<PAGE>
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, 1999
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
ALGOS PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 22-3142274
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
</TABLE>
1333 Campus Parkway, Neptune, New Jersey, 07753-6815
(Address of principal executive offices)
732-938-5959
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant 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 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 27, 1999 was 17,366,545.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ALGOS PHARMACEUTICAL CORPORATION
(A Development Stage Enterprise)
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $37,025,445 $ 30,045,049
Marketable securities 9,001,528 12,005,745
Interest receivable 417,042 260,062
Prepaid expenses and other current assets 683,866 148,218
----------- ------------
Total current assets 47,127,881 42,459,074
Marketable securities, noncurrent 4,052,824
Restricted cash 150,000 150,000
Property and equipment, net 1,098,819 1,187,901
----------- ------------
Total assets $52,429,524 $ 43,796,975
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,117,795 $ 3,702,155
Other current liabilities 794,044 569,393
----------- ------------
Total current liabilities 2,911,839 4,271,548
----------- ------------
Commitments
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares authorized,
17,028,649 and 17,366,545 shares issued and outstanding, respectively 170,287 173,666
Additional paid-in-capital 81,626,800 81,773,110
Unearned compensation expense (611,108) (323,163)
Deficit accumulated during the development stage (31,668,294) (42,098,186)
----------- ------------
Total stockholders' equity 49,517,685 39,525,427
----------- ------------
Total liabilities and stockholders' equity $52,429,524 $43,796,975
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
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,
1998 1999 1998 1999 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ -- $ -- $ -- $ -- $ 3,311,000
------------ ------------ ------------ ------------ -------------
Operating expenses:
Research and development 3,783,018 3,050,801 7,003,478 5,567,790 34,229,920
Selling, general and administrative 1,114,847 2,476,240 1,856,379 5,938,289 17,864,816
------------ ------------ ------------ ------------ -------------
Total operating expenses 4,897,865 5,527,041 8,859,857 11,506,079 52,094,736
------------ ------------ ------------ ------------ -------------
Loss from operations (4,897,865) (5,527,041) (8,859,857) (11,506,079) (48,783,736)
Interest income 515,615 507,729 1,079,804 1,076,187 6,685,550
------------ ------------ ------------ ------------ -------------
Net loss $ (4,382,250) $ (5,019,312) $ (7,780,053) $(10,429,892) $(42,098,186)
============ ============ ============ ============ =============
Net loss per common share, basic
and diluted $ (0.27) $ (0.29) $ (0.49) $ (0.60)
============ ============ ============ ============
Weighted average common
shares outstanding, basic
and diluted 15,999,551 17,304,760 15,977,459 17,301,947
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
ALGOS PHARMACEUTICAL CORPORATION
(A Development Stage Enterprise)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
For the six months ended June from inception
30, to June 30,
1998 1999 1999
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities $ (6,079,205) $ (8,210,735) $(35,772,213)
Cash flows from investing activities:
Purchases of marketable securities (13,063,945) (9,842,358) (76,753,015)
Redemption of marketable securities 11,000,000 64,853,072
Purchases of property and equipment (918,000) (201,492) (1,605,087)
------------ ------------ ------------
Net cash used in investing activities (13,981,945) 956,150 (13,505,030)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock 6,659,015
Proceeds from issuance of common stock 123,125 274,189 72,663,277
------------ ------------ ------------
Net cash provided by financing activities 123,125 274,189 79,322,292
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (19,938,025) (6,980,396) 30,045,049
Cash and cash equivalents, beginning of period 20,246,152 37,025,445 --
------------ ------------ ------------
Cash and cash equivalents, end of period $ 308,127 $ 30,045,049 $ 30,045,049
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
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. LOSS PER SHARE
Since the Company incurred net losses in all periods presented, outstanding
options and warrants to purchase an aggregate of 1,270,415 and 1,353,341 shares
of Common Stock at June 30, 1998 and 1999, respectively, were not included in
diluted per share calculations, as their effect would be antidilutive.
3. OTHER CURRENT LIABILITIES
Other Current Liabilities consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
---- ----
<S> <C> <C>
Accrued compensation $ 318,800 $ 471,257
Accrued research expenses 475,244 98,136
--------- ---------
Total $ 794,044 $ 569,393
========= =========
</TABLE>
4. SUBSEQUENT EVENT
On August 2, 1999, Algos received a "not approvable" letter from the U.S.
Food and Drug Administration (FDA) regarding its New Drug Application (NDA) for
MorphiDex'r'. FDA approval of an NDA is required for Algos to sell MorphiDex'r'
in the United States. "Not Approvable" letters are issued by the FDA for various
reasons and outline deficiencies that must be corrected prior to NDA approval.
In its letter to Algos, the FDA raised issues specifically related to the
adequacy of clinical trials, Algos' preclinical animal toxicology models and a
high-dose pharmacokinetic study. If the FDA requires Algos to perform further
clinical work, the potential approval of MorphiDex'r' could be substantially
delayed.
4
<PAGE>
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, Algos 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.
