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 September 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 November 5, 1996)
INDEX
ORPHAN MEDICAL, INC.(R)
(Development Stage Enterprise)
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - September 30, 1996 and December 31, 1995. 3
Statements of Operations - Three month and nine month periods
ended September 30, 1996 and September 29, 1995 and for the
period January 1, 1993 (inception) through September 30, 1996. 4
Statements of Cash Flows - Nine months ended September 30,
1996 and September 29, 1995 and for the period January 1,
1993 (inception) through September 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 10
Signature 12
Antizol(TM) (fomepizole) for injection, Antizol-Vet(TM) (fomepizole) for
injection, Caprogel(TM) (aminocaproic acid) topical gel, Colomed(TM) (short
chain fatty acids) enema, Cystadane(TM) (betaine anhydrous for oral solution),
Busulfanex(TM) (busulfan) for injection, Elliotts B(TM) Solution (buffered
intrathecal electrolyte/dextrose injection), Xyrem(TM) (gamma hydroxybutyrate),
Sucraid(TM) (B-D-fructofuranoside fructohydrolase) oral solution, Intrachol(TM)
(choline chloride) for injection, and Orphan Medical, Inc.(R) are registered
trademarks of Orphan Medical, Inc.
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BALANCE SHEETS
ORPHAN MEDICAL, INC.
(A Development Stage Company)
September 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS (Unaudited) (Note)
Current assets:
Cash and cash equivalents $ 2,974,557 $ 5,029,682
Short-term investments 15,267,685 3,719,555
Receivable from Chronimed Inc. 10,000 14,192
Other receivables 69,214 4,868
Prepaid expenses 73,052 42,629
------------ ------------
Total current assets 18,394,508 8,810,926
------------ ------------
Property and equipment:
Office equipment 328,706 211,372
Accumulated depreciation (68,011) (35,502)
------------ ------------
260,695 175,870
Organization costs, net of amortization 445 566
------------ ------------
Total assets $ 18,655,648 $ 8,987,362
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,483,029 $ 1,454,081
Accrued payroll and related taxes 58,044 39,291
------------ ------------
Total current liabilities 1,541,073 1,493,372
Commitments
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 (12,405,801) (7,191,485)
------------ ------------
Total shareholders' equity 17,114,575 7,493,990
------------ ------------
Total liabilities and shareholders' equity $ 18,655,648 $ 8,987,362
============ ============
NOTE: THE BALANCE SHEET AT DECEMBER 31, 1995 HAS BEEN DERIVED FROM THE AUDITED
FINANCIAL STATEMENTS AT THAT 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>
<CAPTION>
STATEMENTS OF OPERATIONS
ORPHAN MEDICAL, INC.
(A Development Stage Company)
(Unaudited)
Period from
January 1,
For the Three Months Ended For the Nine Months Ended 1993
-------------------------------- -------------------------------- (Inception) to
September 30, September 29, September 30, September 29, September 30,
1996 1995 1996 1995 1996
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Operating expenses:
Research and
development $ 1,842,704 $ 996,143 $ 4,314,263 $ 2,681,657 $ 9,789,294
General and
administrative 628,733 416,340 1,515,878 1,039,380 3,767,752
------------ ------------ ------------ ------------ ------------
Loss from operations (2,471,437) (1,412,483) (5,830,141) (3,721,037) (13,557,046)
Other income
(expense)
Interest income 269,938 154,302 615,825 303,060 1,151,245
------------ ------------ ------------ ------------ ------------
Net loss and deficit
accumulated during
the development stage $ (2,201,499) $ (1,258,181) $ (5,214,316) $ (3,417,977) $(12,405,801)
============ ============ ============ ============ ============
Net loss per common
share $ (.36) $ (.34) $ (1.02) $ (1.43) $ (5.21)
============ ============ ============ ============ ============
Weighted average
number of shares
outstanding 6,039,588 3,739,588 5,091,048 2,396,030 2,381,010
============ ============ ============ ============ ============
SEE ACCOMPANYING NOTES.
