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, 1999
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, 1999.
CLASS NUMBER OF SHARES
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Common Stock 16,393,110
<PAGE>
SANGSTAT MEDICAL CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
----
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1999 and December 31, 1998...........................
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1999 and 1998.....................
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended March 31, 1999 and 1998.....................
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1999 and 1998.....................
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS...........
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................................
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS..............................................
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS......................
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............
ITEM 5. OTHER INFORMATION..............................................
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...............................
SIGNATURES................................................................
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
SANGSTAT MEDICAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- -----------
(unaudited) (1)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................... $15,392 $16,286
Short-term investments.............................. 11,592 13,375
Accounts receivable (net of allowance for doubtful
accounts of $1,013 in 1999 and $929 in 1998)...... 10,792 10,963
Other receivables................................... 716 2,441
Inventories......................................... 39,563 33,375
Prepaid expenses.................................... 2,151 1,727
----------- -----------
Total current assets......................... 80,206 78,167
PROPERTY AND EQUIPMENT -- Net......................... 2,870 3,134
INTANGIBLE ASSETS (Net of accumulated amortization
of $708 in 1999 and $351 in 1998)................... 13,166 14,151
OTHER ASSETS.......................................... 9,890 11,875
----------- -----------
TOTAL........................................ $106,132 $107,327
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................... $26,170 $25,824
Accrued liabilities................................. 2,110 3,197
Capital lease obligations -- current portion........ 897 493
Notes payable -- current portion.................... 1,754 1,825
----------- -----------
Total current liabilities.................... 30,931 31,339
CAPITAL LEASE OBLIGATIONS............................. 417 765
NOTES PAYABLE......................................... 25,427 15,636
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 5,000
shares authorized; none outstanding............... -- --
Common stock, $.001 par value, 25,000 shares
authorized; outstanding: 1999, 16,393 shares;
1998, 16,215 shares............................... 161,505 160,251
Accumulated deficit................................. (109,993) (100,270)
Accumulated other comprehensive income.............. (2,155) (394)
----------- -----------
Total stockholders' equity................... 49,357 59,587
----------- -----------
TOTAL........................................ $106,132 $107,327
=========== ===========
</TABLE>
(1) Derived from the Company's audited consolidated financial statements.
<PAGE>
SANGSTAT MEDICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 1998
--------- ---------
<S> <C> <C>
REVENUES:
Net product sales................... $10,103 $1,543
Revenue from collaborative
agreements........................ 425 --
--------- ---------
Total revenues...................... 10,528 1,543
--------- ---------
COSTS AND OPERATING EXPENSES:
Cost of sales and manufacturing
expenses.......................... 5,841 1,563
Research and development............ 4,232 3,082
Selling, general and administrative. 9,970 4,631
Amortization of intangible assets... 357 --
--------- ---------
Total costs and operating expenses.. 20,400 9,276
--------- ---------
Loss from operations............... (9,872) (7,733)
INTEREST INCOME -- NET............... 23 1,093
--------- ---------
LOSS BEFORE INCOME TAXES............. (9,849) (6,640)
INCOME TAXES......................... 126 --
--------- ---------
NET LOSS............................. ($9,723) ($6,640)
========= =========
NET LOSS PER SHARE -- Basic
and diluted (Note 3).............. ($0.60) ($0.41)
========= =========
WEIGHTED AVERAGE COMMON SHARES --
Basic and diluted (Note 3)........ 16,308 16,015
========= =========
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended
March 31,
-------------------
1999 1998
--------- ---------
<S> <C> <C>
Net loss............................. ($9,723) ($6,640)
Unrealized gains and losses on
marketable securities classified
as available for sale.............. (773) (397)
Foreign currency translation
adjustments........................ (988) 9
--------- ---------
($11,484) ($7,028)
========= =========
</TABLE>
<PAGE>
SANGSTAT MEDICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................. ($9,723) ($6,640)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization....................... 1,297 232
Stock compensation expense.......................... 28 --
Changes in assets and liabilities:
Accounts receivable............................... 171 (491)
Other receivables................................. 1,725 (286)
Inventories....................................... (6,188) (1,764)
Prepaid expenses.................................. (424) 868
Accounts payable.................................. 346 1,446
Accrued liabilities............................... (1,087) 58
---------- ----------
Net cash used in operating activities.......... (13,855) (6,577)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................... 34 (480)
Maturities of short-term investments.................. 2,385 2,799
Purchase of short-term investments.................... (1,375) (2,197)
Other assets.......................................... 2,408 (955)
---------- ----------
Net cash provided by (used in) investing activities.. 3,452 (833)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock.................................. 1,226 76
Sale of convertible notes payable..................... 9,550 --
Notes payable repayments.............................. (187) (128)
Repayment of capital lease obligations................ (93) (91)
---------- ----------
Net cash provided by (used in) financing activities.. 10,496 (143)
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.................. (987) (4)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS.......... (894) (7,557)
CASH AND EQUIVALENTS, Beginning of period................ 16,286 50,631
---------- ----------
CASH AND EQUIVALENTS, End of period...................... $15,392 $43,074
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.............. $103 $71
========== ==========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Property acquired under capital leases................ $ -- $18
========== ==========
Unrealized loss on investments........................ ($773) ($397)
========== ==========
</TABLE>
<PAGE>
SANGSTAT MEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. 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.
