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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 SEPTEMBER 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-27628
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SUPERGEN, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 91-1841574
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
TWO ANNABEL LANE, SUITE 220, SAN RAMON, 94583
CALIFORNIA (Zip code)
(Address of principal executive offices)
</TABLE>
(925) 327-0200
(Registrant's telephone number, including area code)
NOT APPLICABLE
(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. Yes /X/ No / /
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of the registrant's Common Stock, $.001 par value,
outstanding as of October 30, 1998, was 20,381,439.
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TABLE OF CONTENTS
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PAGE
NO.
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PART I FINANCIAL INFORMATION
Item 1--Financial Statements
Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997............................. 3
Consolidated Statements of Operations for the three and nine month periods ended September 30, 1998 and
1997.................................................................................................. 4
Consolidated Statements of Cash Flows for the nine month periods ended September 30, 1998 and 1997..... 5
Notes to Consolidated Financial Statements............................................................. 6
Item 2--Management's Discussion and Analysis of Financial Condition and Results of Operations............ 8
PART II OTHER INFORMATION
Item 5--Use of Proceeds.................................................................................. 14
Item 6--Exhibits and Reports on Form 8-K................................................................. 14
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2
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SUPERGEN, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
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<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
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ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 8,380 $ 23,326
Marketable securities............................................................. 4,277 --
Accounts receivable, net.......................................................... 368 64
Inventories....................................................................... 966 1,428
Due from related parties.......................................................... 545 570
Prepaid expenses and other current assets......................................... 1,443 493
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Total current assets............................................................ 15,979 25,881
Property, plant and equipment, net.................................................. 3,150 2,906
Developed technology at cost, net................................................... 1,265 1,289
Investment in preferred stock of related party...................................... 500 500
Due from related party.............................................................. -- 80
Other assets........................................................................ 71 116
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Total assets.................................................................... $ 20,965 $ 30,772
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.......................................... $ 2,317 $ 1,243
Accrued employee benefits......................................................... 189 212
Amount due under asset purchase agreement......................................... -- 750
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Total current liabilities......................................................... 2,506 2,205
Stockholders' equity:
Preferred stock, $.001 par value; 2,000,000 shares authorized; none outstanding... -- --
Common stock, $.001 par value; 40,000,000 shares authorized; 20,381,439 and
20,177,696 shares issued and outstanding at September 30, 1998 and December 31,
1997, respectively.............................................................. 70,086 68,976
Accumulated other comprehensive loss.............................................. (115) (93)
Accumulated deficit............................................................... (51,512) (40,316)
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Total stockholders' equity...................................................... 18,459 28,567
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Total liabilities and stockholders' equity...................................... $ 20,965 $ 30,772
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See accompanying notes to consolidated financial statements
3
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SUPERGEN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ----------------------
1998 1997 1998 1997
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Net sales........................................................... $ 537 $ 302 $ 2,089 $ 1,282
Operating expenses:
Cost of sales, including manufacturing capacity costs of $253 in
1998............................................................ 739 445 1,327 1,221
Research and development.......................................... 2,592 2,275 7,630 5,903
Sales and marketing............................................... 738 440 2,185 1,231
General and administrative........................................ 947 912 2,885 2,173
Acquisition of in-process research and development................ -- 1,875 -- 2,706
--------- --------- ---------- ----------
Total operating expenses........................................ 5,016 5,947 14,027 13,234
--------- --------- ---------- ----------
Loss from operations................................................ (4,479) (5,645) (11,938) (11,952)
Interest income..................................................... 205 228 742 495
--------- --------- ---------- ----------
Net loss............................................................ $ (4,274) $ (5,417) $ (11,196) $ (11,457)
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Basic loss per share................................................ $ (0.21) $ (0.30) $ (0.55) $ (0.66)
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Weighted average shares used in basic loss per share calculation.... 20,379 18,238 20,326 17,393
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</TABLE>
See accompanying notes to consolidated financial statements
4
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SUPERGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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NINE MONTHS ENDED
SEPTEMBER 30,
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1998 1997
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Operating activities:
Net loss................................................................................ $ (11,196) $ (11,457)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization......................................................... 417 375
Stock options granted to consultants.................................................. 170 290
Non-cash charges related to acquisition of in-process research and development........ -- 1,875
Changes in operating assets and liabilities:
Accounts receivable................................................................... (304) (30)
Inventories........................................................................... 462 112
Prepaid expenses and other assets..................................................... (927) (570)