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
ORPHAN MEDICAL, INC.
(A Development Stage Company)
(Unaudited)
Period from
For the Nine Months Ended January 1, 1993
------------------------------ (Inception) to
September 30, September 29, September 30,
1996 1995 1996
------------- ------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (5,214,316) $ (3,417,977) $(12,405,801)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation & amortization 32,631 20,032 68,375
Changes in operating assets and liabilities:
Increase in accounts payable and accruals 47,701 860,381 1,541,073
Increase in receivables and other (316,447) (32,390) (350,528)
Increase in prepaids (30,423) (62,658) (73,053)
------------ ------------ ------------
Net cash used in operating activities (5,480,854) (2,632,612) (11,219,934)
INVESTING ACTIVITIES:
Proceeds from sale of office equipment -- -- 38,192
Acquisition of office equipment (117,334) (85,081) (366,898)
Purchases of short-term investments (18,717,959) (1,676,149) (24,895,291)
Maturities of short-term investments 7,426,121 787,221 9,889,491
------------ ------------ ------------
Net cash used in investing activities (11,409,172) (974,009) (15,334,506)
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 (2,055,125) 5,195,145 2,974,557
Cash and cash equivalents at beginning of
period 5,029,682 3,186,328 --
------------ ------------ ------------
Cash and cash equivalents at end of
period $ 2,974,557 $ 8,381,473 $ 2,974,557
============ ============ ============
Supplemental cash flow information:
Interest received $ 386,968 $ 279,830 $ 885,465
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 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 nine month periods ended September 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. 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.
4. 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.
5. 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.
6. 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 September 30, 1996
(unaudited):
<TABLE>
<CAPTION>
Shares Exercise
Reserved for Options Price Per
Options Outstanding Exercisable 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 (26,500) 26,500 166,433 $5.00 - $8.50
Canceled 16,000 (16,000) --
---------- ---------- ----------
Balance at September 30, 1996 5,500 1,244,500 604,433 $4.19 - $7.63
========== ========== ==========
</TABLE>
7. 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 $1,583,000 for the three months ended September 30, 1996. At
September 30, 1996, the Company expects to incur approximately $3,510,000 of
additional expenditures in subsequent periods under these existing commitments.
Commitments for development expenditures will likely 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.
8. RECLASSIFICATIONS
Certain amounts presented for three and nine months ended September 29, 1995
have been reclassified in order to conform to the three and nine months ended
September 30, 1996 presentation. In addition, certain amounts presented for the
year ended December 31, 1995 and for the period January 1, 1993 (inception)
through September 30, 1996 have been reclassified in order to conform to the
three and nine months ended September 30, 1996 presentation.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
Orphan Medical, Inc. (the "Company") 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 September 30, 1996, approximately $11,220,000 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. Since September 27,
1996, the Company received clearance from the Food and Drug Administration (the
"FDA") to market Cystadane and Elliotts B Solution, but it does not expect any
revenues from these products until late in the fourth quarter of 1996. In
addition, the Company is dependent upon others for the physical distribution of
its products (see Item 5).
THREE MONTHS ENDED SEPTEMBER 30, 1996 VS. THREE MONTHS ENDED SEPTEMBER 29, 1995
Research and development expenses increased from $996,143 (71% of the total loss
from operations) for the three months ended September 29, 1995 to $1,842,704
(75% of the total loss from operations) for the three months ended September 30,
1996. The $846,561 increase is largely attributable to outside development
expenditures, principally drug manufacturing costs for products, clinical
programs and toxicology, as well as salary costs attributable to additional
development personnel. As of September 30, 1996, the Company had submitted three
applications with the FDA for marketing approval and received clearance on two
of these applications; whereas the Company had not submitted any applications
for marketing approval with the FDA as of September 29, 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 $416,340 (29% of the total
loss from operations) for the three months ended September 29, 1995 to $628,733
(25% of the total loss from operations) for the three months ended June 30,
1996. The $212,393 increase is principally due to adding marketing and
regulatory staff.
