UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-22890
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SANGSTAT MEDICAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 94-3076-069
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(State of incorporation) (IRS Employer Identification No.)
1505 Adams Drive
Menlo Park, CA 94025
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(Address of principal executive office, Zip Code)
Registrant's telephone number, including area code: 650-328-0300
None
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(Former name, former address and former fiscal year,
if changed since last report)
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[ x ] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of March 31, 1998.
CLASS NUMBER OF SHARES
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Common Stock 16,016,834
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SANGSTAT MEDICAL CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS PAGE
----
<S> <C>
CONDENSED CONSOLIDATED BALANCE SHEETS............................3
March 31, 1998 and December 31, 1997
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS..................4
Three Months Ended March 31, 1998 and 1997
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS..................5
Three Months Ended March 31, 1998 and 1997
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS...........6-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.....................................8-12
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................13
SIGNATURES.................................................................13
</TABLE>
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Part 1. Financial Information
Item 1. Financial Statements
SANGSTAT MEDICAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
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(unaudited) (1)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $43,074,070 $50,630,819
Short-term investments 40,406,130 41,404,955
Accounts receivable (net of allowance for doubt 1,502,593 1,012,631
accounts of $214,451 in 1998 and $139,297 in 1997)
Other receivables 864,908 581,420
Inventories 5,521,937 3,757,451
Prepaid expenses 883,179 1,752,036
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Total current assets 92,252,817 99,139,312
PROPERTY AND EQUIPMENT -- Net 2,279,793 2,015,373
OTHER ASSETS 4,149,440 3,199,785
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TOTAL $98,682,050 $104,354,470
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $4,918,573 $3,486,726
Accrued liabilities 1,274,336 1,222,607
Capital lease obligations -- current portion 308,232 327,222
Notes payable -- current portion 200,726 290,855
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Total current liabilities 6,701,867 5,327,410
CAPITAL LEASE OBLIGATIONS 967,242 1,020,361
NOTES PAYABLE 494,511 536,507
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 5,000,000 shares
authorized; none outstanding -- --
Common stock, $.001 par value,
25,000,000 shares authorized;
outstanding: 1998, 16,016,834 shares;
1997, 16,009,531 shares 159,341,549 159,265,454
Accumulated deficit (68,446,312) (61,806,012)
Accumulated translation adjustment (4,640) (14,014)
Unrealized gain (loss) on investment (372,167) 24,764
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Total stockholders' equity 90,518,430 97,470,192
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TOTAL $98,682,050 $104,354,470
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</TABLE>
(1) Derived from the Company's audited consolidated financial statements.
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SANGSTAT MEDICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended March 31,
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1998 1997
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<S> <C> <C>
REVENUES
NET PRODUCT SALES $1,543,056 $690,499
COSTS AND OPERATING EXPENSES
Cost of sales and manufacturing expense 1,563,043 702,348
Research and development 3,082,080 3,383,507
Selling, general & administrative 4,631,246 1,825,777
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Total costs and operating expenses 9,276,369 5,911,632
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Loss from Operations (7,733,313) (5,221,133)
INTEREST INCOME -- NET 1,093,013 688,804
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NET LOSS ($6,640,300) ($4,532,329)
============= =============
NET LOSS PER SHARE -- Basic ($0.41) ($0.33)
and diluted (Note 1) ======= =======
WEIGHTED AVERAGE COMMON SHARES 16,014,530 13,669,318
============= =============
</TABLE>
<PAGE>
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<PAGE> 5
SANGSTAT MEDICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($6,640,300) ($4,532,329)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 232,069 111,940
Changes in assets and liabilities:
Accounts receivable (491,192) 4,986
Other receivables (285,929) (184,123)
Inventories (1,763,709) (35,380)
Prepaid expenses 867,964 76,070
Accounts payable 1,445,836 105,560
Accrued liabilites 58,327 35,809
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Net cash used in operating activities (6,576,934) (4,417,467)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock 76,095 73,682,063
Note payable repayments (128,260) (138,849)
Repayment of capital lease obligations (90,358) (86,787)
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Net cash provided by (used in) financing activit (142,523) 73,456,427
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (479,822) (71,549)
Maturities of short-term investments 2,798,545 10,183,426
Purchase of short-term investments (2,196,651) (13,902,010)
Other assets (955,319) (193,646)
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Net cash used in investing activities (833,247) (3,983,779)
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EFFECT OF EXCHANGE RATE CHANGES ON CASH (4,045) 3,669
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NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (7,556,749) 65,058,850
CASH AND EQUIVALENTS, Beginning of period 50,630,819 19,818,940
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CASH AND CASH EQUIVALENTS, End of period $43,074,070 $84,877,790
============= =============
NONCASH INVESTING AND FINANCING ACTIVITIES:
Property acquired under capital leases $18,249 $53,134
Unrealized gain (loss) on investments (396,931) (150,244)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $70,879 $69,513
============= =============
</TABLE>
<PAGE>
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<PAGE> 6
SANGSTAT MEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
The consolidated financial statements include the accounts of SangStat
Medical Corporation and its wholly owned subsidiaries. Intercompany
accounts and transactions have been eliminated.