The financial statements presented are unaudited and in the opinion of
management reflect all adjustments (consisting only of normal recurring
adjustments) which the Company considers necessary for a fair presentation
of the financial condition and results of operations as of and for the
interim periods presented. The results for interim periods are not
necessarily indicative of the results to be expected for the full year.
These condensed consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements
and notes thereto included in the Company's 1998 Annual Report on Form 10-K.
2. Acquisition
On September 30, 1998, the Company completed the acquisition of Pasteur
Merieux Connaught's (PMC) organ transplant business known as IMTIX. The
resulting wholly owned subsidiary of the Company, named IMTIX-SangStat, is
dedicated to the research, development, manufacture and marketing of
pharmaceuticals for transplantation. The transaction valued at $31 million
was accounted for as a purchase and consisted of $10 million paid upon
closing and a non-interest bearing note of $21 million payable over five
years as follows: $3 million in 1999, $3 million in 2000, $6 million in
2001, $5 million in 2002 and $4 million in 2003. The note payable is
discounted at a rate of 9.25%. In addition, the Company will pay PMC
certain royalties on IMTIX-SangStat product sales. Approximately $3.2
million of the total purchase price represented purchased in-process
technology that had not yet reached technological feasibility, had no
alternative future use and was charged to the Company's operations in the
third quarter of 1998. Approximately $14.2 million of the purchase price
was allocated to various specified intangible assets and is being amortized
over their estimated useful lives ranging from five to fourteen years.
Additionally, as part of the acquisition, the Company has approximately
$6.0 million of restricted cash that serves as collateral for the standby
letter of credit in favor of PMC.
3. Loss Per Share
Basic EPS is computed by dividing net loss by the weighted average number
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 convertible notes
have been excluded as their effect would be antidilutive.
The following is a reconciliation of the numerators and denominators of the
basic and diluted net loss per share computations (amounts in thousands,
except per share figures):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 1998
--------- ---------
<S> <C> <C>
Net loss (numerator):
Net loss - basic and diluted........ ($9,723) ($6,640)
========= =========
Shares (denominator):
Weighted average common shares
outstanding -- basic and diluted... 16,308 16,015
========= =========
Net loss per share -- basic
and diluted......................... ($0.60) ($0.41)
========= =========
</TABLE>
4. Comprehensive Earnings (Loss)
The following are the components of accumulated other comprehensive loss
(in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Unrealized gain (loss) on
investments........................ ($1,242) ($469)
Accumulated translation adjustments.. (913) 75
------------ ------------
Total.............................. ($2,155) ($394)
============ ============
</TABLE>
<PAGE>
5. Inventories
Inventories, valued at the lower of cost (first-in, first-out) or market
consist of (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Raw materials....................... $22,055 $18,104
Work-in-progress.................... 10,496 8,945
Finished goods...................... 7,012 6,326
------------ ------------
Total............................. $39,563 $33,375
============ ============
</TABLE>
6. Notes Payable
In March 1999, the Company issued $10 million principal amount of
convertible notes due March 30, 2004. These notes bear interest at the
rate of 6.5% through March 30, 2004 and thereafter at the rate of 8.5% on
any overdue amount. The interest is payable semi-annually in September and
March. The notes are convertible at the option of the holder at any time on
or after March 31, 2000 and before March 30, 2004 into shares of common
stock of the Company at the rate of 50.0773 shares of common stock for each
$1,000 principal amount. The net proceeds received by the Company were
$9,550,000. The notes will be accreted to their face amount over the five
year term.