Accounts payable and other liabilities................................................ 1,051 1,540
Due to related parties................................................................ -- (334)
Due from related parties.............................................................. 105 (364)
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Net cash used in operating activities..................................................... (10,222) (8,563)
Investing activities:
Purchases of marketable securities...................................................... (5,353) (167)
Sale of marketable security............................................................. 1,076 --
Purchase of property and equipment...................................................... (637) (2,300)
Acquisition of developed technology..................................................... -- (150)
Purchase of equity investment in related party.......................................... -- (500)
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Net cash used in investing activities:.................................................... (4,914) (3,117)
Financing activities:
Issuance of common stock and warrants................................................... 190 25,582
Repurchase of common stock.............................................................. -- (7,866)
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Net cash provided by financing activities................................................. 190 17,716
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Net increase (decrease) in cash and cash equivalents...................................... (14,946) 6,036
Cash and cash equivalents at beginning of period.......................................... 23,326 13,915
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Cash and cash equivalents at end of period................................................ $ 8,380 $ 19,951
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See accompanying notes to consolidated financial statements
5
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SUPERGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of SuperGen,
Inc. ("SuperGen" or "the Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information on a
basis consistent with the audited financial statements for the year ended
December 31, 1997, and in accordance with the instructions to Form 10-Q. The
consolidated financial statements include the accounts of two wholly-owned
subsidiaries, which are immaterial. The statements include all adjustments
(consisting of normal recurring accruals) which in the opinion of the Company's
management are necessary for a fair presentation of the results for the periods
presented. Certain prior year amounts have been reclassified to conform to the
current year's presentations. The interim results are not necessarily indicative
of results that may be expected for the full year. The accompanying financial
statements should be read in conjunction with the Company's audited financial
statements for the year ended December 31, 1997, which are included in the
Company's Annual Report on Form 10-K.
NOTE 2. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash and cash equivalents include bank demand deposits, certificates of
deposit, marketable securities with maturities of three months or less and an
interest in money market funds which invest primarily in U.S. government
obligations and commercial paper. These instruments are highly liquid and are
subject to insignificant risk.
Marketable securities consist of corporate and government debt securities
and equity securities that have a readily ascertainable market value and are
readily marketable. These investments are reported at fair value. All marketable
securities are designated as available-for-sale, with unrealized gains and
losses included in equity.
The following is a summary of available-for-sale securities as of September
30, 1998 (in thousands):
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GROSS
AMORTIZED UNREALIZED ESTIMATED
COST GAINS (LOSSES) FAIR VALUE
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U.S. corporate debt securities............................................ $ 3,069 $ 13 $ 3,082
U.S. government debt securities........................................... 3,201 16 3,217
Marketable equity security................................................ 167 (144) 23
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Total................................................................... $ 6,437 $ (115) $ 6,322
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GROSS
AMORTIZED UNREALIZED ESTIMATED
COST GAINS (LOSSES) FAIR VALUE
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Amounts included in cash and cash equivalents............................. $ 2,022 $ -- $ 2,022
Marketable securities, current............................................ 4,248 29 4,277
Marketable equity security, non-current................................... 167 (144) 23
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Total................................................................... $ 6,437 $ (115) $ 6,322
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6
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SUPERGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 2. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES (CONTINUED)
Available-for-sale securities at September 30, 1998, by contractual
maturity, are shown below (in thousands):
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<CAPTION>
ESTIMATED
FAIR VALUE
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Debt securities:
Due in one year or less.......................................................... $ 3,230
Due after one year through three years........................................... 3,069
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6,299
Marketable equity security......................................................... 23
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$ 6,322
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-----------
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Realized gains and losses for the nine months ended September 30, 1998 were
not material. The Company held no marketable securities at any time in the nine
months ended September 30, 1997.
NOTE 3. INVENTORIES
Inventories consisted of (in thousands):
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<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
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Raw material........................................... $ 229 $ 235
Work in process........................................ 284 720
Finished goods......................................... 453 473
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$ 966 $ 1,428
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NOTE 4. COST OF SALES
The Company has an agreement with a contract manufacturing facility for the
production of Nipent-Registered Trademark-. This agreement requires the Company
to pay a fixed monthly amount in exchange for a specified number of production
runs per year. Management estimates that production at that facility will fall
short of the minimum level of production runs for which the Company is obligated
to pay. Therefore, cost of sales in the third quarter of 1998 includes a charge
of $253,000 in recognition of this manufacturing capacity cost.
NOTE 5. COMPREHENSIVE LOSS
During the third quarters of 1998 and 1997, total comprehensive losses
amounted to $4,257,000 and $5,417,000 respectively. During the first nine months
of 1998 and 1997, total comprehensive losses amounted to $11,218,000 and
$11,457,000 respectively. There was no other comprehensive loss in 1997.
