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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 March 31, 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 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)
1333 Campus Parkway, 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
April 13, 1998 was 15,999,551.
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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 March 31
1997 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $20,246,152 $10,220,788
Marketable securities, current 17,922,359 27,985,589
Interest receivable 484,789 412,013
Prepaid expenses and other current assets 315,679 300,856
------------- -------------
Total current assets 38,968,979 38,919,246
Marketable securities, noncurrent 3,004,580
Restricted cash 150,000 150,000
Property and equipment, net 146,328 201,014
Other assets 90,591 60,924
------------- -------------
Total assets $42,360,478 $39,331,184
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,861,976 $ 2,336,231
Other current liabilities 739,415 418,450
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Total current liabilities 2,601,391 2,754,681
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Commitments
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares
authorized, 15,951,701 and 15,999,551 shares issued
and outstanding, respectively 159,517 159,996
Additional paid-in-capital 56,151,504 56,464,151
Unearned compensation expense (753,707) (851,615)
Deficit accumulated during the development stage (15,798,227) (19,196,029)
------------- -------------
Total stockholders' equity 39,759,087 36,576,503
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Total liabilities and stockholders' equity $42,360,478 $39,331,184
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
For the three months from inception
ended March 31, to March 31,
--------------------------
1997 1998 1998
---- ---- ----
<S> <C> <C> <C>
Revenues $ - $ - $ 3,311,000
------------ ----------- -----------
Operating expenses:
Research and development 3,165,360 3,220,459 18,797,090
General and administrative 616,736 741,532 7,854,782
---------- ----------- ----------
Total operating expenses 3,782,096 3,961,991 26,651,872
---------- ----------- ----------
Loss from operations (3,782,096) (3,961,991) (23,340,872)
Interest income 557,318 564,189 4,144,843
------------ ------------ ------------
Net loss $(3,224,778) $(3,397,802) $(19,196,029)
============ ============ ============
Net loss per common share, basic and diluted $ (0.20) $ (0.21)
============ ============
Weighted average common
shares outstanding 15,780,288 15,955,367
============ ============
</TABLE>
The accompanying notes are an integral part of these financiaol statements
2
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ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended Cumulative from inception to
March 31, March 31,
----------------------------
1997 1998 1998
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities $ (2,507,672) $ (3,011,963) $(15,248,780)
Cash flows from investing activities:
Investment in marketable securities (14,739,426) (15,035,672) (52,849,120
Redemption of marketable securities 7,968,575 24,784,647
Purchases of property and equipment (1,532) (69,430) (378,441)
------------- ------------- ---------------
Net cash used in investing activities (14,740,958) (7,136,527) (28,442,914)
------------- ------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock 6,659,015
Proceeds from issuance of common stock 31,000 123,126 47,253,466
------------- ------------- ---------------
Net cash provided by financing activities 31,000 123,126 53,912,481
------------- ------------- ---------------
Net increase (decrease) in cash and cash
equivalents (17,217,630) (10,025,364) 10,220,788
Cash and cash equivalents, beginning of period 48,575,719 20,246,152 -
------------- ------------- ---------------
Cash and cash equivalents, end of period $31,358,089 $10,220,788 $10,220,788
============= ============= ===============
</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 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 financial position and
results of the interim periods presented.
2. ACCOUNTING POLICIES
In the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income", which
establishes standards for determining and reporting comprehensive income and its
components. Comprehensive income represents the change in net assets of a
business enterprise as a result of nonowner transactions. The adoption of the
standard did not have an impact on the Company's financial statements.
3. LOSS PER SHARE
Since the Company incurred net losses in all periods presented,
outstanding options and warrants to purchase an aggregate of 1,015,915 and
1,060,455 shares of Common Stock at March 31, 1997 and 1998, respectively, and
100,000 shares of convertible Series B Preferred Stock which were outstanding at
March 31, 1997 were not included in diluted per share calculations, as their
effect would be antidilutive.
4. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
December 31 March 31
1997 1998
<S> <C> <C>
Accrued research expenses $392,618 $325,418
Accrued compensation 346,797 93,032
------------- --------------
$739,415 $418,450
============= ==============
</TABLE>
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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
losses in the future. The Company expects that its product development expenses
will increase as the drugs that the Company currently has under development move
into advanced clinical trials and as additional drugs are developed. In January
1998, the Company initiated the filing of a sequential NDA for its most
developmentally advanced drug, MorphiDex. Upon completion of an NDA, the Company
may incur significant costs associated with the possible commercialization of
MorphiDex prior to the first commercial sale of the product, including
inventory, the establishment of a sales force, initial promotional activities
and other administrative expenses.
Results of Operations
Three months ended March 31, 1997 and 1998
Research and development:
In the three months ended March 31, 1998, research and development
expenses were $3.2 million, an increase of approximately $55,000 or 2%, from
1997. In 1998, expenses increased due to large-scale, advanced clinical trials
of MorphiDex and the expansion of the Company's development staff since the
first quarter of the prior year. The effect of these increases was largely
offset by reduced expenses related to bioavailability studies and the costs of
manufacturing small-scale regulatory test batches of MorphiDex, which occurred
in the first quarter of 1997.
General and administrative:
In the three months ended March 31, 1998, general and administrative
expenses were $741,000, an increase of $125,000 or 20%, from 1997. Increases
related to the general expansion of the Company's business, including
preliminary activities related to possible future commercialization of products,
were offset by lower professional fees.
Interest income:
Interest income increased 1% in the three months ended March 31, 1998
to $564,000. The effect of lower average cash and securities balances was
offset by higher rates of return on invested funds.
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 three
months ended March 31, 1998, cash outflows from operations amounted to
approximately $3.0 million compared to $2.5 million in the first quarter of
1997, primarily as a result of its increased development spending on MorphiDex.
The Company has entered into several research and development
commitments, primarily related to its development of MorphiDex and HydrocoDex.
The Company expects that its product development expenses will
5
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increase as the drugs that the Company currently has under development move into
advanced clinical trials and as additional drugs are developed. In addition, the
Company will incur increased expenses as a result of the planned expansion of
its research and development staff, including the cost of relocating to larger
office facilities.
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. The Company currently expects that
its cash and equivalents at March 31, 1998 will be sufficient to fund its
operations for the development of products currently in clinical trials, based
upon the Company's currently anticipated schedule of clinical trials. If,
however, additional trials are 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 successful 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.
This Management's Discussion and Analysis of Financial condition and
Results of Operations contains "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;" 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
obligations 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 statement in light of these important factors. See "Risk Factors"
in the Company's Annual Report on Form 10-K.
6
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
<TABLE>
<CAPTION>
Exhibit
No. Title
- ------ -------------------------------------------------------------------------------------
<S> <C>
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)
5.1 Opinion of Latham & Watkins as to the validity of the Common Stock(1)
10.1.1 Employment Agreement with Respect to John W. Lyle(4)
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) 'D''D'
10.4.2 License Agreement with McNeil(1) 'D''D'
10.4.3 Registration Rights Agreement with The Medical College of Virginia(1)
10.5 Lease Agreement with Commercial Realty & Resources Corp.(3)
21 Subsidiaries of the Registrant(1)
27 Financial Data Schedule
99 Risk Factors(4)
</TABLE>
(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.
(4) Incorporated by reference to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1997.
'D''D' Portions of this Exhibit have received confidential treatment pursuant to
Rule 406(b) under the Securities Act.
Reports on Form 8K:
None
7
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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 May 15, 1998 /s/ John W. Lyle
__________________ ________________________________________
John W. Lyle
President and Chief Executive Officer
Date May 15, 1998 /s/ Gary R. Anthony
___________________ ________________________________________
Gary R. Anthony
Chief Financial Officer and Principal
Accounting Officer
8
STATEMENT OF DIFFERENCES
The dagger symbol shall be expressed as...........................'D'
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> MAR-31-1998
<CASH> 10,220,778
<SECURITIES> 27,985,589
<RECEIVABLES> 412,013
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 38,919,246
<PP&E> 201,014
<DEPRECIATION> 0
<TOTAL-ASSETS> 39,331,184
<CURRENT-LIABILITIES> 2,754,681
<BONDS> 0
<COMMON> 159,996
0
0
<OTHER-SE> 36,416,507
<TOTAL-LIABILITY-AND-EQUITY> 39,331,184
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,961,991
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,397,802)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,397,802)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
