SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report pursuant Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 1996
[ ] 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 0-24760
Orphan Medical, Inc.
(Exact name of registrant as specified in its charter)
Minnesota 41-1784594
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
13911 Ridgedale Drive, Suite 475,
Minnetonka, MN 55305 (612) 513-6900
(Address of principal executive offices (Registrant's telephone number,
and zip code) including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value 6,039,588
- ---------------------------- ---------
(Class) (Outstanding at August 5, 1996)
INDEX
ORPHAN MEDICAL, INC.(R)
(Development Stage Enterprise)
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Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
<S> <C>
Balance Sheets - June 30, 1996 and December 31, 1995. 3
Statements of Operations - Three month and six month periods ended June 30, 1996
and June 30, 1995 and for the period January 1, 1993 (inception) through June
30, 1996. 4
Statements of Cash Flows - Six months ended June 30, 1996 and June 30, 1995 and for the
period January 1, 1993 (inception) through June 30, 1996. 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations. 8
PART II. OTHER INFORMATION
Items 1 through 4 have been omitted since all items are inapplicable or answers
negative.
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 11
Signature 12
</TABLE>
Elliotts B(TM) solution (buffered intrathecal electrolyte/dextrose injection),
Antizol-Vet(TM) (fomepizole) for injection, Xyrem(TM) (gamma hydroxybutyrate),
Cystadane(TM) (betaine anhydrous for oral solution), and Orphan Medical, Inc.(R)
are registered trademarks of Orphan Medical, Inc.
<TABLE>
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BALANCE SHEETS
ORPHAN MEDICAL, INC.
(A Development Stage Company)
June 30, December 31,
1996 1995
------------ ------------
ASSETS (Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,168,443 $ 5,029,682
Short-term investments 17,319,027 3,719,555
Receivable from Chronimed Inc. 9,756 14,192
Other receivables 15,820 4,868
Prepaid expenses 115,832 42,629
------------ ------------
Total current assets 20,628,878 8,810,926
Property and equipment:
Office equipment 257,363 211,372
Accumulated depreciation (55,089) (35,502)
------------ ------------
202,274 175,870
Organization costs, net of amortization 485 566
------------ ------------
Total assets $ 20,831,637 $ 8,987,362
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,462,874 $ 1,454,081
Accrued payroll and related taxes 52,689 39,291
------------ ------------
Total current liabilities 1,515,563 1,493,372
Commitments (Note 8)
Shareholders' equity:
Common Stock, $.01 par value; 25,000,000 shares authorized;
6,039,588 and 3,739,588 shares issued and outstanding 60,396 37,396
Additional paid-in capital 29,459,980 14,648,079
Deficit accumulated during the development stage (10,204,302) (7,191,485)
------------ ------------
Total shareholders' equity 19,316,074 7,493,990
------------ ------------
Total liabilities and shareholders' equity $ 20,831,637 $ 8,987,362
============ ============
NOTE: THE BALANCE SHEET AT DECEMBER 31, 1995 HAS BEEN DERIVED FROM THE AUDITED
FINANCIAL STATEMENTS AT THE DATE BUT DOES NOT INCLUDE ALL OF THE INFORMATION AND
FOOTNOTES REQUIRED BY GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR COMPLETE
FINANCIAL STATEMENTS.
SEE ACCOMPANYING NOTES.
</TABLE>
<TABLE>
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STATEMENTS OF OPERATIONS
ORPHAN MEDICAL, INC.
(A Development Stage Company)
(Unaudited)
Period from
January 1, 1993
For the Three Months Ended For the Six Months Ended (Inception)
----------------------------- ----------------------------- to
June 30, June 30, June 30, June 30, June 30,
1996 1995 1996 1995 1996
------------ ------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
Operating expenses:
Research and
development $ 1,089,032 $ 1,070,682 $ 2,471,559 $ 1,685,514 $ 7,946,590
General and
administrative 447,024 345,681 887,145 623,040 3,139,019
------------ ------------ ------------ ------------ ------------
Loss from operations (1,536,056) (1,416,363) (3,358,704) (2,308,554) (11,085,609)
------------ ------------ ------------ ------------ ------------
Other income (expense)
Interest income 235,452 69,495 345,887 148,758 881,307
------------ ------------ ------------ ------------ ------------
Net loss and deficit
accumulated during
the development stage $ (1,300,604) $ (1,346,868) $ (3,012,817) $ (2,159,796) $(10,204,302)
============ ============ ============ ============ ============
Net loss per common
share $ (.24) $ (.60) $ (.65) $ (1.26) $ (4.82)
============ ============ ============ ============ ============
Weighted average
number of shares
outstanding 5,483,544 2,239,547 4,611,566 1,713,117 2,117,432
============ ============ ============ ============ ============
SEE ACCOMPANYING NOTES.