Other income increased from $154,302 for the three months ended September 29,
1995 to $269,938 for the three months ended September 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 is expected to decline as currently invested funds
are used to fund development activities.
Net losses for the three months ended September 30, 1996 and for the three
months ended September 29, 1995 were $(2,201,499) and $(1,258,181),
respectively. Net losses per common share for these respective periods were
$(.36) and $(.34), based on weighted average number of common shares outstanding
of 6,039,588 and 3,739,588, 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 $11,219,934 to fund operations from January 1, 1993
(inception) through September 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 $10,393,871 to fund operations.
Net working capital (current assets less current liabilities) increased from
$7,317,554 at December 31, 1995 to $16,853,435 at September 30, 1996. Total
current assets (primarily cash, cash equivalents, and short-term investments)
increased from $8,810,926 at December 31, 1995 to $18,394,508 at September 30,
1996.
The Company's commitments for outside development spending increased from
$1,839,000 at December 31, 1995 to $3,510,000 at September 30, 1996 (also see
Note 7 to the Financial Statements). As a result, the Company expects
development expenditures to increase. The Company estimates that a significant
portion of its future commitments for proposed development expenditures will
relate to Xyrem. 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.
Prospective investors are cautioned that the statements in this periodic report
that are not descriptions of historical facts may be forward looking statements
that are subject to risks and uncertainties. Actual results could differ
materially from those currently anticipated due to a number of factors,
including those identified in the cautionary statements filed as an exhibit to
this report. See Item 5.
PART II - OTHER INFORMATION
Item 5. Other Information
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby filing cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in forward looking statements of the
Company made by, or on behalf of the Company. See Exhibit 99 to this report.
The Company has a Marketing and Distribution Agreement (the "Agreement") that
grants Chronimed exclusive domestic distribution rights with respect to certain
of its products. The Company and Chronimed have agreed to amend the Agreement
with respect to Cystadane, which has received marketing approval from the FDA.
The amended Agreement (the "Cystadane Agreement"), which is filed as Exhibit
10.40, is expected to optimize the distribution of Cystadane by allowing each
company to focus on their respective strengths. Further, the Company and
Chronimed will continue to evaluate the distribution requirements for the
Company's other products, including remaining products for which Chronimed has
exclusive domestic distribution rights. The Company is presently negotiating
distribution agreements with other companies for Elliotts B Solution and
Antizol-Vet, which are products that Chronimed previously agreed would be more
effectively distributed by a hospital distribution company and a distributor of
veterinary products, respectively.
On October 2, 1996, the Company announced that it has been awarded grants
totaling over $1.3 million to support four of the Company's development
projects. At September 30, 1996, the Company had not collected nor had it sought
reimbursement under any of these grants. The Company expects to begin receiving
reimbursements during the fourth quarter of 1996. When collected, the Company
shall account for the grant awards as a reduction of research and development
expense.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT INDEX
Exhibit Sequentially
Number Description Numbered Page
- -------------- ---------------------------------------------- --------------
10.40 Cystadane Agreement between the Company and
Chronimed dated October 11, 1996. 13
- -------------- ---------------------------------------------- --------------
27 Financial Data Schedule - For SEC EDGAR filing 22
- -------------- ---------------------------------------------- --------------
99 Cautionary Statements 23
- -------------- ---------------------------------------------- --------------
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 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 November 8, 1996 By /s/ David A. Feste
---------------- ---------------------------------
David A. Feste
Chief Financial Officer
(principal accounting
officer and principal
financial officer)
EXHIBIT 10.40
CYSTADANE 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
of October 11, 1996 (the "Effective Date") as follows:
1. The Marketing and Distribution Agreement, dated June 2, 1994, and
amended December 22, 1995, and further amended June 3, 1996 (collectively the
"Initial Agreement"), between Chronimed and Orphan Medical is amended as
follows:
Betaine (aka Cystadane(TM)) ("Cystadane") is deleted from the
list of "Initial Products" set forth on exhibit A to the Initial
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 Initial Agreement, or (ii) treated as an "Initial Product" or a
"Product" for any purposes of the Initial Agreement.