7. Business Segment Data
The Company is a specialty pharmaceutical company engaged in the discovery,
development, manufacturing and marketing of transplantation products
worldwide as well as applying a disease management approach to improve the
outcome of organ transplantation. The Company is organized and operates in
two business segments: transplantation products and transplantation
services. Transplantation products consist primarily of products for
patient monitoring and therapeutic products for preventing and treating
organ rejection. Transplantation services consist principally of mail
order pharmaceutical and patient management services. The following
information is presented in accordance with the requirements of SFAS No.
131, "Disclosures about Segments of an Enterprise and Related
Information" (in thousands).
<TABLE>
<CAPTION>
Three
Months Transplantation
ended ---------------------
March 31, Products Services Total
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Net revenues...... 1999 $7,475 $3,053 $10,528
1998 222 1,321 1,543
Interest income... 1999 465 -- 465
1998 1,144 -- 1,144
Interest expense.. 1999 442 -- 442
1998 51 -- 51
Depreciation and
amortization..... 1999 1,232 65 1,297
1998 215 17 232
Segment loss...... 1999 (9,211) (512) (9,723)
1998 (6,518) (122) (6,640)
Segment assets.... 1999 102,453 3,679 106,132
1998 97,096 1,586 98,682
</TABLE>
8. Recently Issued Accounting Standards
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement requires companies to
record derivatives on the balance sheet as assets or liabilities, measured
at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. SFAS No. 133
will be effective for the Company's fiscal year 2000.
9. Litigation
On February 11, 1999, Novartis Pharmaceuticals Corporation ("Novartis")
filed a lawsuit (case number 99-065) in Federal District Court for the
District of Delaware against the Company alleging infringement of United
States patent #5,389,382, a cyclosporine technology patented by Novartis
A.G. The Novartis patent does not cover Neoral but rather a separate
delivery system not used in the Neoral formulation. Novartis seeks the
following relief: (i) a finding that SangStat willfully infringed the
patent; (ii) to permanently enjoin SangStat from infringing the Novartis
patent; (iii) treble damages; and (iv) reasonable attorneys' fees, costs
and expenses. SangStat believes that the lawsuit is without merit and that
it does not infringe upon the Novartis patent. SangStat intends to defend
itself vigorously against this claim.
Although the Company is optimistic that this dispute will ultimately be
resolved favorably to the Company, the course of litigation is inherently
uncertain and there can be no assurance of a favorable outcome. As a
result of the Novartis suit, SangStat could be enjoined from selling
SANGCYA for a significant period of time or ultimately be prevented from
selling SANGCYA. Should this happen, the Company does not believe it would
be able to obtain a license from Novartis on acceptable terms because the
Company believes cyclosporine is an important product for Novartis and that
Novartis would not want to diminish its profits from this product by
licensing it on acceptable terms to the Company. Failure to obtain any such
required license could prevent the Company from selling SANGCYA entirely,
which would have a material adverse effect on the Company's future results
of operations. The litigation, whether or not resolved favorably to the
Company, is likely to be expensive, lengthy and time consuming, will divert
management's attention and could have a material adverse effect on the
Company's business, financial condition, cash flows and results of
operations. SANG-2000 is not covered by this lawsuit and the Company does
not believe that this lawsuit will have an impact on the regulatory
approval of SANG-2000. No adjustments have been made in the accompanying
consolidated financial statements relating to this litigation. On April 15,
1999, the Company filed its answer in the patent infringement lawsuit filed
by Novartis. SangStat also filed a counterclaim against Novartis alleging
that Novartis violated the antitrust laws by engaging in a series of
anticompetitive acts designed and intended to exclude SangStat from the
market. Novartis' answer is due May 18, 1999 and discovery will not begin
until after the answer is filed.