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
ORPHAN MEDICAL, INC.
(A Development Stage Company)
(Unaudited)
Period from
For the Six Months Ended January 1, 1993
------------------------------ (Inception) to
June 30, June 30, June 30,
1996 1995 1996
------------- ------------- ----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (3,012,817) $ (2,159,797) $(10,204,302)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation & amortization 19,668 11,145 55,412
Changes in operating assets and liabilities:
Increase in accounts payable and accruals 22,192 370,442 1,515,564
Increase in receivables and other (102,674) (20,793) (136,736)
Increase in prepaids (73,203) (36,050) (115,832)
------------ ------------ ------------
Net cash used in operating activities (3,146,834) (1,835,053) (8,885,894)
INVESTING ACTIVITIES:
Proceeds from sale of office equipment -- -- 38,192
Acquisition of office equipment (45,992) (59,431) (295,556)
Purchases of short-term investments (18,717,959) (24,895,291)
Maturities of short-term investments 5,214,645 787,201 7,677,995
------------ ------------ ------------
Net cash used in investing activities (13,549,306) 727,770 (17,474,660)
FINANCING ACTIVITIES:
Net proceeds from capital contribution -- -- 5,000,000
Net proceeds from stock offerings 14,834,901 8,801,766 23,636,667
Operating expenses paid by Chronimed -- -- 892,330
------------ ------------ ------------
Net cash provided by financing activities 14,834,901 8,801,766 29,528,997
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (1,861,239) 7,694,483 3,168,443
Cash and cash equivalents at beginning of
period 5,029,682 3,186,328 --
============ ============ ============
Cash and cash equivalents at end of
period $ 3,168,443 $ 10,880,811 $ 3,168,443
============ ============ ============
Supplemental cash flow information:
Interest received $ 273,549 $ 139,884 $ 772,046
SEE ACCOMPANYING NOTES
</TABLE>
ORPHAN MEDICAL, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
Orphan Medical, Inc. (the "Company") is a development stage company formed to
acquire, develop, and market products of high medical value intended to address
inadequately treated or uncommon diseases of distinct patient populations
treated by health care specialists. The Company is the successor to the business
previously conducted by the Orphan Medical Division of Chronimed Inc.
("Chronimed") from January 1, 1993 (inception) to July 1, 1994.
The financial statements are presented as if the Company had been a stand-alone
company as of January 1, 1993, which is the date the Company was formed as a
division of Chronimed. The Statements of Operations include the loss from
operations of the Orphan Medical Division from January 1, 1993 through July 1,
1994 and the loss from operations of the Company as an independent company from
July 2, 1994 through June 30, 1996. These financial statements do not
necessarily represent the results that would have been obtained by the Company
on a stand-alone basis for the period prior to July 2, 1994.
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information,
pursuant to the rules and regulations of the Securities and Exchange Commission.
In the opinion of management, all adjustments (consisting of normal, recurring
accruals) considered necessary for fair presentation have been included.
Operating results for the three and six month periods ended June 30, 1996 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1996. For further information, refer to the audited financial
statements and accompanying notes contained in the Company's Form 10-K filing
for the year ended December 31, 1995.
2. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Accordingly, actual results could differ from those estimates.
3. CHANGE IN FISCAL YEAR
The Company changed its fiscal year ending June 30 to a calendar year ending
December 31. This change resulted in a shortened fiscal year of six months, July
1, 1995 to December 31, 1995.
4. LOSS PER SHARE
Loss per share is based upon the weighted average number of shares outstanding
during the respective periods. Common stock equivalents are not included as
their effect is anti-dilutive.
5. CASH EQUIVALENTS
The Company considers all highly liquid investments, consisting of U.S.
government agency securities and investment grade commercial paper, with
remaining maturities of 90 days or less when purchased to be cash equivalents.
