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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 1997
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 000-28844
ALGOS PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-3142274
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Collingwood Plaza, 4900 Route 33, Neptune, New Jersey, 07753-6804
(Address of principal executive offices)
732-938-5959
(Registrant's telephone number, including area code)
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 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 ____
The aggregate number of shares of the Registrant's common stock outstanding on
October 22, 1997 was 15,951,369.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31 September 30
1996 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 48,575,719 $ 7,202,361
Marketable securities 19,324,376
Prepaid expenses 330,083 199,404
----------- ------------
Total current assets 48,905,802 26,726,141
Marketable securities, noncurrent 16,109,849
Property and equipment, net 86,682 160,643
Other assets 209,257 120,258
------------ ------------
Total assets $ 49,201,741 $ 43,116,891
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 456,684 $ 1,373,149
Other current liabilities 516,786 756,116
------------ ------------
Total current liabilities 973,470 2,129,265
------------ ------------
Commitments
Stockholders' equity:
Preferred stock, $100,000 aggregate liquidation preference 1,000
Common stock, $.01 par value, 50,000,000 shares authorized,
15,669,101 and 15,950,954 shares issued and outstanding, respectively 156,691 159,510
Additional paid-in-capital 55,902,403 55,974,785
Unearned compensation expense (856,150) (647,448)
Deficit accumulated during the development stage (6,975,673) (14,499,221)
------------ ------------
Total stockholders' equity 48,228,271 40,987,626
------------ ------------
Total liabilities and stockholders' equity $ 49,201,741 $ 43,116,891
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
1
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ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended Cumulative from
September 30, September 30, inception to
----------------------------- ------------------------- September 30,
1996 1997 1996 1997 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ - $ - $ 1,500,000 $ - $ 2,311,000
---------- ------------ ----------- ----------- -------------
Operating expenses:
Research and development 609,221 2,370,380 1,612,806 7,504,423 13,281,696
General and administrative 345,104 622,823 1,973,288 1,857,154 6,511,993
---------- ------------ ----------- ----------- -------------
Total operating expenses 954,325 2,993,203 3,586,094 9,361,577 19,793,689
---------- ------------ ----------- ----------- -------------
Loss from operations (954,325) (2,993,203) (2,086,094) (9,361,577) (17,482,689)
Interest income 46,519 625,167 123,531 1,838,029 2,983,468
---------- ------------ ----------- ----------- -------------
Net loss $(907,806) $(2,368,036) $(1,962,563) $(7,523,548) $(14,499,221)
========== ============ =========== =========== =============
Pro forma net loss per common share $ (0.07) $ (0.15) $ (0.16) $ (0.48)
========== ============ =========== ===========
Pro forma weighted average common
shares outstanding 12,360,301 15,899,597 12,339,229 15,832,849
========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
2
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ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the nine months ended Cumulative from
September 30, inception to
---------------------------- September 30,
1996 1997 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities $ (341,550) $ (6,326,115) $(11,266,671)
Cash flows from investing activities:
Purchases of marketable securities (48,014,558) (48,014,558)
Maturities of marketable securities 13,000,000 13,000,000
Purchases of property and equipment (4,055) (106,886) (304,865)
------------ ------------- -------------
Net cash used in investing activities (4,055) (35,121,444) (35,319,423)
------------ ------------- -------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock 50,000 6,659,015
Proceeds from issuance of common stock 19,570 74,201 47,129,440
Deferred financing costs (147,041) -
------------ ------------- -------------
Net cash provided by financing activities (77,471) 74,201 53,788,455
------------ ------------- -------------
Net increase (decrease) in cash and cash equivalents (423,076) (41,373,358) 7,202,361
Cash and cash equivalents, beginning of period 3,707,100 48,575,719 -
------------ ------------- -------------
Cash and cash equivalents, end of period $3,284,024 $ 7,202,361 $ 7,202,361
============ ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements
3
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ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed financial statements presented herein have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X and are unaudited. In the opinion of management, the financial
statements reflect all adjustments (which consist of normal recurring accruals
and adjustments) necessary for a fair statement of the results of the interim
periods presented.