Algos has incurred losses since its inception and expects to incur losses
in the future as its existing development programs continue. Algos' product
development expenses may increase as additional drugs are developed. On
August 2, 1999, Algos received a "not approvable" letter from the U.S. Food
and Drug Administration regarding a New Drug Application (NDA) filed in 1998
for its most developmentally advanced drug, MorphiDex'r'. The Company will
incur additional costs for MorphiDex'r' as a result of the "not approvable"
letter. In addition, Algos may delay certain expenses associated with
pre-commercialization activities related to MorphiDex'r' such as the
establishment of a sales force, the preparation of promotional plans and
materials, additions to and changes in financial and operating systems, and
other related administrative activities.
Results of Operations
Six months ended June 30, 1999 and 1998
Research and development:
In the six months ended June 30, 1999, research and development expenses
were $5.6 million, a decrease of approximately $1.4 million, or 20%, from 1998.
In 1999, expenses decreased due to the impact in 1998 of large-scale, advanced
clinical trials and toxicology studies of MorphiDex'r'. These effects were
partially offset by expenses related to Phase II clinical studies of
HydrocoDex'TM' and the costs of obtaining drug supplies and manufacturing of
full-scale demonstration batches of MorphiDex'r' in 1999.
Selling, general and administrative:
In the six months ended June 30, 1999, selling, general and administrative
expenses were $5.9 million, an increase of approximately $4.1 million from 1998.
The significant increase was primarily attributable to the possible future
commercialization of products including fees to sales and marketing consultants,
costs of educational materials and activities, and the addition of marketing
personnel, as well as the general expansion of the Company's business
activities. Algos expects certain of these expenses to decrease pending
discussions with the FDA regarding the MorphiDex'r' NDA.
Three months ended June 30, 1999 and 1998
Research and development:
In the three months ended June 30, 1999, research and development expenses
were $3.1 million, a decrease of approximately $700,000, or 19%, from 1998. In
1999, expenses decreased due to the impact in 1998 of large-scale, advanced
clinical trials and toxicology studies of MorphiDex'r' and the costs of
preparing the MorphiDex'r' NDA. These expense reductions were partially offset
by expenses related to Phase II clinical studies of HydrocoDex'TM' and the costs
of obtaining drug supplies and manufacturing of full-scale demonstration batches
of MorphiDex'r' in 1999.
5
<PAGE>
Selling, general and administrative:
In the three months ended June 30, 1999, selling, general and
administrative expenses were $2.5 million, an increase of approximately $1.4
million from 1998. The significant increase was primarily attributable to the
possible future commercialization of products including fees to sales and
marketing consultants, costs of educational materials and activities, and the
addition of marketing personnel, as well as the general expansion of the
Company's business activities. Algos expects certain of these expenses to
decrease pending discussions with the FDA regarding the MorphiDex'r' NDA.
Liquidity and Capital Resources
Primarily 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, 1999, cash outflows from operations amounted to
approximately $8.2 million compared to $6.1 million in the first six months of
1998, primarily as a result of its increased expenses related to the possible
commercialization of MorphiDex'r'.
The Company expects to continue to incur product development expenses as
clinical trials of MorphiDex'r' and HydrocoDex'TM' continue and other drugs that
the Company currently has under development move into advanced clinical trials
and as additional drugs are developed and research and development staff
increases. On August 2, 1999, Algos received a "not approvable" letter from the
U.S. Food and Drug Administration regarding its NDA for MorphiDex'r'. As a
result of the "not approvable" letter, Algos will incur additional costs for
MorphiDex'r'. The Company currently expects that its cash and marketable
securities at June 30, 1999 will be sufficient to support a resubmission of the
NDA, if necessary, and fund its other planned development activities through the
year 2000. However, if additional trials are necessary or advisable, or if
additional products are developed, the Company may require additional funds. In
the event that internally generated funds are insufficient for such efforts, the
Company will need to raise additional funds either by incurring debt, issuing
additional equity or through collaborative or license arrangements to ensure
continuity of operations. There is no assurance that the Company would be able
to obtain such additional financing on terms acceptable to the Company.
The Company's future 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 amount of resources required for
the possible resubmission of the MorphiDex'r' NDA and potential continued
activities in preparation for the possible commercialization of MorphiDex'r';
the commercialization of competing products; the execution of licensing or other
collaborative research agreements on terms acceptable to the Company; and the
cost of prosecuting and defending patents.
Year 2000
A potential problem exists for all companies that rely on computers as the
year 2000 approaches. Algos' computer software applications and systems that use
only the last two digits of a year to refer to a year may not properly recognize
the year 2000. This phenomenon (the Year 2000 Issue) could cause a disruption of
operations, including, among other things, a temporary inability to engage in
normal business activities.
Algos is in the process of evaluating the impact of the Year 2000 Issue and
currently believes that the internal financial and operational systems of Algos,
as currently used, will function adequately with respect to the Year 2000 Issue.