Cash equivalents are carried at cost plus accrued interest, which approximates
market value.
6. SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments, consisting of U.S.
government agency securities and investment grade commercial paper, with
remaining maturities of more than 90 days, but less than one year, when
purchased to be short-term investments. Short-term investments are carried at
cost plus accrued interest, which approximates market value, with no resulting
unrealized gains or losses recognized. The Company has classified its short-term
investments as available-for-sale.
7. STOCK OPTIONS
In October 1995, shareholders approved the 1994 Stock Option Plan, pursuant to
which 1,250,000 shares of Common Stock are reserved for issuance to employees,
directors, and consultants.
The following table summarizes all option grants through June 30, 1996
(unaudited):
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Shares Reserved Options Exercise Price
for Options Outstanding Exercisable Per Share
--------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Balance at July 1, 1994 - - - -
Reserved - August 1994 1,250,000 - - -
Granted or became exercisable (1,044,500) 1,044,500 151,900 $4.19 - $5.00
---------- --------- -------
Balance at June 30, 1995 205,500 1,044,500 151,900
Granted or became exercisable (189,500) 189,500 286,100 $5.00 - $7.63
---------- --------- -------
Balance at December 31, 1995 16,000 1,234,000 438,000
Granted or became exercisable (3,000) 3,000 17,833 $5.00
Canceled 3,000 (3,000) -
---------- --------- -------
Balance at June 30, 1996 16,000 1,234,000 455,833 $4.19 - $7.63
========== ========= =======
</TABLE>
8. COMMITMENTS
The Company has various commitments under agreements with outside consultants,
contract drug development and technical service companies, license and research
agreements, and agreements with Chronimed. Fees paid or accrued under agreements
with contract drug development and technical service companies totaled
approximately $881,000 for the three months ended June 30, 1996. At June 30,
1996, the Company expects to incur approximately $3,945,000 of additional
expenditures in subsequent periods under these existing commitments.
9. PUBLIC OFFERING
The Company completed a public offering of Common Stock on April 23, 1996,
pursuant to which it sold 2,300,000 shares of Common Stock at $7.125 per share,
before commissions and expenses. The offering provided approximately $14,834,000
in net cash proceeds to the Company.
10. RECLASSIFICATIONS
Certain amounts presented for three and six months ended June 30, 1995 have been
reclassified in order to conform to the three and six months ended June 30, 1996
presentation. In addition, certain amounts presented for the year ended December
31, 1995 and for the period January 1, 1993 (inception) through June 30, 1996
have been reclassified in order to conform to the three and six months ended
June 30, 1996 presentation.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
Orphan Medical, Inc. was incorporated on June 17, 1994 in order to carry on the
business previously conducted by the Orphan Medical Division of Chronimed. The
activities of the Orphan Medical Division, formed in January 1993, and the
Company, since its incorporation, have primarily related to acquisition of
products for development, hiring of personnel required to implement the
Company's business plan, and commencement of development activities. As of June
30, 1996, approximately $8,886,000 of cash has been used to fund operating
activities since January 1, 1993 (inception). The Company has had no revenues
from the sale of its products to date and does not expect to have any such
revenues until at least late 1996. However, the Company will not be permitted to
market any prescription product it may develop in any jurisdiction in which the
product does not receive regulatory approval. In addition, the Company is
dependent upon others for the physical distribution of its products (see Item
5).
THREE MONTHS ENDED JUNE 30, 1996 VS. THREE MONTHS ENDED JUNE 30, 1995
Research and development expenses increased from $1,070,682 (76% of the total
loss from operations) for the three months ended June 30, 1995 to $1,089,032
(71% of the total loss from operations) for the three months ended June 30,
1996. The $18,350 increase is not as large as increases incurred in prior
quarters, principally because of lower levels of development spending on
products presently being reviewed by the Food and Drug Administration (the
"FDA") and from terminating the development of glucaric acid. As of June 30,
1996, the Company had three applications for marketing approval pending with the
FDA; whereas the Company had not filed any applications for marketing approval
with the FDA as of June 30, 1995. Research and development expenditures will
likely continue to fluctuate from quarter to quarter and from year to year
depending on, among other factors, the timing of product development and the
progress of preclinical and clinical development programs. The Company's product
development schedule for the products currently under development and additional
products it may develop in the future will also be influenced by regulatory
decisions, competitive pressures, and the availability of funding.