2. EARNINGS PER SHARE
The pro forma net loss per share is based on the weighted average number
of shares of Common Stock outstanding during the period, after giving effect to
the October 1996 conversion of Series A Preferred Stock into Common Stock as of
January 1, 1995. In addition, pursuant to Securities and Exchange Commission
Staff Accounting Bulletin No. 83, all shares of Common Stock issuable upon the
conversion of Series B Preferred Stock and the exercise of common stock options
issued during the twelve months prior to the Company's initial public offering
have been included in the calculation of weighted average number of shares of
common stock outstanding for all periods prior to the offering.
The historical net loss per common share based on the actual weighted
average number of common shares outstanding is as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------------------------------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss per common share $(0.15) $(0.15) $(0.32) $(0.98)
Weighted average number of common shares
outstanding 6,171,880 15,899,597 6,153,334 15,832,849
</TABLE>
3. MARKETABLE SECURITIES
Cash and cash equivalents and marketable securities at September 30,
1997 include the following debt securities:
<TABLE>
<CAPTION>
Amortized Estimated Fair Unrealized
Cost Market Value Gains (Losses)
-------------------------------------------------
<S> <C> <C> <C>
U.S. treasury and federal agency debt securities $30,907,235 $30,927,257 $20,022
Corporate debt securities $4,098,356 $4,100,120 $1,756
</TABLE>
The securities are classified as held-to-maturity securities and are
stated at their amortized cost. Noncurrent marketable securities have maturities
in excess of one year and less than two years.
4
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ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
4. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
December 31 September 30
1996 1997
---- ----
<S> <C> <C>
Accrued research expenses $302,036 $563,094
Accrued compensation 214,750 193,022
--------- -----------
$516,786 $756,116
========= ===========
</TABLE>
5. LEASE AGREEMENT
In March 1997, the Company entered into a ten-year operating lease
agreement for an office building expected to be completed in 1998. Effective
upon completion of the building, minimum annual lease payments under the lease
will amount to approximately $269,000 per year for the first five years and
aggregate approximately $1.6 million in the second five-year period. The
agreement provides the Company with an option to purchase the building.
6. RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued SFAS No. 128,
"Earnings per Share", which establishes new requirements for the calculation and
disclosure of earnings per share effective in the fourth quarter of 1997. The
FASB has also issued SFAS No. 130, "Reporting Comprehensive Income", which
establishes standards for determining and reporting comprehensive income and its
components effective in 1998. The Company believes the adoption of these
standards will not have a material effect on its financial position or results
of operations.
5
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
General
Algos, a development stage company, is engaged primarily in the
development and commercialization of proprietary pharmaceutical products. Since
its formation in January 1992, the Company has devoted a substantial amount of
its efforts to licensing technology, recruiting key management and staff,
developing products, filing patents and other regulatory applications and
raising capital.
The Company has incurred losses since its inception and expects to incur
operating losses in the future. The Company expects that its product development
expenses will increase significantly as the drugs that the Company currently has
under development move into advanced clinical trials and as additional drugs are
developed.
Results of Operations
Three months ended September 30, 1997 compared to the three months ended
September 30, 1996
Revenue:
The Company, which is in the development stage, did not have revenue in
the quarters ended September 30,1997 and 1996.
Research and development:
In the quarter ended September 30, 1997, research and development
expenses were $2,370,380 an increase of $1,761,159, or 289%, from the quarter
ended September 30, 1996. The increase was primarily attributable to MorphiDex
clinical trial costs and the expansion of development activities for other
products. In addition, personnel costs increased as a result of additions to the
Company's development staff.
General and administrative:
In the quarter ended September 30, 1997, general and administrative
expenses were $622,823, an increase of $277,719, or 80%, from the quarter ended
September 30, 1996. General and administrative costs increased as a result of
the Company's increased business activities following the completion of its
initial public offering ("IPO") in October 1996.