NOTE 6. BASIC LOSS PER SHARE
Basic loss per share information is computed using the weighted average
number of shares of common stock outstanding during each period. The exercise of
options and warrants is not assumed since the result would be antidilutive.
7
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E
OF THE SECURITIES EXCHANGE ACT OF 1934. THESE FORWARD-LOOKING STATEMENTS
REPRESENT THE COMPANY'S EXPECTATIONS OR BELIEFS CONCERNING FUTURE EVENTS AND
INCLUDE STATEMENTS, AMONG OTHERS, REGARDING:
- THE TIMING AND PROGRESS OF THE DEVELOPMENT OF THE COMPANY'S PROPOSED
PRODUCTS,
- FILING FOR AND RECEIVING REGULATORY APPROVALS,
- ACQUIRING ADDITIONAL PRODUCTS AND TECHNOLOGIES,
- ANTICIPATING THE MARKET OPPORTUNITIES FOR ITS EXTRA AND PROPRIETARY
PRODUCTS,
- MARKETING CURRENT AND PROPOSED PRODUCTS TO HOSPITAL BUYING GROUPS AND
OTHERS,
- DEVELOPING PARTNERSHIP RELATIONSHIPS,
- INCURRING OPERATING EXPENSES AND LOSSES AND REQUIRING ADDITIONAL CAPITAL,
AND
- INCURRING CAPITAL EXPENDITURES.
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF A VARIETY OF FACTORS, INCLUDING THOSE
SET FORTH UNDER "--FACTORS AFFECTING FUTURE OPERATING RESULTS" BELOW AND
ELSEWHERE IN THIS REPORT.
OVERVIEW
SuperGen, Inc. ("SuperGen" or the "Company") is an emerging pharmaceutical
company dedicated to the acquisition, rapid development and commercialization of
products for the treatment of life-threatening diseases, particularly cancer. A
key element of the Company's strategy is to identify, acquire and develop
pharmaceutical products in the later stages of development. The Company believes
this strategy will shorten the research and development cycle and thereby
minimize the time, expense and technical risk associated with drug development.
The Company's primary oncology programs target leukemias and lymphomas, solid
tumors and the development of the Company's proprietary Extra technology (its
enhanced line of already established anticancer drugs). SuperGen also seeks to
expand its portfolio of anticancer drugs through the acquisition of products and
product candidates that complement its portfolio and provide the Company with
market opportunities. The Company also has non-oncology programs in the large
market areas of anemias and other blood cell disorders, obesity/diabetes and
certain autoimmune diseases. The Company intends to seek partnership
opportunities in these areas.
Since late 1996, the Company has actively marketed several pharmaceutical
products. The Company acquired the proprietary drug Nipent-Registered Trademark-
(pentostatin for injection), along with associated North American marketing
rights, in 1996. In December 1997, the Company received governmental approval to
sell Nipent-Registered Trademark- manufactured under its own Supplemental New
Drug Application. Nipent-Registered Trademark- is indicated for the treatment of
Hairy Cell Leukemia and it has Orphan Drug Designation for both chronic
lymphocytic leukemia and cutaneous T-cell lymphoma. In April 1998, the Company
received FDA approval to market the generic drug mitomycin for injection.
Mitomycin, originally developed and marketed by Bristol-Meyers Squibb under the
tradename Mutamycin-Registered Trademark-, is approved in the U.S. for the
treatment of adenocarcinoma of the stomach and pancreas in combination with
other approved chemotherapeutics. The Company began to sell mitomycin in June
1998.
8
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Sales of Nipent-Registered Trademark- were responsible for 96% of product
revenues in the first nine months of 1998 and 81% of product revenues for the
same period in 1997. Remaining product revenues in 1998 consisted of sales of
mitomycin, and remaining product revenues in 1997 consisted of sales of several
generic products purchased in 1997 and 1996.
In September 1997, the Company acquired exclusive worldwide rights to a
patented anticancer compound (RFS2000), which is currently in Phase III human
trials for pancreatic cancer, the fifth leading cause of cancer death. It has
also shown activity against an array of solid tumors in animal and initial human
studies with a favorable side effect profile. At the end of 1997, SuperGen filed
for governmental approval for its first Extra product, Mito Extra. The Food and
Drug Administration accepted that filing for review in February 1998. The
Company intends to file for approval of several additional Extra and generic
anticancer products over the next several years. Also, the Company has continued
development of a proprietary blood cell disorder product for the treatment of
aplastic anemia (and other anemias associated with chemotherapy, radiotherapy,
and renal failure). SuperGen's proprietary obesity/diabetes pill, which has
shown promise in early preclinical and human studies, is currently in Phase II
clinical trials for a genetic disorder leading to chronic obesity and is
expanding into multi-center Phase I/II trials for Type II diabetes. The Company
has received Orphan Drug Designations for its aplastic anemia agent and obesity
pill for the treatment of a genetic disorder leading to chronic obesity.
