<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 March 31, 2000
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
May 1, 2000 was 17,421,345.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
----- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 30,752 $ 28,247
Marketable securities 4,011 4,002
Interest receivable 207 258
Prepaid expenses and other current assets 234 155
-------- --------
Total current assets 35,204 32,662
Restricted cash 150 150
Property and equipment, net 955 950
-------- --------
Total assets $ 36,309 $ 33,762
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,499 $ 3,915
Other current liabilities 452 260
-------- --------
Total current liabilities 3,951 4,175
-------- --------
Commitments
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares authorized,
17,403,895 and 17,421,345 shares issued and outstanding, respectively 174 174
Additional paid-in-capital 81,700 81,805
Unearned compensation expense (105) (105)
Deficit accumulated during the development stage (49,411) (52,287)
-------- --------
Total stockholders' equity 32,358 29,587
-------- --------
Total liabilities and stockholders' equity $ 36,309 $ 33,762
======== ========
</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)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the three months ended Cumulative
March 31, from inception
-------------------------- to March 31,
1999 2000 2000
---- ---- ----
<S> <C> <C> <C>
Revenues $ -- $ -- $ 3,311
-------- -------- ---------
Operating expenses:
Research and development 2,517 1,935 40,105
Selling, general and administrative 3,462 1,386 23,599
-------- -------- ---------
Total operating expenses 5,979 3,321 63,704
-------- -------- ---------
Loss from operations (5,979) (3,321) (60,393)
Interest income 568 445 8,106
-------- -------- ---------
Net loss $ (5,411) $ (2,876) $ (52,287)
======== ======== =========
Net loss per common share, basic
and diluted ($0.31) ($0.17)
======== ========
Weighted average common
shares outstanding, basic and
diluted 17,299,134 17,416,297
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
For the three months ended Cumulative
March 31, from inception
-------------------------- to March 31,
1999 2000 2000
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities $ (3,706) $ (2,541) ($45,591)
Cash flows from investing activities:
Purchases of marketable securities (9,842) (76,753)
Redemption of marketable securities 5,000 72,854
Purchases of property and equipment (105) (50) (1,681)
-------- ------- --------
Net cash used in investing activities (4,947) (50) (5,580)
-------- ------- --------
Cash flows from financing activities:
Proceeds from issuance of preferred stock 6,659
Proceeds from issuance of common stock 158 86 72,759
-------- ------- --------
Net cash provided by financing activities 158 86 79,418
-------- ------- --------
Net increase (decrease) in cash and cash equivalents (8,495) (2,505) 28,247
Cash and cash equivalents, beginning of period 37,025 30,752 -
-------- ------- --------
Cash and cash equivalents, end of period $ 28,530 $28,247 $28,247
======== ======= ========
</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. LOSS PER SHARE
Since the Company incurred net losses in all periods presented, outstanding
options and warrants to purchase an aggregate of 1,508,481 and 1,164,231 shares
of Common Stock at March 31, 1999 and 2000, respectively, were not included in
diluted per share calculations, as their effect would be antidilutive.
3. MERGER AGREEMENT WITH ENDO PHARMACEUTICALS HOLDINGS INC.
On November 26, 1999, the Company entered into a definitive merger
agreement pursuant to which Algos will merge with a subsidiary of Endo
Pharmaceuticals Holdings Inc. in a tax-free transaction. In the transition,
Algos shareholders will receive common stock of Endo and warrants to purchase
additional shares of common stock of Endo for nominal consideration. The
warrants will become exercisable only if the U.S. Food and Drug Administration
approves Algos' New Drug Application for MorphiDex'r' by a specified date.
The agreement places restrictions on the Company's ability to enter into
certain transaction, including incurring debt, issuing additional shares of
stock, paying dividends, disposing of assets and entering into certain
significant agreements. The transaction is subject to the approval of Algos
shareholders, regulatory approvals and certain other conditions and is
expected to be completed in the second quarter of 2000. Algos will reimburse
Endo for all out-of-pocket expenses if the Algos shareholders do not approve
the merger.
4
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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, Algos has devoted a substantial amount of its efforts
to licensing technology, recruiting key management and staff, developing
products, filing patent and regulatory applications and raising capital.
Algos has incurred losses since its inception and expects to incur losses
in the future. Algos' product development expenses may increase as additional
drugs are developed. In August 1999, Algos received a not approvable letter from
the FDA regarding a new drug application filed in 1998 for its most
developmentally advanced drug, MorphiDex'r'. Algos will incur additional
development costs for MorphiDex'r' in connection with amending the new drug
application and delay certain expenses associated with pre-commercialization
activities 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 related administrative activities.