Interest income:
Interest income increased substantially in the quarter ended September
30, 1997 due to the investment of the proceeds of the Company's IPO.
Nine months ended September 30, 1997 compared to the nine months ended September
30, 1996
Revenue:
The Company, which is in the development stage, did not have revenue in
the nine months ended September 30,1997. In the nine months ended September
30,1996, the Company recognized $1,500,000 of license revenue, representing a
portion of the initial payment due the Company under its June 1996 license
agreement with McNeil Consumer Products Company.
6
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Research and development:
In the nine months ended September 30, 1997, research and development
expenses were $7,504,423, an increase of $5,891,617, or 365%, from the nine
months ended September 30, 1996. The increase was primarily attributable to cost
of performing clinical trials and manufacturing small-scale test batches of
MorphiDex and the expansion of development activities for other products. In
addition, personnel costs increased as a result of additions to the Company's
development staff.
General and administrative:
In the nine months ended September 30, 1997, general and administrative
expenses were $1,857,154, a decrease of $116,134, or 6%, from the nine months
ended September 30, 1996. The decrease reflects a one-time charge of $915,000 in
the 1996 period related to the issuance of Series B Preferred Stock. This
decrease was partially offset by increases in professional fees, insurance, and
other general and administrative costs resulting from the Company's increased
business activities.
Interest income:
Interest income increased substantially in the nine months ended
September 30, 1997 due to the investment of the IPO proceeds.
Liquidity and Capital Resources
As a result of its product development efforts, the Company has
experienced net cash outflows from operations since its inception in 1992. In
the nine months ended September 30, 1997, cash outflows from operations totaled
$6,326,115, compared to $341,550 in the prior year period. The increase in
expenses was primarily attributable to increased development expenses for
MorphiDex. Development expenses in the 1996 period were partially offset by an
initial payment of $1,500,000 due the Company under its June 1996 license
agreement with McNeil Consumer Products Company. The Company is a party to
several research and development agreements pursuant to which it expects to
incur additional expenses, primarily related to its development of MorphiDex.
The Company expects that its development expenses will continue to increase as
its development programs expand and additional preclinical studies and clinical
trials are initiated.
The Company's funding requirements will depend on a number of factors
including the results of its development efforts, the timing and costs of
obtaining required regulatory approvals, the development of competing
technologies, the amount of resources required for the establishment of
marketing and distribution capabilities, the execution of licensing or other
collaborative research agreements on terms acceptable to the Company, and the
cost of prosecuting and defending patents. At September 30, 1997, cash and
marketable securities totaled $42.6 million. The Company currently expects that
these funds will be sufficient to fund its operations for the development of
products currently in clinical trials. If additional trials are necessary or
advisable, or if additional products are developed, the Company may require
additional funds to complete such trials. In the event that revenue and income
from product introductions or other internally generated funds are insufficient
for such additional trials, the Company will need to raise additional funds by
incurring debt, issuing additional equity or entering into collaborative or
license arrangements.
Other
The Financial Accounting Standards Board has issued SFAS No. 128,
"Earnings per Share", which establishes new requirements for the calculation and
disclosure of earnings per share effective in the fourth quarter of 1997. The
FASB has also issued SFAS No. 130, "Reporting Comprehensive
7
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Income", which establishes standards for determining and reporting comprehensive
income and its components effective in 1998. The Company believes the adoption
of these standards will not have a material effect on its financial position or
results of operations.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this Form 10q contain
"forward-looking" statements, within the meaning of Section 27A of Securities
Act of 1993, as amended and Section 21E of the Securities Exchange Act of 1934,
that are based on management's beliefs and assumptions, current expectations,
estimates and projections. Statements that are not historical facts, including
statements which are preceded by, followed by, or that include the words
"believes;" "anticipates;" "plans;" "expects;" "estimates" or similar
expressions and statements about the company's development schedule and future
use of funds are forward-looking statements. Many of the factors that will
determine the Company's future results are beyond the ability of the Company to
control or predict. These statements are subject to risks and uncertainties and,
therefore, actual results may differ materially. The reader should not rely on
any forward-looking statement. The Company undertakes no obligation to update
any forward-looking statements whether as a result of new information, future
events or otherwise.