The Company has incurred losses in each year since its inception and has
accumulated approximately $51.5 million in net losses through September 30,
1998. Revenue from future product sales or other sources may never be sufficient
to fund operations and the Company may never achieve profitability or positive
cash flow.
The Company expects its research and development expenses to increase as a
result of expanded clinical trials of RFS 2000, Nipent-Registered Trademark-,
the Extra product line and other drugs. The Company expects its marketing and
sales expenses to increase as it expands its United States direct sales and
marketing organization.
The Company's future quarterly operating results will depend on a variety of
factors, including
- changes in the Company's level of research and development, including the
timing of any expansion of clinical trials,
- acquisitions of products or technology,
- regulatory approvals of new products or expanded labeling of existing
products,
- the price, volume and timing of sales of the Company's products,
- the Company's ability to successfully manufacture approved products for
sale,
- the mix between Nipent-Registered Trademark- sales in the United States
and those under a supply agreement for sale outside North America, and
- variations in gross margins of the Company's products, which may be
affected by the sales mix referred to above, competitive pricing
pressures, and fluctuations in manufacturing yields.
In addition, sales of any product in any given period may include a
significant amount of orders for inventory by distributors and wholesalers and
may not be indicative of actual demand for products by physicians and patients.
There can be no assurance that distributors or wholesalers will be able to
forecast demand for product accurately. The Company expects quarterly operating
results to fluctuate in the future.
9
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RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997.
Total revenues were $537,000 compared to $302,000 in 1997. Revenues in both
periods consisted entirely of product sales. The increase in revenues in 1998
was due primarily to higher sales volumes of Nipent-Registered Trademark-, which
resulted from sales of Nipent-Registered Trademark- under a supply agreement for
sale outside North America, which commenced in March 1998. Sales of mitomycin,
which commenced in June 1998, also contributed to the increased revenues in
1998.
Gross margin on sales of Nipent-Registered Trademark- was negative in both
1998 and 1997. In 1998, margins on sales of Nipent-Registered Trademark- were
adversely affected by a $253,000 charge to cost of sales for manufacturing
capacity costs and lower unit selling prices for Nipent-Registered Trademark-
sold under the supply agreement (relative to selling prices for direct sales of
Nipent-Registered Trademark- in the United States). Margins in 1997 were
adversely affected by low selling prices for certain generic products and high
unit cost for Nipent-Registered Trademark- inventory. In 1997, sales of
Nipent-Registered Trademark- consisted entirely of inventory acquired from
Warner-Lambert Company and margins were affected by the relatively high unit
cost of that inventory. The unit cost of manufactured
Nipent-Registered Trademark- has been, and is expected to continue to be,
significantly lower than the unit cost assigned to the
Nipent-Registered Trademark- inventory acquired from Warner-Lambert Company.
However, the Company is in the early stages of Nipent-Registered Trademark-
sales and manufacturing and current margins may not be indicative of future
margins due to possible variations in average selling prices and manufacturing
costs.
Research and development expenses were $2,592,000 in 1998 compared to
$2,275,000 in 1997. The increased expense was primarily due to manufacturing and
clinical costs associated with RFS2000, and expansion of the research and
development staff. These increased costs were partially offset by the effect of
Nipent-Registered Trademark- manufacturing start-up costs incurred in 1997 and
not duplicated in 1998.
Sales and marketing expenses were $738,000 in 1998 compared to $441,000 in
1997. The increased expense was primarily due to advertising and related costs
to support Nipent-Registered Trademark- sales in 1998. Also, the Company has
expanded its sales and professional services staff resulting in additional
expense in 1998.
General and Administrative expenses were $947,000 in 1998 compared to
$912,000 in 1997. The increased expense in 1998 included costs, totaling
$120,000, related to the termination of a consultancy relationship with a former
director and costs resulting from a slight increase in administrative staff.
These increased expenses were offset by lower legal and other costs in 1998.
Such costs incurred in 1997 related to technology acquisition and equity
financing transactions, and were not repeated in 1998.
In 1997, the Company incurred a charge of $1,875,000 for the acquisition of
in-process research and development, relating to the acquisition of RFS2000.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997.