Novartis also sued the FDA on February 11, 1999 in the United States
District Court for the District of Columbia (case number 1:99CV-00323)
alleging that the FDA did not follow its own regulations in approving
SANGCYA in October 1998. The lawsuit against the FDA appears to be based
on arguments similar to those used in the failed citizen's petition in
which Novartis alleged that because Neoral and SANGCYA, both oral
solutions, are based on different formulation technologies, they should be
classified as different dosage forms. Novartis asks that the court rescind
the AB rating that was given to SANGCYA. Loss of the "AB" rating would
prevent SANGCYA from being automatically substitutable for Neoral oral
solution, which would impede the marketing of SANGCYA. The Company
believes that the lawsuit is without merit and that the FDA will prevail in
this matter. Although the Company is optimistic that this dispute will
ultimately be resolved favorably to the Company, the course of litigation
is inherently uncertain and there can be no assurance of a favorable
outcome. Novartis' requested relief, if granted, could have a significant
negative economic impact on SangStat. In order to defend its interests
vigorously, SangStat filed a Motion for Leave to Intervene in this lawsuit
on February 23, 1999 and the court granted the Company's motion to
intervene. The FDA filed a motion to dismiss the lawsuit on April 12, 1999.
The Court has not yet ruled on that motion.
10. Subsequent Event
On May 10, 1999, the Company and Abbott Laboratories announced that they
have signed a multi-year co-promotion, distribution and research agreement
for SangCyaTM (Cyclosporine Oral Solution [MODIFIED]) 100 mg/mL and
cyclosporine capsules in the United States. As part of this agreement,
Abbott made a $ 7 million equity investment on May 7, 1999 and the Company
can, at its option, have Abbott make a second $7 million equity investment
in the Company 90 days following the first investment. In addition, Abbott
shall make up-front and milestone payments and a long-term loan to the
Company which will be funded on or before May 21, 1999.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations - Three Months Ended March 31, 1999 and 1998
SangStat is a specialty pharmaceutical company, applying a disease
management approach to improve the outcome of organ transplantation. The
Company has a total of 12 monitoring and therapeutic product and product
candidates to address the pre-transplant, acute care and chronic phases of
transplantation. During the first three months of the year, the Company
continued the launch of its two lead products, filed for approval of
SangCya capsules in Europe, conducted clinical studies on these and other
products, supported the sales and marketing teams and continued the
expansion of THE TRANSPLANT PHARMACYT.
Total revenues. Net product sales in the first quarter of 1999 increased
to $10,528,000 from $1,543,000 in the same quarter of 1998. The increase
of $8,985,000 or 582% reflects the consolidation of revenues from IMTIX-
SangStat, the launch of SangCya oral solution and Thymoglobulin in the U.S.
and growth of THE TRANSPLANT PHARMACY. Revenue from collaborative
agreements was $425,000 for the quarter ended March 31, 1999.
Cost of sales and manufacturing. Cost of sales and manufacturing expenses
were $5,841,000 for the first quarter ended March 31, 1999 as compared with
$1,563,000 in the same period in 1998. The increase of $4,278,000 or 273%
was substantially due to additional costs associated with increased sales
of therapeutic products, including sales by IMTIX-SangStat, and THE
TRANSPLANT PHARMACY.
Research and development. Research and development expenses were
$4,232,000 in the first quarter of 1999 compared to $3,082,000 in the same
period in 1998. The increase primarily reflects an increase in spending for
SangCya Capsules, THYMOGLOBULIN, AZATHIOPRINE and the addition of IMTIX-
SangStat research & development spending. In addition, the Company
continued to expand its clinical and regulatory activities for SANGCYA,
SANG-2000 and THYMOGLOBULIN.
Selling, general and administrative. Selling, general and administrative
expenses increased to $9,970,000 in the first quarter of 1999 from
$4,631,000 in the same quarter of the previous year. This increase of
$5,339,000 or 115% primarily reflects the consolidation of IMTIX-SangStat
expenses, the Company's build-up of its commercial infrastructure, launch
activities in the U.S. for SangCya oral solution and Thymoglobulin, pre-
launch activities for SangCya oral solution in Europe, and support for the
growing number of patients in THE TRANSPLANT PHARMACY.