Important factors that may affect future results include, but are not
limited to; uncertainty associated with pre-clinical studies and clinical trials
and regulatory approval; the effect of economic conditions; impact of
competitive products and pricing; product development; changes in laws and
regulations; customer demand; possible future litigation; availability of future
financing; and uncertainty of market acceptance of new products. Readers should
evaluate any statements in light of these important factors. See "Risk Factors"
in the Company's Annual Report on Form 10-K.
8
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibits:
<TABLE>
<CAPTION>
Exhibit No. Title
<C> <S>
3.1 Form of Amended and Restated Certificate of Incorporation of Algos Pharmaceutical Corporation(1)
3.2 Form of Amended and Restated By-laws of Algos Pharmaceutical Corporation(1)
4.1 Form of Stock Certificate of Common Stock(1)
10.1.1 Employment Agreement with Respect to John W. Lyle(1)
10.1.2 Employment Agreement with Respect to Gastone Bello(1)
10.1.3 Employment Agreement with Respect to Frank S. Caruso(1)
10.2.1 1994 Stock Option Plan(1)
10.2.2 Form of 1996 Stock Option Plan(1)
10.2.3 Form of 1996 Non-employee Director Stock Option Plan(2)
10.3.1 Algos Pharmaceutical Corporation Stockholders' Agreement(1)
10.4.1 License Agreement with The Medical College of Virginia(1)
10.4.2 License Agreement with McNeil(1)
10.4.3 Registration Rights Agreement with The Medical College of Virginia(1)
10.5 Lease Agreement(3)
11 Statement Regarding Computation of Per Share Earnings
21 Subsidiaries of the Registrant(1)
27 Financial Data Schedule(A)
(1) Incorporated by reference to the Registrant's registration statement on Form S-1
declared effective on September 25, 1996.
(2) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996.
(3) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1997.
(A) Included in EDGAR filing only.
</TABLE>
(b). Reports on Form 8-K:
None
9
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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.
ALGOS PHARMACEUTICAL CORPORATION
Date: November 14, 1997 /s/ John W. Lyle
-------------------
John W. Lyle
President and Chief Executive Officer
Date: November 14, 1997 /s/ Gary R. Anthony
-------------------
Gary R. Anthony
Chief Financial Officer and Principal
Accounting Officer
10
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Exhibit 11. Statement re computation of per share earnings
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
-------------------------- -------------------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $(907,806) $(2,368,036) $(1,962,663) $(7,523,548)
Weighted average number of common shares
outstanding:
Weighted average number of common shares
outstanding 6,171,880 15,899,597 6,153,334 15,832,849
Common shares issuable upon conversion
of Series A Preferred Stock 5,872,250 5,853,856
Common shares issuable upon conversion
of Series B Preferred Stock 100,000 100,000
Common shares issuable upon exercise
of stock options granted within one
year of the initial public offering 216,171 232,039
---------- ---------- ---------- ----------
12,360,301 15,899,597 12,339,229 15,832,849
========== ========== ========== ===========
Net loss per common share $(0.07) $(0.15) $(0.16) $(0.48)
</TABLE>
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> SEP-30-1997
<CASH> 7,202,361
<SECURITIES> 19,324,376
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 26,726,141
<PP&E> 304,865
<DEPRECIATION> 144,222
<TOTAL-ASSETS> 43,116,891
<CURRENT-LIABILITIES> 2,129,265
<BONDS> 0
<COMMON> 159,510
0
0
<OTHER-SE> 40,828,116
<TOTAL-LIABILITY-AND-EQUITY> 43,116,891
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 9,361,577
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,523,548)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,523,548)
<EPS-PRIMARY> (0.48)
<EPS-DILUTED> 0
</TABLE>