While the quarterly financial information in this filing is unaudited,
the financial statements presented reflect all adjustments (consisting
only of normal recurring adjustments) which the Company considers
necessary for a fair presentation of the results of operations for the
interim periods covered and of the financial condition of the Company at
the dates of the interim balance sheets. These results for interim
periods are not necessarily indicative of the results for the entire
year. The information included in this report should be read in
conjunction with the Company's audited financial statements and notes
thereto included in the Company's 1997 Annual Report to Shareholders.
Net Loss Per Share
The Company adopted Statement of Financial Accounting Standards No. 128,
Earnings Per Share ("SFAS 128") in the fourth quarter of 1997. SFAS
128 requires a dual presentation of basic and diluted EPS. Basic EPS
excludes dilution and is computed by dividing net loss by the weighted
average of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that would occur if securities or other
contracts to issue common stock were exercised or converted into common
stock. Common share equivalents including stock options, warrants and
redeemable convertible preferred stock have been excluded as their
effect would be antidilutive. All net loss per share amounts for all
periods have been presented, and where necessary, restated to conform to
the SFAS 128 requirement.
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<PAGE> 7
Recently Adopted Accounting Standard
Effective January 1, 1998, the Company adopted SFAS 130, Reporting
Comprehensive Income. This statement requires that all items recognized
under accounting standards as components of comprehensive earnings be
reported in an annual financial statement and displayed with the same
prominence as other annual financial statements. This statement also
requires that an entity classify items of other comprehensive earnings
by their nature in an annual financial statement. Annual financial
statements for prior periods will be reclassified, as required. The
Company's total comprehensive earnings (loss) were as follows:
Three months ended March 31,
----------------------------
1998 1997
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Net loss ($6,640,300) ($4,532,329)
Unrealized gains and losses on marketable
securities classified as available-for-sale (396,931) (150,244)
Foreign currency translation adjustments 18,654 844
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Total comprehensive loss ($7,018,577) ($4,681,729)
============ =============
Recently Issued Accounting Standard
In June 1997, the Financial Accounting Standards Board issued SFAS No
131, Disclosures About Segments of an Enterprise and Related
Information, which establishes annual and interim reporting standards
for an enterprise's business segments and related disclosures about its
products, services, geographic areas, and major customers. Adoption of
this statement will not impact the Company's consolidated financial
position, results of operations or cash flows and is effective for
fiscal years beginning after December 15, 1997, with earlier application
permitted.
Inventories
Inventories, valued at the lower of cost (first-in, first-out) or market
consist of:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
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<S> <C> <C>
Raw materials $3,671,141 $1,929,954
Work-in-progress 291,035 144,389
Finished goods 1,559,761 1,683,108
------------ ------------
Total $5,521,937 $3,757,451
============ ============
</TABLE>
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<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations - Three Months Ended March 31, 1998 and 1997
During the first quarter, the Company continued to prepare for the launch of
its two lead products, including running additional clinical studies, building
a sales and marketing team and developing THE TRANSPLANT PHARMACY.