On November 26, 1999, the Company entered into a definitive merger
agreement pursuant to which Algos will merge with a subsidiary of Endo
Pharmaceuticals Holdings Inc. in a tax-free transaction. In the transition,
Algos shareholders will receive common stock of Endo and warrants to purchase
additional shares of common stock of Endo for nominal consideration. The
warrants will become exercisable only if the U.S. Food and Drug Administration
approves Algos' New Drug Application for MorphiDex'r' by a specified date.
The agreement places restrictions on the Company's ability to enter into
certain transaction, including incurring debt, issuing additional shares of
stock, paying dividends, disposing of assets and entering into certain
significant agreements. The transaction is subject to the approval of Algos
shareholders, regulatory approvals and certain other conditions and is
expected to be completed in the second quarter of 2000. Algos will reimburse
Endo for all out-of-pocket expenses if the Algos shareholders do not approve
the merger.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2000 Compared to the Three Months
Ended March 31, 1999
Revenue:
Research and development:
In the three months ended March 31, 2000, research and development expenses
were $1.9 million, a decrease of $0.6 million, or 23%, from the three months
ended March 31, 1999. Research and development expenses were higher in 1999 due
to the impact of large-scale clinical studies of MorphiDex'r' and a greater
number of ongoing clinical studies of HydrocoDex'TM' and other Algos products in
development. Algos' development expenses may increase in future periods as
additional clinical studies are initiated and Algos' products enter more
advanced stages of development.
Selling, general and administrative:
In the three months ended March 31, 2000, selling, general and
administrative expenses were $1.4 million, a decrease of $2.1 million from the
three months ended March 31, 1999. The decrease was primarily attributable to
expenses incurred in 1999 in preparation for the possible future
commercialization of products, including fees to sales and marketing
consultants, educational materials and activities, and the addition of marketing
personnel. Algos expects to delay some other expenses associated with the
possible commercialization of products pending amendments to the MorphiDex'r'
new drug application. In addition, in 1999, Algos incurred higher compensation
expenses, professional fees and other general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
In the three months ended March 31, 2000 and 1999, spending for Algos'
product development efforts and other pre-commercialization activities resulted
in net cash outflows from operations of $2.5 million, $3.7 million,
respectively. Algos funded this spending primarily from accumulated cash
balances which resulted primarily from sales of common stock. In the three
months ended March 31, 2000, net cash outflows from operations decreased
compared to the three months ended March 31, 2000 as the result of lower
development expenses and lower spending for other pre-commercialization
activities.
Algos expects 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
5
<PAGE>
increased. In August 1999, Algos received a not approvable letter from the FDA
regarding its new drug application for MorphiDex'r'. Algos will incur additional
development costs associated with amending the MorphiDex'r' new drug
application. Algos currently expects that as a stand-alone entity its cash and
marketable securities at March 31, 2000 will be sufficient to fund its
development activities through the year 2001 and support a resubmission of the
new drug application based upon Algos' current schedule of clinical trials and
level of business activities. However, if additional trials are necessary or
advisable, or if additional products are developed, Algos may require additional
funds. In the event that internally generated funds are insufficient for such
efforts, Algos will need to raise additional capital. We cannot assure you that
Algos would be able to obtain such additional financing on terms acceptable to
Algos. Algos' 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
activities in preparation for the possible commercialization of MorphiDex'r';
the successful completion of the merger of Algos with Endo Pharmaceuticals
Holdings Inc. the commercialization of competing products; the execution of
licensing or other collaborative research agreements on terms acceptable
to Algos; and the cost of prosecuting and defending patents.
NET OPERATING LOSSES
At December 31, 1999, Algos had accumulated net operating loss
carryforwards of approximately $48 million for federal and state tax purposes.
Federal carryforwards expire in 2009 through 2019 and are available to reduce
future taxable income recognized in the carryforward period, if any. Due to the
uncertainty of future taxable income, Algos has established a valuation
allowance for these carryforwards and has not recognized their potential benefit
on a current basis. The future utilization of these carryforwards may be limited
by Section 382 of the Internal Revenue Code related to changes ownership of
Algos.
OTHER
Generally, Algos' results of operations are not significantly affected by
seasonal factors and Algos does not believe that inflation has had a significant
impact on its business.