Total revenues were $2,089,000 in 1998 compared to $1,282,000 in 1997. The
increase in revenues was due primarily to higher sales volumes of
Nipent-Registered Trademark- in 1998, which resulted principally from sales of
Nipent-Registered Trademark- under a supply agreement for sale outside North
America, which commenced in March 1998. The Company began to sell mitomycin late
in the second quarter of 1998 and revenues from sales of mitomycin contributed
slightly to the overall revenue increase.
Gross margin was higher in 1998 due primarily to the lower unit cost of
Nipent-Registered Trademark- sold. This positive effect upon margin was
partially offset by lower selling prices for Nipent-Registered Trademark- sold
under the supply agreement and a $253,000 charge to cost of sales for
manufacturing capacity costs. The Company is in the early stages of
Nipent-Registered Trademark- sales and manufacturing and current margins may not
be indicative of future margins due to possible variations in average selling
prices and manufacturing costs.
Research and development expenses were $7,630,000 in 1998 compared to
$5,903,000 in 1997. Product formulation and development costs associated with
RFS 2000, Nipent-Registered Trademark- and mitomycin contributed to the
10
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overall increase in expenses in 1998. Costs attributable to expansion of the
research and development staff also contributed to the increase in expense, as
did the Company's investment of $200,000 in a related party in the first quarter
of 1998.
Sales and marketing expenses were $2,185,000 in 1998 compared to $1,231,000
in 1997. This increase was primarily due to costs reflecting the expansion of
the sales and marketing group from six at December 31, 1996 to 15 at September
30, 1998. In 1998 the Company initiated media advertising for
Nipent-Registered Trademark- and increased its presence at strategic trade
shows. Costs associated with these activities also contributed to the overall
increase in expenses.
General and Administrative expenses were $2,885,000 in 1998, compared to
$2,173,000 in 1997. The increase was due principally to consultancy and other
costs relating to investor relations, patent related legal fees and enhancements
in information technology. Higher facilities and personnel costs also
contributed to the overall increase in expense. The Company moved into larger
administrative offices in March of 1997 and the administrative staff has grown
slightly to accommodate increases in headcount and business activities.
In 1997, the Company incurred the following charges for the acquisition of
in-process research and development:
- $831,000 related to the acquisition of the generic anticancer drug
etoposide, and
- $1,875,000 for the acquisition of RFS2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and marketable securities totaled $12.7
million at September 30, 1998 compared to $23.3 million at December 31, 1997.
The net cash used in operating activities of $10.3 million in the first nine
months of 1998 reflected the net loss of $11.2 million partially offset by non-
cash charges for depreciation, stock options granted to consultants and the
termination of a consultancy relationship with a former director. Cash used for
purchases of property and equipment was $608,000, principally for equipment,
fixtures and computer equipment at the Company's research facility established
in Pleasanton, California late in 1997.
The Company believes that its cash, cash equivalents and investments in
marketable securities on-hand at September 30, 1998 will satisfy its budgeted
cash requirements for approximately 12 months, based on the Company's current
operating plan. The primary planned uses of cash during that period are:
- funding operations,
- conducting clinical testing of potential proprietary and Extra-TM-
products,
- marketing for expanded indications for Nipent-Registered Trademark- that
may be developed, and
- continuing research and development programs.
The Company is actively considering future contractual arrangements that
would require significant financial commitments, particularly for acquiring
rights to additional drug candidates and for clinical trials for existing and
new drug candidates. The Company will need to raise capital before the third
quarter of 1999 if cash needs exceed budgeted amounts. The Company does not
anticipate significant capital expenditures for the remainder of 1998.
The Company may seek such additional funding through public or private
financings or collaborative or other arrangements with third parties. The
Company has no credit facility or other committed sources of capital. There can
be no assurance that additional funds will be available on acceptable terms, if
at all. See "--Factors Affecting Future Operating Results."
11
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FACTORS AFFECTING FUTURE OPERATING RESULTS
As the future operating results of the Company cannot be accurately
predicted, the following factors should be carefully reviewed together with the
other information contained in this quarterly report on Form 10-Q.
- HISTORY OF OPERATING LOSSES. The Company has incurred losses in every
fiscal period to date and expects to continue to incur significant
operating losses. The likelihood of the long-term success of the Company
must be considered in light of the expenses, difficulties and delays
frequently encountered in the development, commercialization and
manufacturing of new pharmaceutical products, as well as competition and
the burdensome regulatory environment in which the Company operates. The
Company has limited experience in each of these areas. The Company may
never achieve significant revenues or profitable operations.