2. The initial term ("Initial Term") of this agreement shall start on
the Effective Date and continue unless sooner terminated as provided for in
section 18 below, until the second anniversary of the date of Orphan Medical's
invoice for the first commercial sale of Cystadane to Chronimed (the "Cystadane
Domestic Launch Date" or the "CDLD").
3. Orphan Medical hereby appoints Chronimed, and Chronimed hereby
accepts such appointment, as a non-exclusive distributor with respect to the
sale and use of Cystadane within the United States all subject to the terms of
this agreement; provided, however, such distribution rights shall be exclusive
for Cystadane products sold direct to patients for such patients' own use within
the United States. Chronimed may market, sell or distribute Cystadane for use
within the United States to all types of customers or patients, including
patient direct, pharmacies, and wholesalers. Chronimed shall use all reasonable
commercial efforts to promote the distribution of Cystadane within the United
States.
4. Orphan Medical shall establish, and may change from time-to- time,
upon at least thirty (30) days prior notice to Chronimed, the published
wholesale price (the "AWP") for Cystadane. As of the Effective Date of this
agreement the AWP for Cystadane is [REDACTED-CONFIDENTIAL TREATMENT REQUESTED]
per bottle containing 180 grams of Cystadane (a "Bottle"). The parties estimate
that each patient or customer will use one Bottle of Cystadane per month.
5. The price per Bottle of Cystadane payable by Chronimed shall be
[REDACTED-CONFIDENTIAL TREATMENT REQUESTED] of the AWP in effect at the time of
the receipt by Orphan Medical of an order for Cystadane from Chronimed and shall
be paid within thirty (30) days of the date of Orphan Medical's invoice to
Chronimed for the applicable Cystadane order. The parties may review annually
the price payable by Chronimed for Cystadane, but no change in such price shall
be effective unless mutually agreed to in writing by the parties. If any payment
from Chronimed to Orphan Medical shall not have been received by Orphan Medical
within fifteen (15) days after the date such payment is due, then for so long as
such payment is overdue, interest at the rate of one and one-half per cent
(1.5%) per month, or such lower rate as may be the maximum legally permissible
rate, shall automatically become due and payable on such unpaid amount.
6. During the term of this agreement, Orphan Medical shall pay to
Chronimed a royalty on sales of Cystadane for use in the United States directly
made by Orphan Medical or made by Orphan Medical's agents, representatives or
distributors other than Chronimed. No royalty shall be payable for sales of
Cystadane for use outside the United States. The royalty shall be computed and
payable as follows:
(a) The royalty on Cystadane products shall be equal to
[REDACTED-CONFIDENTIAL TREATMENT REQUESTED] of Orphan Medical's net
sales of such products in the United States;
(b) 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; and
(c) 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 and insurance charges, and (iv) taxes
and duties.
7. The term of this agreement shall automatically renew and continue
following the Initial Term until either party gives the other party at least one
hundred twenty (120) days prior written notice of its desire to terminate this
agreement. During such notice period, the parties in their discretion may
negotiate amendments to this agreement including new financial provisions. If
the parties do not mutually agree in writing to amend or extend this agreement,
it shall terminate without any further notice or action one hundred twenty (120)
days after the giving of such notice or such later date as may be provided for
in the notice.
Upon expiration or termination of this agreement, Chronimed shall have
no further distribution, royalty/compensation or other rights with respect to
Cystadane or this agreement, Orphan Medical shall have further no obligations to
Chronimed under this agreement and Orphan Medical may pursue all other methods
of distribution with respect to Cystadane. Sections 16, 19, 21, 23, 25 and 30 of
this agreement shall survive any expiration or termination of this agreement.
