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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 June 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)
908-938-5959
(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
July 17, 1997 was 15,899,709.
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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 June 30
1996 1997
----- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $48,575,719 $13,354,613
Marketable securities 18,312,717
Prepaid expenses 330,083 186,889
----------- -----------
Total current assets 48,905 802 31,854,219
Marketable securities, noncurrent 12,865,826
Property and equipment, net 86,682 160,786
Other assets 209,257 149,924
----------- -----------
Total assets $49,201,741 $45,030,755
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 456,684 $ 669,969
Other current liabilities 516,786 1,075,291
----------- -----------
Total current liabilities 973,470 1,745,260
----------- -----------
Commitments
Stockholders' equity:
Preferred stock, $100,000 aggregate liquidation preference 1,000 1,000
Common stock, $.01 par value, 50,000,000 shares authorized,
15,669,101 and 15,849,709 shares issued and outstanding,respectively 156,691 158,497
Additional paid-in-capital 55,902,403 55,974,198
Unearned compensation expense (856,150) (717,015)
Deficit accumulated during the development stage (6,975,673) (12,131,185)
----------- -----------
Total stockholders' equity 48,228,271 43,285,495
----------- -----------
Total liabilities and stockholders' equity $49,201,741 $45,030,755
=========== ===========
</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 six months ended Cumulative
June 30, June 30, from inception
----------------------------- --------------------------- to June 30,
1996 1997 1996 1997 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 1,500,000 $ -- $ 1,500,000 $ -- $ 2,311,000
----------- ----------- ----------- ------------ ------------
Operating expenses:
Research and development 603,873 1,968,683 1,003,585 5,134,043 10,911,316
General and administrative 1,417,344 617,594 1,628,184 1,234,331 5,889,170
----------- ----------- ----------- ------------ ------------
Total operating expenses 2,021,217 2,586,277 2,631,769 6,368,374 16,800,486
----------- ----------- ----------- ------------ ------------
Loss from operations (521,217) (2,586,277) (1,131,769) (6,368,374) (14,489,486)
Interest income 34,425 655,544 77,012 1,212,862 2,358,301
----------- ----------- ----------- ------------ ------------
Net loss $ (486,792) $(1,930,733) $(1,054,757) $ (5,155,512) $(12,131,185)
=========== =========== =========== ============ ============
Pro forma net loss per common share $ (.04) $ (0.12) $ (0.09) $ (0.33)
=========== =========== =========== ============
Pro forma weighted average common
shares outstanding 12,346,720 15,818,662 12,328,907 15,799,475
=========== =========== =========== ============
</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 six months ended Cumulative
June 30, from inception
------------------------ to March 31,
1996 1997 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities $(1,214,102) $ (4,400,086) $ (9,340,642)
Cash flows from investing activities:
Purchases of marketable securities (30,813,025) (30,813,025)
Purchases of property and equipment (4,055) (81,596) (279,575)
----------- ------------ ------------
Net cash used in investing activities (4,055) (30,894,621) (31,092,600)
----------- ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock 50,000 6,659,015
Proceeds from issuance of common stock 19,600 73,601 47,128,840
Deferred financing costs (53,940) -
----------- ------------ ------------
Net cash provided by financing activities 15,660 73,601 53,787,855
----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents (1,202,497) (35,221,106) (13,354,613)
Cash and cash equivalents, beginning of period 3,707,100 48,575,719 -
----------- ------------ ------------
Cash and cash equivalents, end of period $ 2,504,603 $ 13,354,613 $ 13,354,613
=========== ============ ============
</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>
Six months ended June 30,
----------------------------------
1996 1997
---- ----
<S> <C> <C>
Net loss per common share $(0.18) $(0.33)
Weighted average common shares outstanding 6,144,700 15,799,475
</TABLE>
3. MARKETABLE SECURITIES
Cash and cash equivalents and marketable securities at June 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 $27,844,667 $27,865,917 $21,250
Corporate debt securities $ 3,892,357 $ 3,896,647 $ 4,290
</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. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
December 31 June 30
1996 1997
---- ----
Accrued research expenses $302,036 $ 928,439
Accrued compensation 214,750 146,852
-------- ----------
$516,786 $1,075,291
======== ==========
4
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ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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 is currently evaluating the impact of
these standards on the Company's financial statements.