General and administrative expenses increased from $345,681 (24% of the total
loss from operations) for the three months ended June 30, 1995 to $447,024 (29%
of the total loss from operations) for the three months ended June 30, 1996. The
$101,343 increase is principally due to adding staff.
Other income increased from $69,495 for the three months ended June 30, 1995 to
$235,452 for the three months ended June 30, 1996. This increase is due solely
to interest income attributable to higher levels of investable funds, which
resulted from the Company's public offering of Common Stock in May 1995 and
April 1996. Other income will continue to fluctuate from quarter to quarter and
from year to year depending principally on the amount of funds available for
investment.
Net losses for the three months ended June 30, 1996 and for the three months
ended June 30, 1995 were $(1,300,604) and $(1,346,868), respectively. Net losses
per common share for these respective periods were $(.24) and $(.60), based on
weighted average number of common shares outstanding of 5,483,544 and 2,239,547,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Since July 2, 1994, the effective date the Company was spun-off from Chronimed,
it has financed its operations from initial working capital balances, the net
proceeds from the 1995 and 1996 public offerings, and interest income. The 1995
and 1996 public offerings resulted in aggregate net proceeds, after commissions
and expenses, of $23,636,667.
The Company has used $8,885,895 to fund operations from January 1, 1993
(inception) through June 30, 1996. Of this amount, Chronimed paid $826,063 to
fund the Company's operating expenses from January 1, 1993 through July 1, 1994.
Thereafter, the Company has used $8,059,832 to fund operations.
Net working capital (current assets less current liabilities) increased from
$7,317,554 at December 31, 1995 to $19,113,315 at June 30, 1996. Total current
assets (primarily cash, cash equivalents, and short-term investments) increased
from $8,810,926 at December 31, 1995 to $20,628,878 at June 30, 1996.
The Company's commitments for consulting, drug development, and technical
services increased from $1,839,000 at December 31, 1995 to $3,945,000 at June
30, 1996 (also see Note 8 to the Financial Statements). As a result, the Company
expects development expenses to increase in the second half of 1996 as current
clinical programs advance and new clinical programs are initiated. A significant
portion of the Company's proposed development expenditures relate to Xyrem(TM).
In order to limit its potential financial commitment on this product, the
Company is currently exploring several options that could reduce the Company's
future cash funding requirements for this product. The Company believes that it
will have sufficient capital to fully implement its planned development schedule
at least through the first quarter of 1998.
PART II - OTHER INFORMATION
Item 5. Other Information
The Company has a Marketing and Distribution Agreement that grants Chronimed
exclusive domestic distribution rights with respect to certain of its products.
The Company has determined that two of these products, Elliotts B(TM) solution
and Antizol-Vet(TM), which have applications for marketing approval pending
before the FDA, can be more effectively distributed by a hospital distribution
company and a distributor of veterinary products, respectively, instead of
Chronimed. The Company has, therefore, agreed to pay Chronimed a royalty in
consideration for releasing the Company from the provision in the Marketing and
Distribution Agreement granting Chronimed exclusive domestic distribution rights
with respect to these two products (see Exhibit 10.39). In addition, the Company
and Chronimed are currently discussing Chronimed's distribution rights and
obligations relating to Cystadane(TM), and may further amend the Marketing and
Distribution Agreement with respect to this product in order to provide for its
optimal distribution. Further, the Company and Chronimed will continue to
evaluate the distribution requirements for other products, including
remaining products for which Chronimed has exclusive domestic distribution
rights.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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<CAPTION>
EXHIBIT INDEX
Method of
Exhibit Number Description Filing
-------------- ----------- ---------
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10.39 Agreement between OMI and Chronimed dated June 3, 1996 to amend Filed herewith
Marketing and Distribution Agreement dated July 2, 1994.
27 Financial Data Schedule - For SEC EDGAR filing Filed herewith
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 1996.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Orphan Medical, Inc.