This belief is based on Algos' correspondence with vendors and the fact that
Algos is not significantly reliant on its computer software applications and
systems during its developmental stage. However, if certain data management and
statistical applications do not function properly, the analysis and reporting of
study results could be delayed and the timing of subsequent development
activities and regulatory filings adversely affected. In the third quarter of
1999, Algos expects
6
<PAGE>
to update certain of its purchased software with standard programs provided by
the software manufacturers and complete its testing of the updated programs.
Based on the results of this testing, Algos expects to develop any necessary
contingency plans in the fourth quarter of 1999.
Algos has limited information concerning the compliance status of its
third-party contractors. Algos' current third party contractors generally
perform clinical testing of Algos products and provide Algos with the results of
those tests, perform analytical laboratory testing, and manufacture drug
supplies. Algos is currently evaluating its correspondence with third-parties
regarding their readiness for the Year 2000 Issue. Various third parties have
advised Algos that their evaluation of their Year 2000 readiness is not
complete. Algos believes that many Year 2000 Issues for such third-party
contractors would not be material to Algos, since many activities could be
performed without the aid of a computer, or by alternative contractors. However,
disruption in the systems of drug suppliers and manufacturers could result in
interruptions in drug supplies and subsequently study delays or terminations. On
an ongoing basis, Algos will consider the need for purchasing inventories of
drug supplies.
As part of the possible future commercialization of products, Algos intends
to have third parties manufacture and distribute its products. Algos will place
significant dependence on the third parties' computer systems for purchasing,
production, customer order entry and invoicing and other related activities. A
disruption in these systems could result in lost revenue from inventory
shortages, improper execution of customer orders and/or delays in the resolution
and collection of outstanding invoices. In addition, Algos may make significant
additions to and changes in its existing computer software applications and
systems and/or the use of such systems . If Algos makes any such additions or
changes, it would affect Algos' exposure to the Year 2000 Issue since Algos
would become more reliant on its computer software applications and systems.
Therefore, Algos' assessment of its Year 2000 Issue and development of
contingency plans in these areas is ongoing.
At this time, Algos does not expect that the cost of its Year 2000 Issue
compliance program will be material to its business, financial condition, or
results of operations and does not currently anticipate any material disruption
in its operations. Algos has not incurred more than $10,000 of costs to date
related to the Year 2000 Issue.
Forward Looking Statements
This Report contains "forward-looking" statements, within the meaning of
Section 27A of Securities Act of 1933, 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 or
commercialization schedules 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; uncertainty of market acceptance of new products; impact of
competitive products and pricing; product development; changes in laws and
regulations; customer demand; possible future litigation; the availability of
future financing and reimbursement policies of government and private health
insurers and others. Readers should evaluate any statement in light of these
important factors. See "Risk Factors".
7
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of Stockholders of Algos Pharmaceutical Corporation was
held on June 21, 1999.
(b) The following Directors nominated by the Company were elected for
three-year terms:
John W. Lyle and Donald G. Drapkin
Roger H. Kimmel, Michael Hyatt, James R. Ledley and Dieter A. Sulser
continue their terms as Directors after the meeting.
(c) At the Annual Meeting, stockholders approved the following:
(i) Election of Directors:
<TABLE>
<CAPTION>
Votes for: Votes Against or Withheld: Abstained:
<S> <C> <C> <C>
John W. Lyle 15,722,954 2,132 0
Donald G. Drapkin 15,722,954 2,132 0
</TABLE>
(ii) An amendment to the Company's Non-Employee Director Stock Option Plan to
increase the number of shares which may be granted under the plan by
200,000 and to increase the annual option grants to Non-Employee Directors
from 5,000 shares to 10,000 shares.
<TABLE>
<CAPTION>
Votes for: Votes Against or Withheld: Abstained:
<S> <C> <C> <C>
15,597,327 100,780 7,753
</TABLE>
ITEM 5. OTHER INFORMATION
On August 2, 1999, Algos released the following press release addressing the
"not approvable" letter it received from the FDA with respect to the
MorphiDex'r' NDA:
"Algos Pharmaceutical Receives Not Approvable Letter From FDA for MorphiDex'r'
ALGOS PREPARED TO WORK CLOSELY WITH FDA TO RESOLVE ISSUES
NEPTUNE, NJ - August 2, 1999 - Algos Pharmaceutical Corporation (Nasdaq: ALGO)
today announced that it has received a "not approvable" letter from the U.S.
Food and Drug Administration (FDA) for MorphiDex'r', an NMDA enhanced opioid
analgesic. Algos submitted a New Drug Application (NDA) for MorphiDex'r' in
August 1998 for the treatment of moderate to severe cancer pain. MorphiDex'r' is
a patented combination of morphine and the NMDA-receptor antagonist
dextromethorphan.
"We are disappointed in the FDA's response to our NDA submission for
MorphiDex'r'," said John Lyle, President and Chief Executive Officer of Algos.
"We believe the submitted data support the safety and efficacy of MorphiDex'r'.
We are moving forward to address the issues raised by the FDA. In addition to
working with the FDA staff, the FDA process also allows a company to request a
review of an NDA submission by an FDA advisory committee."