Total revenues. Net product sales were $1,543,000 in the first quarter
of 1998 as compared with $690,000 in the first quarter of 1997. This
increase of $853,000 or 123% was primarily due to a 618% increase in
sales of THE TRANSPLANT PHARMACY and an 11% increase in revenues for
THYMOGLOBULIN in Canada under that country's emergency drug release
program and partially offset by a 9% decrease in sales of PRA-STAT and
CROSS-STAT. In the first quarter of 1998, two additional transplant
centers became participants in THE TRANSPLANT PHARMACY, which brought
the number of participating centers in the United States to eleven and
further expanded the number of patients enrolled in THE TRANSPLANT
PHARMACY.
Cost of sales and manufacturing. Cost of sales and manufacturing
expenses were $1,563,000 for the first quarter ended March 31, 1998 as
compared with $702,000 in the same quarter of 1997. This increase of
$861,000 or 123% primarily reflects the increase in cost of sales for
THE TRANSPLANT PHARMACY as well as some increase in cost of sales for
THYMOGLOBULIN and monitoring products.
Research and development. Research and development expenses decreased
to $3,082,000 in the first quarter of 1998 from $3,384,000 in the same
period in 1997. This decrease of $302,000 or 9% primarily reflects a
decline in regulatory and clinical development expenses for
AZATHIOPRINE, partially offset by increases in expense for CELSIORr,
ALLOTRAP peptides and XENOJECT. The Company is conducting both
ongoing and newly initiated clinical trials in transplant patients with
THYMOGLOBULIN and CYCLOSPORINE. In the first quarter of 1998, the
Company completed its first clinical trial of its proprietary
CYCLOSPORINE, Sang-35, in liver transplant recipients. This trial
was conducted to assess the bioequivalence of Sang-35 to Neoral in
this growing patient population and to further build on the clinical
data already accumulated from more than 450 healthy volunteers and
stable renal transplant recipients. The results of this liver trial
have been accepted for a podium presentation at the Annual Meeting of
the American Society of Transplant Physicians in May 1998. In February,
SangStat received correspondence from the FDA indicating that the Agency
had completed its review of the Company's CYCLOSPORINE marketing
application. Importantly, the short list of questions raised in the
letter were not related to the bioequivalence trials. A pre-approval
inspection of the finished product manufacturing facility was deemed not
necessary by the FDA. The Abbreviated Antibiotic Drug Application
(AADA) for marketing SangStat's proprietary CYCLOSPORINE, Sang-35, was
submitted to the FDA in November 1996, as a bioequivalent formulation to
Neoral for the prevention of rejection in organ transplant recipients.
SangStat provided responses to the FDA's questions in March 1998, and
these answers are currently under active review at the FDA. In February
1998, the Company filed in Europe for marketing authorization for its
proprietary CYCLOSPORINE product candidate for the prevention of graft
rejection in transplant recipients. This application has been filed to
potentially benefit from the European Union's Mutual Recognition
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<PAGE> 9
Procedure for registering drugs in multiple member states. Importantly,
the application has been accepted and is currently under review by the
reference state's (in which the application was filed) regulatory
agency. Further in regard to CYCLOSPORINE, in January SangStat unveiled
CycloTech, an innovative cyclosporine delivery system intended to be
used by patients with the Company's CYCLOSPORINE drug product candidate
as it targets the $1.3 billion cyclosporine market. CycloTech is a
compact, hand-held device with a built-in smart chip that is designed to
deliver and track each dose of oral cyclosporine solution taken by a
transplant recipient. CycloTech is pending 510(k) clearance by the FDA.