8. During the term of this agreement, Orphan Medical shall maintain an
inventory of at least [REDACTED-CONFIDENTIAL TREATMENT REQUESTED] cases of
Cystadane, with each case containing twelve (12) Bottles of Cystadane (a "Case")
and the minimum order for Cystadane from Chronimed shall be
[REDACTED-CONFIDENTIAL TREATMENT REQUESTED] Cases. Chronimed may return
Cystadane products to Orphan Medical in accordance with the Orphan Medical
return policy as in effect at the time of return. Attached hereto marked Exhibit
A is a copy of Orphan Medical's Return Goods Policy for Cystadane which is in
effect as of the Effective Date of this agreement. Such policy may be changed by
Orphan Medical from time-to-time effective as to Chronimed upon Orphan Medical
giving notice to Chronimed. Anything to the contrary notwithstanding in Orphan
Medical's Return Goods Policy for Cystadane now in effect or as it may be
changed by Orphan Medical in the future, Chronimed may return to Orphan Medical,
Cystadane products which are returned by Chronimed's direct patients, and upon
Orphan Medical's receipt of such products, Orphan Medical shall ship a like
quantity of replacement Cystadane products to Chronimed.
9. Orphan Medical shall be responsible for selecting the method of
shipment for Cystadane to Chronimed. Orphan Medical shall be responsible for the
costs of shipping and insurance of Cystadane to Chronimed.
10. During the term of this agreement Orphan Medical shall not sell
Cystadane to any other wholesale entity within the United States on terms or
prices more favorable than those extended to Chronimed.
11. The parties shall jointly develop a "How to Obtain" system with
brochures and other print materials determined by Orphan Medical. Each party
will pay for the costs it incurs in connection with the development or
implementation of such system. Chronimed shall put into outgoing orders
reasonable amounts of additional brochures or other product information of
Orphan Medical at no additional cost to Orphan Medical.
12. Chronimed shall provide storage and warehouse space for Cystadane
in an amount to be mutually agreed on by the parties and subject to applicable
current good manufacturing practices requirements prescribed by the United
States Food and Drug Administration (the "FDA"). Warehousing space provided to
Orphan Medical shall be within the temperature and relative humidity range noted
in the Cystadane product labeling.
13. Chronimed will provide Orphan Medical with distribution services
for the distribution of Cystadane from Chronimed warehouses to customers of
Orphan Medical who are not the customers or patients of Chronimed. These
distribution services will include Orphan Medical's indigent program. The
parties shall negotiate in good faith a mutually agreeable fee payable by Orphan
Medical for distribution services on a per order or per shipment basis.
14. In addition to the obligations of the parties provided for in the
other sections of this agreement, Orphan Medical shall be responsible for the
following matters with respect to Cystadane:
(a) providing a finished and marketable Cystadane product;
(b) labeling the Cystadane product with NDC labeler code;
(c) developing the marketing materials and strategies;
(d) marketing the Cystadane product in such ways as Orphan
Medical may determine, including formulary such as prenotification
coverage with payors, such as Medicaid;
(e) providing annual sales forecast, including anticipated
domestic launch dates for the Cystadane product, and Elliot's B(TM)
Solution, and 4-MethyPyrazole (aka Antizol(TM) ) other than as human
pharmaceutical products;
(f) regulatory issues with respect to the Cystadane product;
(g) designing indigent forms and providing copies to Chronimed
to send to people who request such forms;
(h) evaluating all indigent forms for acceptability;
(i) paying for any Cystadane product given out under the
indigent program;
(j) paying OBRA rebates for Medicaid patients;
(k) answering all questions of a medical nature through
medical services at Orphan Medical;
(l) providing appropriate training to Chronimed customer
service personnel to allow for adequate customer service regarding
product distribution; and
(m) establishing the AWP and listing with appropriate pricing
references.