Interest income - net. Interest income - net decreased by $1,070,000 or
98% to $23,000 in the first quarter of 1999 from $1,093,000 in the same
quarter of the previous year. The decrease reflects the decrease in the
average cash balance available for investment as a result of the Company's
use of cash for operating activities and the increase in interest expense
due to the notes payable obtained by the Company.
Income taxes. For the quarter ended March 31, 1999, the Company recorded a
tax benefit of $126,000 based upon the financial results of its overseas
operations. A tax provision was not required in first quarter of 1998.
Net loss. The Company's net loss increased to $9,723,000 or $0.60 per
share in the first quarter of 1999, compared with a net loss of $6,640,000
or $0.41 per share in the first quarter of 1998. The increase primarily
reflects increases in costs of sales and manufacturing expenses and
selling, general and administrative expenses offset by an increase in
revenues.
Liquidity and Capital Resources
During the first three months of 1999 and 1998, the net cash used in
operating activities was approximately $13,855,000 and $6,577,000,
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 periods and the purchase of inventory. As of March
31, 1999, the Company had cash, cash equivalents and short-term investments
of $26,984,000 and total assets of $106,132,000.
Net cash provided by investing activities for the first quarter ended March
31, 1999 was $3,452,000 as compared to net cash used of $833,000 for the
comparable period in 1998. The amount in 1999 is primarily the result of
the maturity of short-term investments and a decrease in other assets,
partially offset by the purchase of short-term investments.
Net cash provided by financing activities for the first quarter ended March
31, 1999 was $10,496,000 as compared to net cash used of $143,000 for the
same period in 1998. The amount in 1999 was substantially comprised of
proceeds received from the issuance of convertible notes payable. In March
1999, the Company issued $10 million principal amount of convertible notes
due March 30, 2004. These notes bear interest at the rate of 6.5% through
March 30, 2004 and thereafter at the rate of 8.5% on any overdue amount.
The interest is payable semi-annually in September and March. The notes are
convertible at the option of the holder at any time on or after March 31,
2000 and before March 30, 2004 into shares of common stock of the Company
at the rate of 50.0773 shares of common stock for each $1,000 principal
amount. The net proceeds received by the Company were $9,550,000. The
notes will be accreted to their face amount over the five year term.
On May 10, 1999, the Company and Abbott Laboratories announced that they
have signed a multi-year co-promotion, distribution and research agreement
for SangCyaTM (Cyclosporine Oral Solution [MODIFIED]) 100 mg/mL and
cyclosporine capsules in the United States. As part of this agreement,
Abbott made a $ 7 million equity investment on May 7, 1999 and the Company
can, at its option, have Abbott make a second $7 million equity investment
in the Company 90 days following the first investment. In addition, Abbott
shall make up-front and milestone payments and a long-term loan to the
Company which will be funded on or before May 21, 1999.
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 risk factors common to the regulatory
review and approval process, as well as new product launches, could cause
actual results to differ materially with regard to the approval of SangCya
oral solution (in Europe) and cyclosporine capsules and market acceptance
of SangCya oral solution, CycloTech, and Thymoglobulin. 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
regulatory agencies (or the agencies' panel of experts) will agree with the
Company's assessment of clinical trial results or proposed labels; (2) that
there can be no assurance that the agencies 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; (3) that there can be no assurance of
regulatory approval of either SangCya oral solution (in Europe) or
cyclosporine capsules; (4) that competitive pressures, manufacturing or
supply interruptions, or pricing actions, changes in the prescribing
practices of physicians, reimbursement practices of third party payors,
product liability claims or other factors could adversely impact sales of
products; (5) that there can be no assurance regarding the willingness of
patients, physicians, pharmacists and third-party payors to convert to
SangCya, cyclosporine capsules, and Thymoglobulin, based on factors such as
price, perception of bioequivalence, perceived clinical benefits and risks,
ease of use, other product features and brand loyalty; (7) that SangStat's
products compete with drugs marketed by pharmaceutical companies that have
significantly greater financial resources and established marketing and
distribution channels for competing products. The drug industry is
characterized by intense price competition and the Company anticipates that
it will face this and other forms of competition.