Not approvable letters are issued by the FDA for various reasons and outline
deficiencies that must be corrected prior to approval. The applicant and the FDA
then discuss what further steps need to be taken before the NDA can be approved.
These steps usually involve the submission of additional data by the
8
<PAGE>
company and the review of such data by the FDA. The FDA must review the
company's response to a deficiency letter within two or six months depending on
whether or not "substantial review work" is required. In its letter to Algos
dated August 2, 1999, the FDA raised issues specifically related to the adequacy
of clinical trials, Algos' preclinical animal toxicology models and a high-dose
pharmacokinetic study.
"We responded quickly to all FDA questions and requests for additional data
during the course of the NDA review period," Lyle added. "We will continue to
respond in this manner and are committed to working with the FDA to reach
resolution of the issues raised in the letter in a prompt manner."
"Algos will be discussing with the FDA whether it needs to perform additional
clinical work on MorphiDex'r'," Lyle said. "If further clinical work is
required, the potential approval of MorphiDex'r' could be substantially
delayed."
"With over $40 million in cash, we believe Algos has sufficient financial
resources to fully support a resubmission of the MorphiDex'r' NDA, including
completion of possible additional MorphiDex'r' clinical work," Lyle continued.
"In addition, we believe Algos has sufficient funds to continue the previously
planned development of the other products currently in the Company's pipeline."
Algos Pharmaceutical Corporation, based in Neptune, New Jersey, is a leader in
developing proprietary pain management products. The Company's products combine
existing analgesics and anesthetics with NMDA-receptor antagonist drugs. Algos'
products currently in development include opioid analgesics for
moderate-to-severe pain, non-opioid analgesics for mild-to-moderate pain,
long-lasting local anesthetics for post-operative pain, an intranasal anesthetic
for migraine and products for the treatment of opiate and nicotine addiction.
This news release contains "forward-looking" statements, within the meaning
of Section 27A of the Securities Act of 1933, 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 statement about Algos are
forward-looking statements. Many of the factors that will determine Algos'
future results are beyond the ability of Algos 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. Algos undertakes no obligation to update any forward-looking
statements whether as a result of new information, future events or otherwise.
The FDA review process is an uncertain one whose outcome cannot be guaranteed.
There is no guarantee the FDA will accept or approve any New Drug Application.
There is no guarantee Algos will be able to sufficiently address the issues
raised by the FDA in the MorphiDex'r' "not approvable" letter. Any Algos
response to the FDA on the MorphiDex'r' "not approvable" letter must be
reviewed by the FDA within two or six months depending on whether or not
"substantial review work" is required. There is no guarantee the FDA will grant
an approval of the MorphiDex'r' NDA as a result of the Algos response. There is
no guarantee the foregoing standards and timeline will not be changed.
Important factors that may affect Algos' future results include, but are
not limited to, uncertainty associated with pre-clinical studies and clinical
trials and regulatory approval, uncertainty of market acceptance of new
products, reimbursement policies of government and private health insurers,
impact of competitive products and pricing, product development, changes in laws
and regulations, customer demand, possible future litigation, and availability
of future financing."
9
<PAGE>
Readers should evaluate any statements in light of these important factors. See
"Risk Factors" in Algos' Annual Reports on Form 10-K and Quarterly Reports on
Form 10-Q.
# # #
10
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
<TABLE>
<CAPTION>
Exhibit
No. Title
- --------- --------------------------------------------------------------------------------------
<S> <C>
1.1 -- Purchase and Registration Rights Agreement, dated as of November 9, 1998(6)
3.1 -- Amended and Restated Certificate of Incorporation of Algos Pharmaceutical Corporation(1)
3.2 -- Amended and Restated By-laws of Algos Pharmaceutical Corporation(1)
4.1 -- Form of Stock Certificate of Common Stock(1)
4.2 -- Warrant to Purchase 250,000 Shares of Common Stock of Algos Pharmaceutical Corporation and Biotech Target
S.A., a Panamanian corporation, dated November 9, 1998(6)
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)
10.1.4 -- Employment Agreement with Respect to Joseph Sardella(5)
10.2.1 -- 1994 Stock Option Plan(1)
10.2.2 -- 1996 Stock Option Plan(1)
10.2.3 -- 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)(A)
10.4.2 -- License Agreement with McNeil Consumer Products Company(1)(A)
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
</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.
(5) Incorporated by Reference to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1998.
(6) Incorporated by Reference to the Registrant's registration statement on
Form S-3 dated March 10, 1999.
(A) Portions of this Exhibit have received confidential treatment pursuant to
Rule 406(b) under the Securities Act.
Reports on Form 8-K:
None.