- ADDITIONAL FINANCING REQUIREMENTS. The Company's need for additional
funding is expected to be substantial and will be determined by the
progress and cost of the acquisition, development and commercialization of
its products and other activities. Cash, cash equivalents and marketable
securities on hand at September 30, 1998 will satisfy the Company's
budgeted cash requirements for approximately 12 months. During that
period, the Company will need to secure additional funding. If the Company
experiences unanticipated cash requirements during that period, the
Company could require funds much sooner. Failure to obtain adequate
funding in a timely manner would have a material adverse effect on the
Company's business, results of operations and cash flows.
- EARLY STAGE OF DEVELOPMENT OF PROPRIETARY PRODUCTS; UNCERTAINTY OF FINAL
PRODUCT DEVELOPMENT. While the Company's proposed proprietary products are
in the development rather than the research stage, significant development
remains prior to the time any of these proposed products may be brought to
market. The Company's products currently under development may never be
successfully developed, receive required governmental regulatory
approvals, become commercially viable or achieve market acceptance.
- MANUFACTURING RISK. The Company is manufacturing (through contract
manufacturers and vendors) Nipent-Registered Trademark- and mitomycin, for
sale. If, for any reason, the Company is unable to produce sufficient
quantities of these products to satisfy market demand in a timely manner,
the result could be a material adverse effect upon the Company's business,
results of operations and cash flows. The Company also relies upon various
domestic and foreign manufacturers and vendors for storage of crude
concentrate, for production of certain of its bulk Extra and generic
formulations and for production of sufficient quantities of compounds to
conduct clinical trials for its proposed proprietary products. Failure of
any of these manufacturers or vendors to successfully perform could have a
material adverse effect upon the Company's business, results of operations
and cash flows.
- PHARMACEUTICAL DEVELOPMENT. The Company has obtained clearance from the
FDA related to its Nipent-Registered Trademark- and mitomycin
manufacturing processes and sources of bulk drugs for certain of its Extra
and generic products. However, it has yet to receive marketing approval
for any of its internally developed products, and such marketing approval
may never be obtained.
- DEPENDENCE ON KEY PERSONNEL. The Company's success is dependent on certain
key management and scientific personnel, including Dr. Joseph Rubinfeld,
the loss of whose services could significantly affect the ability of the
Company to achieve its planned objectives. The loss of key personnel, or
the inability to attract and retain the highly skilled personnel required
to conduct and expand the Company's activities, could have a material
adverse effect upon the Company's business, results of operations and cash
flows.
- NEED TO COMPLY WITH GOVERNMENTAL REGULATION AND TO OBTAIN PRODUCT
APPROVALS. The Company cannot predict if or when it might submit its
products currently under development for regulatory
12
<PAGE>
review. Once the Company submits its potential products for review,
regulatory approvals may never occur.
- PATENTS AND PROPRIETARY TECHNOLOGY. The Company has licenses to or
assignments of numerous issued U.S. patents but these may not provide any
significant protection against competitors. Failure to comply with the
terms of licenses and agreements could result in loss of the Company's
underlying rights to one or more of its potential proprietary products.
Claims against the Company may be raised based on patents held by others
and such claims may be successful. If the Company becomes involved in any
litigation, that process could consume a substantial portion of the
Company's resources regardless of the outcome of such litigation.
- COMPETITION. There are many companies, both public and private, including
well-known pharmaceutical companies that are engaged in the development
and sale of products for many of the applications being pursued by the
Company. The industry in which the Company competes is characterized by
extensive research and development efforts and rapid technological
progress. Price erosion is also characteristic of this industry,
particularly with regard to products such as the Company's proposed Extra
and generic drugs. The Company's competitive position will be affected by
many factors, including but not limited to:
- the Company's ability to attract and retain qualified personnel,
develop effective proprietary products, implement development and
marketing plans, and secure adequate capital resources,
- the ability of the Company to establish or maintain proprietary
positions,
- discoveries by others,
- the number and success of competitors, and
- market selling prices, inventory production costs and their effects
upon the Company's gross margins.
The above factors are not intended to be inclusive and there are numerous
other factors which could contribute to the business risk inherent in the
Company's operations. Some of these factors are described in the Company's
Annual Report on Form 10-K. Failure to satisfactorily achieve any of the
Company's objectives or avoid any of these risks may have a material adverse
effect on the Company's business, results of operations and cash flows.
13
<PAGE>
SUPERGEN, INC.