15. In addition to the obligations of the parties provided for in the
other sections of this agreement, Chronimed shall be responsible for the
following matters with respect to Cystadane:
(a) purchasing Cystadane product at the prices provided for in
this agreement;
(b) selling Cystadane products for use within the United
States at such prices as Chronimed may determine;
(c) providing all available sales and distribution information
to Orphan Medical; provided however the design, content and frequency
of reports with regard to sales and distribution shall be mutually
agreed to by the parties and shall initially be submitted by Chronimed
to Orphan Medical on a weekly basis;
(d) providing upon Orphan Medical's request, Chronimed's
internal reports with respect to Cystadane product sales, amounts
shipped and inventory on hand;
(e) tracking by lot numbers of all shipments to non-direct
patients, and upon Orphan Medical's request, sales information by payor
type, including direct patients and Medicaid (including any state or
federally funded program) patients;
(f) maintaining a system by which the distribution of each lot
of Cystadane product can be readily determined to facilitate a recall
if necessary and maintaining FIFO shipment procedures and other
internal procedures that shall comply with requirements prescribed by
the FDA;
(g) offering a dedicated 800 number for customers to order the
Cystadane product;
(h) including additional marketing materials in mailed orders,
when requested by Orphan Medical, on a mutually agreed upon basis;
(i) gathering a valid prescription by fax, mail, or telephone
when necessary;
(j) obtaining and receiving a Letter of Medical Necessity from
the prescribing physician when necessary;
(k) receiving an assignment of benefits form for all patients
who have medical insurance coverage when necessary;
(l) filling all prescription orders with:
(i) a form describing how to reorder;
(ii) a package insert; and
(iii) a patient medical profile form to be returned
to Chronimed in order to decrease the possibility of allergies
and drug interactions;
(m) verifying insurance reimbursements, coverage, accepting
assignment of benefits, and collecting all payor and patient payments;
(n) having a pharmacist available for non-medical pharmacy
questions from patients or physicians from 7 a.m. to 7 p.m. CST Monday
through Friday;
(o) reporting any and all adverse events or Cystadane product
complaints to Orphan Medical the same day received;
(p) reporting all issues related for formulary coverage to
Orphan Medical the same day learned, for Orphan Medical to resolve;
(q) providing indigent forms for relevant candidates; and
(r) managing all formulary inquiries as they relate to
individual patient prescriptions, with help and support from Orphan
Medical as reasonably requested by Chronimed.
16. Each party shall perform its obligations under this agreement in
compliance with all applicable laws and regulations, including FDA regulations.
Each party shall indemnify the other party, its officers, employees and agents
harmless from any and all claims, causes of action, damages, liability, costs
and expenses (including reasonable attorney's fees) arising from the actions or
omissions of the indemnifying party or such party's failure to perform its
obligation under this agreement.
17. Orphan medical will warrant Cystadane to Chronimed's direct
patients in accordance with Orphan Medical's warranty as such warranty may be in
effect from time-to-time, and Chronimed shall have no authority to expand or
modify in any way such warranty. The warranty to patients is Orphan Medical's
standard warranty and is in lieu of all other warranties, express or implied,
which are hereby disclaimed and excluded by Orphan Medical, including without
limitation any warranty of merchantability or fitness for a particular purpose
or use.
18. If either party defaults in the performance of any material
provision of this agreement, then the non-defaulting party may give written
notice to the defaulting party and, if the default is not remedied within thirty
(30) days following receipt of such notice, this agreement will be terminated
without any further notice or action. Material breaches of this agreement shall
include, without limitation, failure to timely pay amounts due, insolvency, or
the commencement of bankruptcy or liquidation proceedings.
19. The provisions of section 6.3 (Confidential Information), section
6.4 (Permitted Disclosures) and the definition of "Confidential Information"
contained in section 1.1 of the Initial Agreement are incorporated into and make
a part of this agreement.
20. This agreement constitutes the entire agreement between the parties
with respect to the subject matter and supersedes all prior or contemporaneous
agreements, understandings, negations and discussions, whether written or oral.
21. This agreement shall be governed by and interpreted under the laws
of the State of Minnesota, U.S.A., excluding its choice of law rules.
22. All modifications, amendments, and/or waivers to this agreement,
must be in writing and signedby both parties.