11
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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 August 16, 1999 /s/ John W. Lyle
-------------------- --------------------------------
John W. Lyle
President and Chief Executive Officer
Date August 16, 1999 /s/ Gary R. Anthony
-------------------- --------------------------------
Gary R. Anthony
Chief Financial Officer and Principal
Accounting Officer
12
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as ........................... 'TM'
The registered trademark symbol shall be expressed as ................ 'r'
<PAGE>
EXHIBIT 99
RISK FACTORS
Algos operates in a rapidly changing environment that involves a number of
risks that may significantly affect Algos' results, some of which are beyond
Algos' control. The following discussion highlights some of these risks, and
others are discussed elsewhere in other documents filed by Algos with the
Securities and Exchange Commission.
IF WE ARE UNABLE TO DEVELOP A MARKETABLE PRODUCT FROM WHICH WE CAN DERIVE
REVENUES, WE ARE UNLIKELY TO ACHIEVE PROFITABILITY.
We have no revenues from product sales and no history of commercial
manufacturing or marketing. To date, substantially all of our funding has been
provided by contributions of capital made by our founders, sales of our stock
and payments received under a license agreement with McNeil Consumer Products
Company with whom we are working to develop an over-the-counter pain reliever.
As a result, we have experienced losses since our inception and losses are
continuing and are expected to continue.
We have a limited history upon which you may base an evaluation of our
likely performance and there is a risk that we will not be able to develop a
marketable product and/or achieve profitability. Algos' prospects must be
considered in light of the potential problems, expenses, complications and
delays encountered in connection with the formation of a new business and the
development of new pharmaceutical products, including obtaining the necessary
regulatory approvals, the utilization of unproven technology, and the
competitive market environment in which Algos plans to operate.
IF WE ARE UNABLE TO ADEQUATELY DEMONSTRATE THE SAFETY AND EFFECTIVENESS OF OUR
PRODUCTS IN HUMANS, WE MAY NOT BE ABLE TO PROCURE NECESSARY REGULATORY APPROVALS
TO BRING OUR PRODUCTS TO MARKET.
In order to receive regulatory approval to sell our products, Algos must
demonstrate that our potential products are safe and effective in humans. There
can be no assurance that clinical trials of products under development will
demonstrate the safety and efficacy of such products to the extent necessary to
obtain regulatory approvals. Many pharmaceutical companies have suffered
significant setbacks in advanced clinical trials, even after promising results
in earlier trials. Therefore, there is a risk that we may fail to adequately
demonstrate the safety and efficacy of our products which could delay or prevent
regulatory approval of our products and prevent them from being sold.
On August 2, 1999, Algos received a "not approvable" letter from the U.S.
Food and Drug Administration (FDA) regarding its New Drug Application (NDA) for
MorphiDex. FDA approval of an NDA is required for Algos to sell MorphiDex in the
United States. "Not Approvable" letters are issued by the FDA for various
reasons and outline deficiencies that must be corrected prior to NDA approval.
In its letter to Algos, the FDA raised issues specifically related to the
adequacy of clinical trials, Algos' preclinical animal toxicology models and a
high-dose pharmacokinetic study. There is no assurance Algos will be able to
sufficiently address the issues raised by the FDA in the MorphiDex'r' "not
approval" letter. If the FDA requires Algos to perform further preclinical or
clinical work, the potential approval of MorphiDex could be substantially
delayed or may not occur at all There is no assurance the FDA will grant an
approval of the MorphiDex'r' NDA as a result of the Algos response to the "not
approvable" letter.
The speed with which we complete our clinical trials is dependent upon,
among other factors, the ability to locate and enroll suitable patients at
acceptable facilities. Accordingly, delays in planned
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patient enrollment in Algos' current trials or future clinical trials may result
in increased costs, program delays, or both, which may delay the ability of
Algos to begin generating revenues.
We currently do not have regulatory approval to sell any products. The FDA
and comparable agencies in foreign countries impose substantial requirements on
the introduction of pharmaceutical products through lengthy and detailed
laboratory and clinical testing and other costly and time-consuming procedures.
Satisfaction of these requirements typically takes a number of years and varies
substantially based upon the type, complexity, and novelty of the pharmaceutical
products. There can be no assurance that if clinical trials are completed for a
given product, Algos will be able to submit a New Drug Application for such
product or that any such application will be reviewed and approved by the FDA in
a timely manner, or at all. Government regulation also affects the manufacture
and marketing of pharmaceutical products. Regulatory approvals, if granted, may
include significant limitations on the indicated uses for which a product may be
marketed, which may reduce the size of the potential market for any Algos
product. See "Business--Government Regulation" in Algos' 1998 Annual Report on
Form 10-K/A.
IF ALGOS PRODUCTS ARE NOT ACCEPTED BY THE MARKET, ALGOS WILL NOT BE ABLE TO
ACHIEVE PROFITABILITY.
Even if regulatory approvals are obtained and Algos products prove to be
superior to alternative products on the market, uncertainty exists as to Algos'
ability, or the length of time required, to achieve market acceptance of Algos
products. A number of factors may limit the market acceptance of Algos products,
including:
the availability of alternative products with greater name and brand
recognition than Algos products,
the price of Algos products relative to alternative products,
the availability of third-party reimbursement, and
the extent of marketing efforts by third-party distributors or agents
retained by Algos.