PART II--OTHER INFORMATION
ITEM 5. USE OF PROCEEDS
On March 13, 1996, the Company commenced its initial public offering (the
"IPO") of 4,025,000 units (a unit consisted of one share of Common Stock $0.001
par value per share, and a warrant to purchase one share of Common Stock at
$9.00), including the underwriter's over-allotment option consisting of 525,000
units at a public offering price of $6.00 per unit pursuant to a registration
statement on Form S-B (file no. 333-476 LA) filed with the Securities and
Exchange Commission. Of the units registered, 4,024,302 were sold. Paulson
Investment Company was the managing underwriter of the IPO. Aggregate gross
proceeds to the Company from the IPO (prior to deduction of underwriting
discounts and commissions and expenses of the offering and any exercises of the
warrants) were $24,146,000. All of the shares registered for the exercise of the
warrants have not yet been sold. There were no selling stockholders in the IPO.
The Company paid underwriting discounts, commissions and expenses of
$1,992,000 and other expenses of approximately $623,000 in connection with the
IPO. The total expenses paid by the Company in the IPO were $2,615,000, and the
net proceeds to the Company from the IPO through September 30, 1998, including
the subsequent exercise of warrants to purchase common stock, were $23,424,000.
From March 13, 1996, the effective date of the registration statement, to
September 30, 1998, (the Company's fiscal 1998 third quarter end), the
approximate amount of net proceeds used was:
<TABLE>
<S> <C>
Construction of plant, building and facilities.............. $ 1,246,000
Purchase and installation of equipment...................... 295,000
Purchase of real estate..................................... 744,000
Working capital used in operations.......................... 16,862,000
Repurchase of common stock.................................. 3,557,000
Purchase of equity investment in a related party............ 500,000
Acquisition of developed technology......................... 220,000
</TABLE>
None of such payments consisted of direct or indirect payments to directors,
officers, owners of more than 10% of the outstanding stock of the Company or
affiliates of the Company, with the exception of:
- the payment to repurchase common stock, which was made to a stockholder
that, immediately prior to the repurchase, owned more than 10% of the then
outstanding common stock of the Company, and
- compensation to directors and officers as compensation for services
provided to the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No.
<TABLE>
<S> <C>
10.1 Letter of intent regarding Nipent-Registered Trademark- manufacturing.
27.1 Financial Data Schedule--electronic filing only.
</TABLE>
(b) No reports were filed on Form 8-K during the quarter for which this
report is filed.
14
<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.
Date: November 11, 1998
<TABLE>
<S> <C> <C>
By: /s/ JOSEPH RUBINFELD
----------------------------------------
Joseph Rubinfeld, Ph.D.
CHIEF EXECUTIVE OFFICER, PRESIDENT, AND
DIRECTOR (PRINCIPAL EXECUTIVE AND
FINANCIAL OFFICER)
By: /s/ KEVIN C. LEE
----------------------------------------
Kevin C. Lee
CONTROLLER (PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
15
<PAGE>
SuperGen Letterhead
SENT VIA FAX AND OVERNIGHT MAIL TO [ ]
April 9, 1998
[ ]
Dear [ ]:
[ ] and SuperGen agree that this letter of intent is binding and the
basic terms as to general capacity exclusivity, exclusivity, minimum
processing commitments, and price. The parties agree to negotiate in good
faith a manufacturing Agreement setting forth fully each party's obligations
and rights, but when appropriate the terms of such Manufacturing Agreement
shall be consistent with and substantially similar to the Professional
Services Agreement between the parties. [ ] hereby agrees: (i) to
reserve sufficient capacity and resources to batch process up to [ ]
batches of approximately [ ] kg quantities ("Batch") of crude Pentostatin
or other bulk drug substance for SuperGen per calendar year ("Processing");
(ii) make available on an exclusive basis for the Processing, Rooms [ ],
[ ], [ ] and [ ] located on [ ] (collectively, the
"Rooms"); and (iii) that neither [ ] nor any Related Entity (as defined
below) will: (a) manufacture, sell or otherwise distribute the Pentostatin
drug substance except at the direction of SuperGen, (b) assist (in any
manner, including without limitation by loaning money) any third parties to
do any of the foregoing, (c) perform any research or other services (except
the Services) with respect to the Pentostatin drug substance. For purposes of
the paragraph, Related Entity shall mean any entity, (i) controlled by [ ]
or (ii) in which [ ] has a substantial interest resulting in policy or
management influence. The exclusivity period contemplated by this paragraph
shall begin on [ ] and shall end on [ ].