In regard to THYMOGLOBULIN, in January 1998, the Company announced the
preliminary results of the first U.S. double blinded trial evaluating
THYMOGLOBULIN (anti-thymocyte globulin, rabbit) vs. ATGAM (anti-
thymocyte globulin, horse) for induction therapy, at the time of
transplant, to prevent acute graft rejection in kidney transplant
patients. A preliminary intent-to-treat analysis of the data showed
that the overall incidence of acute rejection (biopsy proven, primary
endpoint) in the THYMOGLOBULIN treated patients was 4.2% versus 25% in
the ATGAM treated patients (p=0.01). Only 10.4% patients treated with
THYMOGLOBULIN developed CMV disease vs. 33.3% treated with ATGAM
(p=0.025). There were fewer serious adverse events with THYMOGLOBULIN
(p=0.0009). Greater and more persistent T-cell depletion and a more
frequent leukopenia were observed with THYMOGLOBULIN treatment as
compared to ATGAM. These findings may partly explain the lower
incidence of rejection with THYMOGLOBULIN as compared to ATGAM. New data
on the long-term follow-up of this induction trial also will be
presented at the Annual Meeting of the American Society of Transplant
Physicians in May 1998. Based on these results, SangStat intends to
conduct further studies with THYMOGLOBULIN for the prevention of
rejection, as part of its development program for this new indication in
the United States. In late January 1998, a Product License Application
(PLA) `Complete Review' letter from the FDA was issued for
THYMOGLOBULIN. The FDA pre-approval site inspection of the Pasteur
Merieux Connaught manufacturing facility was also completed. The PLA
for market clearance of THYMOGLOBULIN for the treatment of rejection was
filed with the FDA in January 1997. SangStat and Pasteur Merieux
Connaught provided responses to the questions on the PLA and
observations from the inspection, and these answers are currently under
active review at the FDA.
Selling, general and administrative. Selling, general and
administrative expenses increased to $4,631,000 in the first quarter of
1998 from $1,826,000 in the same quarter of the previous year. This
increase of $2,805,000 or 154% primarily reflects the Company's
expansion of its commercial infrastructure and pre-marketing activities
to help support the future potential U.S. launches, subject to
regulatory approvals, of the Company's first two therapeutic product
candidates, THYMOGLOBULIN and CYCLOSPORINE, and the growth of The
Transplant Pharmacy program to eleven transplant centers. This included
the expansion of the North American marketing, sales and customer
service departments to a total of 33 people including a sales force of
18 representatives, and continued personnel additions to support the
growing number of patients and centers participating in The Transplant
Pharmacy program.
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<PAGE> 10
Other income and expenses. Interest income increased by $422,000 to
$1,144,000 in the first quarter of 1998 from $722,000 in the same
quarter of the previous year. This increase is due to the increase in
the average cash balance available for investment as a result of the
Company's sale of equity securities in a public offering in March 1997.
Interest and other expense for capital lease obligations and long term
notes increased to $51,000 in the first quarter of 1998 from $33,000 in
the first quarter of 1997.
Net loss. The Company's net loss was $6,640,000 or $0.41 per share in
the first quarter of 1998, compared with a net loss of $4,532,000 or
$0.33 per share in the first quarter of 1997.
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<PAGE> 11
Liquidity and Capital Resources
During the quarters ended March 31, 1998 and 1997, the net cash used in
operating activities was approximately $6,577,000 and $4,417,000,
respectively. The increase in net cash used in operating activities in
these periods is due substantially to the increased amount of net loss
incurred in each of these quarters. As of March 31, 1998, the Company
had cash, cash equivalents and short-term investments of $83,480,000 and
total assets of $98,682,050.
Net cash used in financing activities was $143,000 in the quarter ended
March 31, 1998 compared to proceeds of $73,456,000 in the corresponding
quarter in 1997. The 1997 amount was substantially comprised of
proceeds received from the sale of Common Stock in the Company's public
offering in March 1997, partially offset by net repayments of notes
payable and capital lease obligations.
Net cash used in investing activities totaled $833,000 and $3,984,000 in
the quarters ended March 31, 1998 and 1997, respectively, and resulted
substantially from the Company's net purchases of short-term investments
and property and equipment and the change in other assets.