Furthermore, some of the Algos products contain opioid ingredients that may
require stringent record-keeping obligations, strict storage requirements, and
other limitations on such products' availability that could limit the
distribution and commercial usage of such products. In light of these factors,
there is a significant risk that Algos will not be able to gain market
acceptance for its products which may prevent us from achieving profitability.
OUR SUBSTANTIAL RELIANCE ON THE CAPITAL MARKETS IN ORDER TO MEET OUR FINANCIAL
REQUIREMENTS MAY BE DILUTIVE OF THE VALUE OF ALGOS COMMON STOCK AND MAY IMPEDE
OUR ABILITY TO DEVELOP AND COMMERCIALIZE OUR PRODUCTS.
As a development stage company, Algos requires substantial amounts of
funding for its research and product development programs, operating expenses,
regulatory approvals, and sales and marketing expenses, and no assurance can be
given that development and commercialization costs will not exceed the amounts
budgeted for such purposes. Because we do not currently generate any revenues
from product sales, we are dependent on our existing cash and our ability to
raise additional capital in order to fund our operations until we can begin
marketing our products. Any material delay in the marketing of MorphiDex'r' or
any of our other products may require us to raise additional capital. Algos has
limited financial resources and its substantial reliance on the capital markets
to satisfy its financial requirements
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may dilute the value of Algos common stock. Conversely, if Algos is unable to
obtain sufficient funds through the financial markets or through collaborative
or other arrangements on a timely basis, there is a risk that Algos may be
required to delay, scale back, or eliminate certain of its research, development
or commercialization programs or to make arrangements with third parties to
develop or commercialize products or technologies that Algos would otherwise
seek to develop or commercialize itself. In the event this occurs, Algos may not
be able to independently develop or commercialize any or all of its products.
IF ALGOS IS UNABLE TO SUCCESSFULLY MARKET AND SELL OUR PRODUCTS, WE MAY BE
FORCED TO LICENSE OUR PRODUCTS TO OTHERS WHICH WILL HAVE AN ADVERSE EFFECT ON
ALGOS' PROFITABILITY.
Algos intends to market and sell some or all of its products, if
successfully developed and approved, through a direct sales force in the United
States. However, Algos currently has limited marketing and sales staff, and has
yet to establish any product distribution channels. If we are unable to develop
a sales force with technical expertise or to establish appropriate distribution
channels, we may be forced to license products we have developed to third
parties instead of directly marketing them which may reduce our profitability.
IF ALGOS IS UNABLE TO ACQUIRE SUFFICIENT SUPPLIES FROM THIRD PARTIES, THEN
ALGOS' ABILITY TO DELIVER OUR PRODUCTS TO THE MARKET MAY BE IMPEDED.
Algos currently uses, and expects to continue to use, outside contractors
to manufacture drug supplies for its clinical trials. In addition, Algos
currently intends to use outside contractors to manufacture products approved
for sale, if any. There is no assurance that Algos will be able to obtain its
requested amounts of drugs from these contractors or that supplies will not be
interrupted due to FDA and/or Drug Enforcement Agency, the DEA, regulatory
requirements or other reasons. If Algos cannot obtain a sufficient supply of
ingredients or supplies are interrupted, this may have a material adverse effect
on our ability to develop and commercialize our products and our reputation in
the marketplace.
For instance, Algos currently uses a single contract manufacturer for
supplies of its most developmentally advanced product, MorphiDex'r', and
suppliers of raw materials are limited. The regulatory qualification of
additional suppliers and/or manufacturers may require significant time and
expense. In addition, the acquisition of opioid ingredients as components of
certain Algos products is subject to quota restrictions imposed and administered
by the DEA. Accordingly, there is a risk that Algos will be unable to obtain its
requested quantities of opioid ingredients which could be detrimental to Algos'
ability to bring its products to market.
IF ALGOS IS UNABLE TO ATTRACT AND RETAIN QUALIFIED PERSONNEL, WE MAY NOT BE ABLE
TO MAINTAIN OUR COMPETITIVE POSITION.
Because of the specialized scientific nature of Algos' business, we are
highly dependent upon our ability to attract and retain qualified scientific and
technical personnel. The loss of significant scientific and technical personnel
or the failure to recruit additional key scientific and technical personnel
could have a material adverse effect on Algos' ability to develop and deliver
our products to market in a competitive manner. While Algos has consulting
agreements with certain key individuals and institutions and has employment
agreements with certain key executives, there can be no assurance that Algos
will be successful in retaining such personnel or their services under existing
agreements. The loss of John Lyle, Algos' Chief Executive Officer, could have a
material adverse effect on Algos because of the loss of Mr. Lyle's expertise and
because we would need to expend time and financial resources to seek a new Chief
Executive Officer which would materially slow our efforts to develop and
3
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commercialize our products. Algos currently maintains a $6.0 million life
insurance policy on Mr. Lyle. There is intense competition for qualified
personnel in the areas of Algos' activities, and there can be no assurance that
Algos will be able to continue to attract and retain the qualified personnel
necessary for the development of its business.