23. In no event shall either party be liable to each other or any other
party for loss of profits, indirect, special, consequential or incidental
damages arising out of this agreement, Cystadane or any product even if it has
been advised of the possibility of such potential loss or damage.
24. Neither party may assign, delegate or transfer any of its rights or
obligations, except Orphan Medical may delegate the obligations described under
section 14(g) through (i), under this agreement, without the prior written
consent of the other party. Any attempted assignment, delegation or transfer
without such consent shall be void.
25. If any provision of this agreement is found to be invalid or
unenforceable, such provision shall be deemed stricken from this agreement and
the remainder of this agreement shall continue in full force and effect.
26. This agreement does not make either party the employee, agent or
legal representative of the other for any purpose whatsoever. Neither party is
granted any right or authority to assume or to create any obligation or
responsibility, express or implied, on behalf of or in the name of the other
party. Each party is acting as an independent contractor.
27. Notices permitted or required to be given hereunder shall be deemed
sufficient if given by (a) registered or certified mail, postage prepaid, return
receipt requested, (b) private courier service, or (c) facsimile addressed to
the respective addresses of the parties as contained in the Initial Agreement or
at such other addresses as the respective parties may designate by like notice
from time to time. Notices so given shall be effective upon (1) receipt by the
party to which notice is given, or (2) on the fifth (5th) day following mailing,
whichever occurs first.
28. If the performance of this agreement or any obligation hereunder
(other than the payment of monies due owing hereunder) is prevented, restricted
or interfered with by reason of any event or condition beyond the reasonable
control of such party (including without limitation acts of state or
governmental action, riots, disturbance, war, strikes, lockouts, slowdowns,
prolonged shortage of energy or other supplies, epidemics, fire, flood,
hurricane, typhoon, earthquake, lightning and explosion), the party so affected
shall be excused from such performance, only for so long as and to the extent
that such a force prevents, restricts or interferes with the party's performance
and provided that the party affected gives notice thereof to the other party and
uses diligent efforts to remedy such event or conditions.
29. The timing and content of all public announcements relating to this
agreement or its execution must be approved by both parties prior to the release
of such announcement. Any use by one party of the other party's name or
trademarks in connection with the agreement or any Cystadane product must be
approved in advance by the other party.
30. Any dispute, controversy or claim arising out of or relating to
this agreement, or any breach thereof, including but not limited to any matters
relative to the provisions of section 6 of this agreement, shall be resolved in
accordance with the procedures set forth in section 11 of the Initial Agreement.
IN WITNESS WHEREOF, Chronimed and Orphan Medical have caused this
agreement to be executed by their respective authorized representatives as of
the Effective Date.
CHRONIMED INC.
By /s/ Steven A. Crees
------------------------------
Its Senior Vice President
-------------------------
ORPHAN MEDICAL, INC.
By /s/ John Howell Bullion
------------------------------
John Howell Bullion,
Chief Executive Officer
Exhibit A to Cystadane Agreement
Orphan Medical Return Goods Policy: Cystadane(TM)(betaine anhyrous for oral
solution)
The Company's policy shall be as follows:
1. Orphan Medical will accept responsibility for any product shipped to
Chronimed which is damaged during shipping. Renumeration shall be in the
form of replacement product.
2. Orphan Medical will accept responsibility for any product which is not
acceptable from a quality standpoint. This would include product involved
in recall or market withdrawal situations. Renumeration would again be in
the form of replacement product.
3. Orphan Medical will work closely with Chronimed to assist in inventory
management. In the event that product is overstocked by Chronimed, and in
the event that Orphan Medical warehouse space is available to accept the
given product, Orphan Medical will accept returns because of overstock. It
is anticipated that the ability to forecast use based on chronic condition
will be good and that this situation is unlikely to occur.
4. Similarly, Orphan Medical will work closely with Chronimed regarding the
ordering of any short dated product. All attempts will be made to utilize
short dated product for mail order patients vs. wholesale accounts and
outdated merchandise should be minimized using this approach. In event of
outdated product, Orphan Medical will accept responsibility by exception
only (i.e. on a case by case basis).