Statement of Financial Accounting Standards (SFAS) No. 133, 'Accounting for
Derivative Instruments and Hedging Activities' is effective in the year 2001.
Based on Algos' current business activities, the statement is not expected to
have a material impact on Algos' financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements". Algos is
currently evaluating the future impact of SAB No. 101 on its financial
statements.
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 Algos' development or
commercialization schedules and future use of funds 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 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 Exhibit 99 to this report on Form 10-Q.
6
<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)
2.1 -- The Merger Agreement, dated November 26, 1999, by and
among Endo Pharmaceutical Holdings Inc., Endo Inc. and
Algos Pharmaceutical Corporation (the 'Merger
Agreement')(7)
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)
10.5 -- Lease Agreement with Commercial Realty & Resources
Corp.(3)
21 -- Subsidiaries of the Registrant(1)
27 -- Financial Data Schedule, March 31, 2000
99 -- Risk Factors
99.1 -- Form of Warrant Agreement of Endo Pharmaceutical Holdings
Inc. (attached as Exhibit C to the Merger Agreement)(7)
99.2 -- Form of Warrant Agreement of Endo Pharmaceutical Holdings
Inc. (attached as Exhibit I to the Merger Agreement)(7)
99.3 -- Form of Stockholder Voting Agreement between Endo
Pharmaceuticals Holdings Inc. and the stockholder named
therein (attached as Exhibit B to the Merger Agreement)(7)
99.4 -- Form of Employment Agreement between Endo Pharmaceuticals
Holdings Inc. and John W. Lyle (attached as Exhibit H to
the Merger Agreement)(7)
99.5 Letter Agreement, dated November 26, 1999, among Algos
Pharmaceutical Corporation, KIA V, L.P. and KEP V, L.P.(7)
</TABLE>
(footnotes continued on next page)
7
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(footnotes from previous page)
(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.
(7) Incorporated by reference to the Registrant's current Report on Form 8-K
dated November 26th, 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
8
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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, 2000 /s/ John W. Lyle
----------------- ---------------------------------
John W. Lyle
President and Chief Executive Officer
Date May 15, 2000 /s/ Gary R. Anthony
----------------- ---------------------------------
Gary R. Anthony
Chief Financial Officer and Principal
Accounting Officer
9
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 28,247
<SECURITIES> 4,002
<RECEIVABLES> 258
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 32,662
<PP&E> 1,434
<DEPRECIATION> 484
<TOTAL-ASSETS> 33,762
<CURRENT-LIABILITIES> 4,175
<BONDS> 0
<COMMON> 174
0
0
<OTHER-SE> 29,413
<TOTAL-LIABILITY-AND-EQUITY> 33,762
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 3,321
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,876)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,876)
<EPS-BASIC> (.17)
<EPS-DILUTED> (.17)
<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.
Although the results of Algos' trials to date have been encouraging, the results
are not by themselves predictive of results that will be obtained from
subsequent or more extensive trials. Furthermore, 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.
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 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 including 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, Algos
will be able to submit a New Drug Application 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 market for Algos' product. See 'Business -- Government Regulation'
in Algos' 1999 Annual Report on Form 10-K.
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
1
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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,
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 our 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 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
reputation in the marketplace and our ability to develop and commercialize our
products.
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
2
<PAGE>
Algos will be unable to obtain its requested quantities of opioid ingredients
which could be detrimental to Algos' ability to bring its product 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
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 drugs that may have higher costs than
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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.
IF ALGOS INCURS INDEMNIFICATION LIABILITY, OR A PRODUCTS LIABILITY SUIT IS
SUCCESSFULLY PROSECUTED AGAINST US, WE MAY NOT HAVE SUFFICIENT FUNDS TO PAY THE
RESULTING LIABILITY.
Algos will be exposed to potential product liability risks, which are
inherent in the testing, manufacturing and marketing of human therapeutic
products. In addition, Algos is contractually obligated under certain of our
license agreements to indemnify the individuals and/or institutions from whom we
have licensed the technology against claims relating to the manufacture and sale
of the products to be sold by Algos. Algos' indemnification liability, as well
as direct liability to consumers for any defects or health risks in the products
sold, could expose Algos to substantial losses which would reduce earnings and
funds available for research and development activities.
Algos currently carries certain liability insurance for our clinical trial
activities and we plan to purchase such product liability insurance as we deem
appropriate prior to marketing our products. 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 obtain or maintain such
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 and ibuprofen is the active ingredient in
Motrin, 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' 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.
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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.
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