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
Quarter ended June 30, 1997 compared to the quarter ended June 30, 1996
Revenue:
The Company, which is in the development stage, did not have revenue in
the quarter ended June 30,1997. In the quarter ended June 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.
Research and development:
In the quarter ended June 30, 1997, research and development expenses
were $1,968,683, an increase of $1,364,810, or 226%, from the quarter ended June
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 June 30, 1997, general and administrative expenses
were $617,594, a decrease of $799,750, or 56%, from the quarter ended June 30,
1996. The comparable 1996 quarter included a one-time charge of $915,000 related
to the issuance of Series B Preferred Stock in connection with an amendment to
the Company's license agreement with The Medical College of Virginia. Other
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. These increased costs were partially offset by
lower compensation expense related to 1996 stock option grants.
Interest income:
Interest income increased substantially in the quarter ended June 30,
1997 due to the investment of the proceeds of the Company's IPO.
6
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Six months ended June 30, 1997 compared to the six months ended June 30, 1996
Revenue:
The Company, which is in the development stage, did not have revenue in
the six months ended June 30,1997. In the six months ended June 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.
Research and development:
In the six months ended June 30, 1997, research and development
expenses were $5,134,043, an increase of $4,130,458, or 412%, from the six
months ended June 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 six months ended June 30, 1997, general and administrative
expenses were $1,234,331, a decrease of $393,853, or 24%, from the six months
ended June 30, 1996. The decrease primarily reflects the one-time charge of
$915,000 in the comparable 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 six months ended June
30, 1997 due to the investment of the IPO proceeds.
Liquidity and Capital Resources
As a result of its drug development efforts, the Company has
experienced net cash outflows from operations since its inception in 1992. In
the six months ended June 30, 1997, cash outflows from operations amounted to
$4,400,086 as compared to $1,214,102 in the prior year period, primarily as a
result of increased development spending on MorphiDex. The Company has entered
into several contract research and development agreements pursuant to which it
expects to incur additional expenses, primarily related to its development of
MorphiDex, and expects that its 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 June 30, 1997, cash and marketable
securities totaled $44 million. The Company currently expects that these funds
will be sufficient to fund its operations for the development of products
currently in clinical trials, based on its currently anticipated schedule of
clinical trials. If, additional trials are deemed to be necessary or advisable,
or if additional products are developed, the Company may require additional
funds to complete such trials and, in the event that revenue and income from
product introductions or other internally generated funds are insufficient for
such efforts, the Company will need to raise additional funds by incurring debt,
issuing additional equity or through collaborative or license arrangements.
7
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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 Income", which
establishes standards for determining and reporting comprehensive income and its
components effective in 1998. The Company is currently evaluating the impact of
these standards on the Company's financial statements.
Certain information set forth in the prior paragraphs contains
forward-looking statements as such term is defined in Section 27A of the
Securities Act of 1933 and Section 21E of the Exchange Act. All statements
concerning the expected use of funds, the Company's development schedule, and
the ability to fund operations for a specified period are forward-looking
statements. Certain factors, including those discussed above, could cause actual
results to differ materially from those in the forward-looking statements. 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:
Exhibit No. Title
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.
(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: 8/14/97 /s/ John W. Lyle
-------------------------------
John W. Lyle
President and Chief Executive Officer
Date: 8/14/97 /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 six months ended
June 30, June 30,
---------------------------- -------------------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss (486,792) (1,930,733) (1,054,757) (5,155,512)
Weighted average number of common shares outstanding:
Weighted average number of common shares outstanding 6,166,772 15,818,662 6,144,700 15,799,475
Common shares issuable upon conversion of
Series A Preferred Stock 5,858,569 5,844,659
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 221,379 239,548
---------- ----------- ----------- ----------
12,346,720 15,818,662 12,328,907 15,799,475
========== ========== ========== ==========
Net loss per common share (0.04) (0.12) (0.09) (0.33)
</TABLE>
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 13,354,613
<SECURITIES> 18,312,717
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 31,854,219
<PP&E> 160,786
<DEPRECIATION> 0
<TOTAL-ASSETS> 45,030,755
<CURRENT-LIABILITIES> 1,745,260
<BONDS> 0
<COMMON> 158,497
0
1,000
<OTHER-SE> 43,125,998
<TOTAL-LIABILITY-AND-EQUITY> 45,030,755
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,368,374
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,155,512)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,155,512)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,155,512)
<EPS-PRIMARY> (.33)
<EPS-DILUTED> 0
</TABLE>