SuperGen hereby orders from [ ] Processing work for [ ] Processing
Batches and [ ] agrees to batch process these [ ] Processing Batches
during the period beginning [ ], and ending [ ] ("Initial Minimum
Processing"). SuperGen hereby agrees to provide Processing work to [ ]
resulting in Processing work through the Rooms in the year 1999 and each
subsequent renewal year resulting in the processing of at least [ ]
Batches or an equivalent in terms of financial support by fulfilling other
SuperGen projects through use of the Rooms ("1999 Minimum Processing"). In
the event SuperGen exceeds [ ] Batches of Processing during the period of
[ ]through [ ], the 1999 Minimum Processing shall be reduced by the
number of Batches in excess of the Initial Minimum Processing. Processing
fees through the Rooms for the Initial Minimum Processing
<PAGE>
period shall be $[ ] per batch or $[ ] ("Initial Minimum Processing
Fee") for the [ ] Batches. Such Initial Minimum Processing Fee shall be
paid by paying, in addition to all other amounts due from SuperGen, on a
monthly basis by the tenth of the month, the greater of: (i) invoice amounts
due to finished Pentostatin or other drug substance produced in the Rooms, or
(ii) the monthly equalized payment of the Initial Minimum Processing Fee
which is $[ ], unless SuperGen has already paid the full Initial
Processing Fee, in which case such equalized amount shall be deemed to be $0.
Fees for the 1999 Minimum Processing and subsequent minimum processing
obligations (if the Manufacturing Agreement is renewed) ("Minimum Processing
Fee") shall be paid in equal monthly installments on or before the 10th day
of each month or by the Batch to the extent actual Processing fees exceed the
equalized monthly payment. To the extent Batch fees paid up through a
particular calendar month exceed the Minimum Processing Fee prorated
according to the number of calendar months that have elapsed in the calendar
year in question (e.g., in such particular month is March, the Minimum
Processing Fee will be multiplied by 3/12), such excess shall be subtracted
from the total remaining equalized payments and the results divided by the
number of months remaining in the year, which amount becomes the new monthly
equalized payment. Upon making total Processing fee payments equal to the
then current annual Minimum Processing Fee, SuperGen may cease making monthly
payments and may pay for Processing by the Batch for the remainder of the
then current calendar year.
In the event the Manufacturing Agreement is renewed in writing by both
parties for years subsequent to 1999, SuperGen agrees to Process a minimum of
[ ] Batches or provide work equivalent thereto in fees through the Rooms
in each calendar year and pay for the Processing in the manner outlined in
the prior paragraph to maintain exclusivity of the Rooms.
During 1999, and each renewal year thereafter, the Processing Fee per Batch
shall increase by no more than the greater of (i) [ ]% of the previous
year's fee or (ii) by an adjustment based upon the percentage increase from
the previous year's fee as indicated in Schedule 0635 of the Producer Price
Index ("PPI") published by the Bureau of Labor Statistics, United States
Department of Labor. The PPI adjustment shall be calculated on the first
business day of each year as follows: The minimum annual process fee for the
prior year shall be multiplied by a fraction. The numerator of the fraction
shall be the PPI for the most recent month for which the CPI is available.
The denominator of the fraction shall be the PPI for the month of January of
the previous contract year.
All of SuperGen's obligations to purchase minimum numbers of Batches shall be
subject to [ ] providing to SuperGen manufacturing services whose quality
and timeliness is at least as high as the industry standard. In no event
shall SuperGen be liable for [ ] loss of business opportunity or any
other consequential damages arising out of a breach by SuperGen of the
Manufacturing Agreement. This letter of intent and the Professional Services
Agreement constitute the parties' exclusive agreement with respect to the
subject matter hereof. [ ] and SuperGen agree to negotiate in good faith
to reach an agreement that is consistent with this letter of intent.
Sincerely, Agreed by:
<PAGE>
/s/ Dr. Joseph Rubinfeld
Dr. Joseph Rubinfeld /s/ [ ]
----------------------------------
President & CEO Title: President [ ]
---------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRRACTED FROM SUPERGEN,
INC. SEPTEMBER 30, 1998 CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 8,380
<SECURITIES> 4,277
<RECEIVABLES> 378
<ALLOWANCES> 10
<INVENTORY> 966
<CURRENT-ASSETS> 15,979
<PP&E> 3,914
<DEPRECIATION> 764
<TOTAL-ASSETS> 20,965
<CURRENT-LIABILITIES> 2,506
<BONDS> 0
0
0
<COMMON> 70,086
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 20,965
<SALES> 2,089
<TOTAL-REVENUES> 2,089
<CGS> 1,327
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 12,700
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (11,196)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,196)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,196)
<EPS-PRIMARY> (0.55)
<EPS-DILUTED> (0.55)
</TABLE>