IF WE ARE UNABLE TO PATENT OUR TECHNOLOGY OR ARE FOUND TO HAVE VIOLATED OR
INFRINGED ON THE PATENTS OF OTHERS, THIS WOULD ADVERSELY AFFECT OUR ABILITY TO
GENERATE REVENUES AND WE MAY NOT BE ABLE TO RECEIVE AN APPROPRIATE RETURN ON OUR
INVESTMENT.
Algos' policy is to seek patent protection and enforce intellectual
property rights. However, no assurance can be given that any patents will be
allowed or will provide protection against competitive products or otherwise be
commercially viable. In this regard, the patent position of pharmaceutical
compounds and compositions is particularly uncertain. Because we are a
development stage company without brand name recognition for our products, our
ability to successfully patent and protect the technologies we are developing or
may develop in the future is especially crucial to our ability to generate
future revenues and maintain our competitive position. However, there is a risk
that Algos' pending patent applications may not be allowed, or if they are
allowed, that the scope of the claims allowed will be insufficient to protect
Algos products. Furthermore, even issued patents may later be modified or
revoked by the United States Patent and Trademark Office, the PTO, or in legal
proceedings. Any of these outcomes would reduce future revenues and the return
on any investment in Algos.
In addition, no assurance can be given as to whether Algos will be able to
avoid violating or infringing upon patents issued to others. If Algos were found
to be infringing on a patent held by another, Algos might have to seek a license
to use the patented technology. There can be no assurance that, if required,
Algos would be able to obtain such a license on terms acceptable to Algos, if at
all. If a legal action were to be brought against Algos or its licensors or
licensees, Algos could incur substantial costs in defending itself, and there
can be no assurance that such an action would be resolved in Algos' favor. If a
patent infringement dispute were to be resolved against Algos, Algos could be
subject to significant damages and the manufacture or sale of one or more of
Algos' technologies or proposed products, if developed, could be stopped.
IF THIRD-PARTY REIMBURSEMENT FOR OUR PRODUCTS IS UNAVAILABLE OR INADEQUATE, WE
MAY NOT BE ABLE TO REALIZE AN APPROPRIATE RETURN ON OUR INVESTMENT AND/OR THE
MARKET ACCEPTANCE OF OUR PRODUCTS COULD BE ADVERSELY AFFECTED.
Algos' ability to commercialize its pain management products may depend in
part on the extent to which reimbursement for the costs of such products will be
available from government health administration authorities, private health
insurers, and others. Government, private insurers, and other third-party payers
are increasingly attempting to contain health care costs by limiting both
coverage and the level of reimbursement for new products approved for marketing
by the FDA and by refusing, in some cases, to provide any coverage for uses of
approved products for indications for which the FDA has not granted marketing
approval. Because we are developing a drug that may have higher costs than
generic alternatives that are currently available, there is a risk that insurers
will be unwilling to provide coverage for our product. If adequate coverage and
reimbursement levels are not provided by government and third-party payers for
uses of Algos products, the market acceptance of our products could be adversely
affected and/or Algos may not be able to establish and maintain price levels
sufficient for the realization of an appropriate return on our investment.
4
<PAGE>
IF ALGOS INCURS INDEMNIFICATION LIABILITY, OR A LIABILITY SUIT IS SUCCESSFULLY
PROSECUTED AGAINST US, WE MAY NOT HAVE SUFFICIENT FUNDS TO PAY THE RESULTING
DAMAGES.
Algos will be exposed to product liability claims and other potential
liability risks, which are inherent in the development, manufacturing, marketing
and other activities related to the development and commercialization of human
therapeutic products. In addition, Algos is contractually obligated under
certain of our agreements to indemnify certain individuals and/or institutions,
including licensors, directors and officers of the Company with whom we do
business. Algos' indemnification liability, as well as direct liability as
third parties, could expose Algos to substantial losses which would reduce
earnings and funds available for research and development activities.
Algos currently carries certain insurance for these indemnification
obligations and other potential liabilities. In addition, McNeil Consumer
Products Company is required by its license agreement to maintain product
liability insurance and may self-insure to cover its indemnification obligations
to Algos. However, there can be no assurance that Algos will be able to maintain
such insurance or purchase additional insurance on acceptable terms or that any
insurance obtained will provide adequate coverage against potential liabilities.
IF THE MCNEIL LICENSE AGREEMENT IS TERMINATED AND ALGOS DESIRES TO DEVELOP AND
COMMERCIALIZE ITS OVER-THE-COUNTER PRODUCTS, ALGOS MAY BE FORCED TO DO SO ITSELF
WHICH MAY REDUCE PROFITS.
We are relying on McNeil to commercialize products involving acetaminophen,
ibuprofen, and certain other over-the-counter pain relievers. Acetaminophen is
the active ingredient in Tylenol'r' and ibuprofen is the active ingredient in
Motrin'r', both of which are manufactured by McNeil. If the agreement with
McNeil is terminated, then in the event that we desire to develop and
commercialize our products, we may be forced to do so ourselves. Because Algos
does not have the same level of resources as McNeil, this may reduce any
potential future revenues we may otherwise generate.