--------------------------------------
Registrant
Date August 7, 1996 By /s/ David A. Feste
------------------------------ ----------------------------------
David A. Feste
Chief Financial Officer
(principal accounting officer
and principal financial officer)
EXHIBIT 10.39
AGREEMENT
For good and valuable consideration, the receipt and adequacy of which
are hereby acknowledged, Chronimed Inc., a Minnesota corporation ("Chronimed")
and Orphan Medical, Inc., a Minnesota corporation ("Orphan Medical"), agree as
follows:
1. The Marketing and Distribution Agreement, dated June 2, 1994, and
amended December 22, 1995 (the "Agreement"), between Chronimed and
Orphan Medical is amended as follows:
a. Elliot's B(TM) Solution is deleted from the list of "Initial
Products" set forth on exhibit A to the Agreement and, from and
after the date of this agreement, shall not be (i) subject to
the Exclusive License granted to Chronimed pursuant to the
Agreement, or (ii) treated as an "Initial Product" or a
"Product" for any purposes of the Agreement.
b. 4-Methyl Pyrazole (aka Antizol(TM)) in all forms, other than as
a human pharmaceutical, is deleted from the list of "initial
Products" set forth on exhibit A to the Agreement and, from and
after the date of this agreement shall not be (i) subject to the
Exclusive License granted to Chronimed pursuant to the
Agreement, or (ii) treated as an "Initial Product" or a
"Product" for any purposes of the Agreement.
2. Orphan Medical hereby agrees to make payment to Chronimed of a royalty
on future sales in the United States by Orphan Medical of products that
are excluded from the Exclusive License pursuant to section 1. The
royalty shall be computed and payable as follows:
a. The royalty of Elliot's B(TM) Solution products shall be equal
to one percent (1%) of Orphan Medical's net sales of such
products in the United States.
b. The royalty on 4-Methyl Pyrazole (aka Antizol(TM)) products
shall be equal to three percent (3%) of Orphan Medical's net
sales of such products in the United States.
c. Royalties shall be payable to Chronimed on a quarterly basis
within forty-five (45) days after the end of the calendar
quarter to which they relate, and each royalty payment shall be
accompanied by a written summary of the net sales upon which the
royalty payment is based.
d. For purposes of calculating the amount of the royalty owing to
Chronimed, the term "net sales" shall mean accrued gross sales
revenues collected by Orphan Medical during the relevant
calendar quarter, less (i) all returns, allowances and rebates,
(ii) bad debts, (iii) transportation, shipping & insurance
charges, and (iv) taxes and duties.
e. If any dispute, controversy or claim arises relative to the
provisions of this section 2, such dispute, controversy or claim
shall be resolved in accordance with the procedures set forth in
section 11 of the Agreement.
3. The Marketing Agreement (regarding Cystagon) between Chronimed and
Orphan Medical, dated October 19, 1994, and amended on December 22,
1995, is hereby terminated in all respects and shall be of no continuing
legal force or effect between Chronimed and Orphan Medical. Each of
Chronimed and Orphan Medical, on its own behalf and on behalf of its
insurers, successors and assigns, hereby releases the other party, and
its insurers, successors and assigns, from any liabilities, claims or
causes of action arising out of, or relating to, such Marketing
Agreement or the termination thereof. Within 30 days of the date of this
agreement, Chronimed shall pay Orphan Medical amounts accrued under this
Cystagon Marketing Agreement through Chronimed's accounting period ended
May 24, 1996.
IN WITNESS WHEREOF, Chronimed and Orphan Medical have caused this
agreement to be executed by their respective authorized representatives as of
the 3rd day of June, 1996.
CHRONIMED INC.
By /s/ Steven A. Crees
------------------------------------
Its Senior Vice President
ORPHAN MEDICAL, INC.
By /s/ John Howell Bullion
------------------------------------
Its Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,168,443
<SECURITIES> 17,319,027
<RECEIVABLES> 25,576
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 20,628,878
<PP&E> 257,363
<DEPRECIATION> 55,089
<TOTAL-ASSETS> 20,831,637
<CURRENT-LIABILITIES> 1,515,563
<BONDS> 0
0
0
<COMMON> 60,396
<OTHER-SE> 19,255,678
<TOTAL-LIABILITY-AND-EQUITY> 20,831,637
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,358,704
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (345,887)
<INCOME-PRETAX> (3,012,817)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,012,817)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,012,817)
<EPS-PRIMARY> (.65)
<EPS-DILUTED> (.65)
</TABLE>