Other factors that could cause actual results to differ materially include,
without limitation, uncertainty related to the current or future
manufacturing of commercial quantities of SangCya, CycloTech and
Thymoglobulin on commercially favorable terms, adequate and continuous
supply of bulk cyclosporine drug substance, Thymoglobulin, and CycloTech
devices, market acceptance, profitability, competition, the patent
infringement lawsuit filed against SangStat by Novartis Pharmaceuticals,
Inc. with respect to SangCya oral solution, the lawsuit filed against the
FDA by Novartis Pharmaceuticals Inc. and any possible governmental
investigation of The Transplant Pharmacy. For a discussion of these and
other factors that might result in different outcomes, see SangStat's 1998
Form 10-K, in particular "Risks Associated with Litigation with Novartis,"
"Uncertainty of Market Acceptance," "Substantial Competition" and "The
Transplant Pharmacy"set forth therein.
Year 2000 Issue
The Company utilizes various computer software packages in the conduct
of its business activities. The Company has conducted a preliminary
assessment of its internal information technology systems to identify the
systems that could be affected by the Year 2000 issue. Based on this
preliminary assessment, the Company currently has no reason to believe that
its critical internal information technology systems are not Year 2000
compliant. The Company intends to continue to assess the Year 2000
compliance of its internal information technology systems. To date, the
Company has not made any material expenditures related to the Year 2000
compliance of its internal information technology systems and the Company
does not currently anticipate spending any material amounts for Year 2000
remediation. Total cost of completing Year 2000 compliance is estimated to
be less than $100,000. There can be no assurance that Year 2000 errors or
defects will not be discovered in the Company's internal information
technology systems. In the event Year 2000 errors or defects are discovered
in the Company's internal information technology systems and the Company is
not able to remedy such errors or defects in a timely manner, or the cost
to remedy such errors or defects is significant, there would be a material
adverse effect on the Company's business, results of operations or
financial condition. The Company has not yet fully assessed the extent of
its exposure, or fully investigated the plans of its suppliers and vendors
to address their exposures to these year 2000 problems, and thus the
Company may be adversely impacted should these organizations not
successfully address this issue. Completion of this work is targeted for
June 30, 1999. When all assessments have been completed, the Company will
develop a contingency plan for any areas in which a Year 2000 exposure
exists.
Euro-Currency
The Single European Currency (Euro) was introduced on January 1, 1999 with
complete transition to this new currency required by January 2002. The
Company is currently assessing the issues raised by the introduction of the
Euro. The Company has made and expects to continue to make changes to its
internal systems in preparation for the recently introduced Euro. The
Company further expects that introduction and use of the Euro will affect
the Company's foreign exchange activities and may result in increased
fluctuations in foreign currency results. Any delays in the Company's
ability to be Euro-compliant could have an adverse impact on the Company's
results of operations or financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to part II, Item 7A, Quantitative and Qualitative
Disclosures About Market Risk, in the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1998.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 15, 1999, the Company filed its answer in the patent
infringement lawsuit filed by Novartis Pharmaceuticals Corporation
("Novartis"). SangStat also filed a counterclaim against Novartis
alleging that Novartis violated the antitrust laws by engaging in
a series of anticompetitive acts designed and intended to exclude
SangStat from the market. Novartis' answer is due May 18, 1999.
With respect to the FDA lawsuit, the Court granted the Company's
motion to intervene. The FDA filed a motion to dismiss the
lawsuit on April 12, 1999. The Court has not yet ruled on that
motion.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EDGAR Financial Data Schedule 27.1
(b) There were no reports on Form 8-K filed during the period
covered by this report.
<PAGE>
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 17, 1999 BY: /S/ STEPHEN G. DANCE
------------------------------------
STEPHEN G. DANCE
SENIOR VICE PRESIDENT, FINANCE
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<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
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STATEMENTS OF OPERATIONS, MARCH 31, 1999/1998.
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