The Company expects to incur significant costs related to, among other
things, continued clinical and preclinical testing, regulatory approval
activities and research and development programs in the future and
establishment of larger sales staffs in the United States and Europe. If
and when the Company receives FDA approval of its therapeutic drug
candidates, the Company expects to have additional working capital
requirements for expansion of sales and increased inventory levels. If
the Company receives FDA approval for THYMOGLOBULIN, it may be obligated
to make a final milestone payment under a related license agreement
totaling $1.5 million. The Company believes that its existing capital
resources, together with product sales and interest income will be
sufficient to meet the Company's operating and capital requirements
through at least 1999. Although the Company has no current contractual
obligations relating to capital expenditures, it anticipates that
capital expenditures, primarily for its United States operations, will
aggregate approximately $1 million during 1998. The Company's future
capital requirements will depend on many factors, including its research
and development programs, the scope and results of clinical trials, the
time and costs involved in obtaining regulatory approvals, the costs
involved in obtaining and enforcing patents or any litigation by third
parties regarding intellectual property, the status of competitive
products, the establishment of sales and marketing capacity or third-
party manufacturing arrangements, the establishment of collaborative
relationships with other parties, and the costs of manufacturing scale-
up and working capital requirements for inventory and financing of
accounts receivable. If adequate funds are not available, the Company
may be required to delay, scale back or eliminate one or more of its
development programs or obtain funds through arrangements with
collaborative partners or others that may require the Company to
relinquish rights to certain technologies, product candidates or
products that the Company would not otherwise relinquish.
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<PAGE> 12
This document contains forward-looking statements that involve risks and
uncertainties. Forward-looking statements may reflect the Company's
current views with respect to future events. Actual results may vary
materially and adversely from those anticipated, believed, estimated, or
otherwise indicated. Important factors common to the FDA drug review
and approval process could cause actual results to differ materially
with regard to the approvability of SangStat's THYMOGLOBULIN or
CYCLOSPORINE. These factors include, without limitation: (1) that data
obtained from clinical trials are subject to varying interpretations,
and there can be no assurance that the FDA (or an FDA panel of experts)
will agree with the Company's assessment of clinical trial results; (2)
that there can be no assurance that the agency will not issue new
guidelines, guidance documents, policies, or regulations or otherwise
have new, different or previously unknown requirements that may
materially affect the approvability of the product; and (3) that there
can be no assurance of FDA approval of the product. Other factors that
could cause actual results to differ materially include, without
limitation, uncertainty related to the manufacturing of commercial
quantities of product on commercially favorable terms, market acceptance
and potential litigation. For a discussion of factors that might result
in different outcomes, see the Company's annual report on Form 10-K, in
particular "Risk Factors" set forth therein, filed with the Securities
and Exchange Commission.
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<PAGE> 13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EDGAR Financial Data Schedule 27.1
(b) No reports on Form 8-K were filed by the Company during the
quarter ended March 31, 1998.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
SANGSTAT MEDICAL CORPORATION
----------------------------
(REGISTRANT)
DATE: May 14, 1998 BY: /S/ PHILIPPE POULETTY, M.D.
------------------------------------
PHILIPPE POULETTY, M.D.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
DATE: May 14, 1998 BY: /S/ JAMES F. HINRICHS, CFA
------------------------------------
JAMES F. HINRICHS, CFA
CHIEF FINANCIAL OFFICER
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<PAGE> 13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM CONDENSED CONSOLIDATED BALANCE SHEET OF MARCH 31,
1998 AND DECEMBER 31, 1997 AND THE CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS, MARCH 31, 1998/1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 43,074,070
<SECURITIES> 40,406,130
<RECEIVABLES> 2,367,501
<ALLOWANCES> 0
<INVENTORY> 5,521,937
<CURRENT-ASSETS> 92,252,817
<PP&E> 2,279,793
<DEPRECIATION> 0
<TOTAL-ASSETS> 98,682,050
<CURRENT-LIABILITIES> 6,701,867
<BONDS> 0
0
0
<COMMON> 159,341,549
<OTHER-SE> (68,823,119)
<TOTAL-LIABILITY-AND-EQUITY> 98,682,050
<SALES> 1,543,056
<TOTAL-REVENUES> 1,543,056
<CGS> 1,563,043
<TOTAL-COSTS> 1,563,043
<OTHER-EXPENSES> 7,713,326
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,093,013
<INCOME-PRETAX> (6,640,300)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,640,300)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,640,300)
<EPS-PRIMARY> ($0.41)
<EPS-DILUTED> ($0.41)
</TABLE>
