Fund II, Ltd., incorporated herein by reference to NaPro's
Current Report of Form 8-K dated June 22, 1999 (File No. 0-243201).
27.1 Financial Data Schedule.
19
<PAGE>
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.
August 13, 1999 /s/ Sterling K. Ainsworth
Sterling K. Ainsworth
President and Chief Executive Officer
(Principal Executive Officer)
August 13, 1999 /s/ Gordon Link
Gordon Link
Vice President and Chief Financial Officer
(Principal Financial Officer)
August 13, 1999 /s/ Robert L. Poley
Robert L. Poley
Controller
(Principal Accounting Officer)
20
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