The license agreement dated June 26, 1996 with McNeil Consumer Products
Company extends until the later of the expiration of Algos' patent rights or ten
years from the date of execution, provided that the agreement is terminable:
by either party in the event of a breach by the other party upon 90
days notice or upon certain events of bankruptcy;
by McNeil Consumer Products Company, at any time upon 60 days notice;
and
by Algos upon certain other circumstances.
IF ALGOS' COMPETITORS SUCCEED IN DEVELOPING COMPETING TECHNOLOGIES MORE RAPIDLY
THAN ALGOS, THE PRODUCTS WE ARE DEVELOPING MAY BE RENDERED OBSOLETE WHICH WOULD
PREVENT US FROM SUCCESSFULLY COMPETING IN OUR TARGET MARKETS.
As a development stage company, Algos' success will largely depend upon its
ability to successfully achieve market share at the expense of existing and
established products in Algos' target markets. A number of pharmaceutical
companies are developing pain relief products. Many of Algos' competitors have a
significantly higher degree of brand name recognition and substantially more
financial resources than those of Algos. They also may have greater research and
development capacities, experience, recognition, and marketing, financial, and
managerial resources than Algos. Accordingly, if Algos'
5
<PAGE>
competitors succeed in developing competing technologies and obtaining FDA
approval for products more rapidly than Algos, Algos products or technologies
may be rendered non-competitive or obsolete, in which case we would be unable to
compete in our target market.
A THIRD PARTY MAY HAVE DIFFICULTY SUCCESSFULLY MOUNTING A TAKEOVER BID FOR
CONTROL OF ALGOS WHICH COULD PREVENT YOU FROM MAXIMIZING THE VALUE OF YOUR ALGOS
COMMON STOCK AND COULD MAKE YOUR INVESTMENT LESS LIQUID.
The ownership of Algos is concentrated, with a small group of stockholders,
directors, officers, and related investors owning approximately 40% of the
common stock. These stockholders, if they acted together, would have the ability
to influence significantly the election of Algos' directors as well as the
management and policies of Algos. This concentration of ownership may have the
effect of delaying or preventing a change of control of Algos. Certain other
provisions of Algos' Amended and Restated Certificate of Incorporation could
also have the effect of delaying or preventing changes of control or management
of Algos, which could adversely affect the market price and liquidity of our
common stock. In addition, Algos is subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law, which prohibits Algos from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
first becomes an "interested stockholder," unless the business combination is
approved in a prescribed manner. The application of these provisions could have
the effect of delaying or preventing a change of control of Algos and could make
your investment less liquid.
IF WE, OUR CONTRACTORS, OR OTHER ENTITIES ARE UNABLE TO ADEQUATELY ADDRESS THE
POTENTIAL DISRUPTIONS TO COMPUTER SYSTEMS THAT MAY OCCUR DUE TO THE ADVENT OF
THE YEAR 2000, WE MAY NOT BE ABLE TO EFFECTIVELY MANUFACTURE, DEVELOP OR
COMMERCIALIZE OUR PRODUCTS.
A potential problem exists for all companies that rely on computers as the
year 2000 approaches. Computer software applications and systems that use only
the last two digits of a year to refer to a year may not properly recognize the
year 2000. This could cause a disruption of our operations, including, among
other things, a temporary inability to engage in normal business activities.
Because new development projects have not yet commenced and because we have not
completed our preparations for the commercialization and marketing of our
products, our assessment of our readiness with respect to the potential year
2000 computer problem is not complete.
For example, with respect to product development activities at Algos, if
certain data management and statistical applications do not function properly,
the analysis and reporting of study results could be delayed and the timing of
subsequent development activities and regulatory filings could be adversely
affected.
Algos may make significant additions to and changes in its existing
computer software applications and systems and/or the use of these systems in
anticipation of the possible commercialization of products. If Algos makes any
of these additions or changes, it would affect Algos' exposure to the potential
year 2000 computer problem since Algos would become more reliant on its computer
software applications and systems. If Algos commercializes products, it expects
to place significant dependence on the third parties' computer systems for
purchasing, production, customer order entry and invoicing, and other related
activities. A disruption in these systems could result in lost revenue from
inventory shortages, improper execution of customer orders, and/or delays in the
resolution and collection of outstanding invoices.
6
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As part of our manufacturing, development and commercialization efforts, we
will ask our outside vendors, manufacturers, suppliers and service providers
whether they and/or any additional information systems and software that we
acquire from them are year 2000 compliant. However, these parties may be unable
or unwilling to make assurances of their year 2000 compliance. And, even if we
do receive assurances of year 2000 compliance, the parties making the assurances
may not in fact be year 2000 compliant. In the event any of our outside vendors,
manufacturers, suppliers, and service providers are not year 2000 compliant, we
will likely be prevented from developing or commercializing some or all of our
products in a timely or efficient manner.
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