EXHIBIT 99
Orphan Medical, Inc.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward looking statements to encourage companies to provide prospective
information without fear of litigation so long as statements are identified as
forward looking and are accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those projected in the statement. The Company desires to take
advantage of these "safe harbor" provisions and is filing this Exhibit 99 in
order to do so. Accordingly, the Company hereby identifies the following
important factors which could cause the Company's actual results to differ
materially from any such results which may be projected, forecast, estimated or
budgeted by the Company in forward looking statements made by the Company from
time to time in reports, proxy statements, registration statements and other
written communications, or in oral forward looking statements made from time to
time by the Company's officers and agents.
LACK OF REVENUES AND PROFITABLE OPERATIONS; UNCERTAINTY OF FUTURE
FINANCIAL RESULTS.
The Company has been unprofitable since its inception in January 1993 and had an
accumulated deficit of $12,405,801 as of September 30, 1996. The Company has
never had any operating revenues, and to date its only income has been derived
from interest earned on invested funds. The Company has not commercially
introduced any products, although sales revenues are anticipated by the end of
1996. The Company expects to continue to incur operating losses at least through
1997 as it expends additional funds on product development. The amount of these
losses may vary significantly from year-to-year and quarter-to-quarter and will
depend on, among other factors, the timing of product development and regulatory
approval. There can be no assurance that the Company will ever generate revenues
or achieve profitability
DEVELOPMENT STAGE COMPANY.
The Company is in the development stage and its operations and the development
of its proposed products are subject to all of the risks inherent in the
establishment of a new business enterprise, including reliance on key personnel,
the lack of fully-developed products, insufficient capital, a competitive
environment characterized by numerous well-established and well-capitalized
competitors, expected losses at least through 1997, a market subject to
extensive regulatory oversight, and reliance on outside contractors for the
manufacture of its proposed products. The likelihood of the success of the
Company must be considered in light of the problems, expenses and delays
frequently encountered in connection with the development of new pharmaceutical
products or medical products and the competitive and regulatory environment in
which the Company operates.
FUTURE CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL WILL BE AVAILABLE.
The Company's current cash, cash equivalents, and short-term investments are
expected to be sufficient to fund the Company's operations at least through the
first quarter of 1998. Thereafter, the Company may require additional funds to
fully implement its business plan and meet its working capital requirements.
Adequate funds for the Company's operations, whether from financial markets or
from other sources, may not be available when needed on terms attractive to the
Company, or at all. Lack of funding could cause the Company to delay, scale back
or eliminate some or all of its products currently under development, including
acquisition and licensing programs, or prevent the commercial introduction of
some or all of its products altogether.
DEPENDENCE ON LICENSE AND ACQUISITION STRATEGY.
The Company has adopted a license and acquisition strategy to build its product
portfolio. The Company's strategy for growth is dependent upon its continued
ability to identify and acquire new pharmaceutical products targeted at niche
markets which can be promoted through the Company's existing marketing and
distribution channels. Because the Company does not engage in proprietary
research and development of new pharmaceutical products, it must rely upon the
willingness of others to sell or license pharmaceutical product opportunities to
the Company. Other companies, including those with substantially greater
resources, are competing with the Company to acquire such products. There can be
no assurance that the Company will be able to acquire rights to additional
products on acceptable terms, if at all. The failure of the Company to acquire
or license new pharmaceutical products or to promote or market commercially
successful products would have a material adverse effect on the Company's
business and prospects. Further, the marketing strategy, distribution channels
and levels and bases of competition with respect to newly acquired or licensed
products may be different than those of the Company's current products and there
can be no assurance that the Company will be able to compete favorably in
marketing any product.
The Company has contractual production rights to certain compounds through
various license agreements. These agreements are generally terminable by the
licensor for cause upon short notice or in the event the Company is insolvent or
bankrupt, does not apply minimum resources and efforts to develop the compound
under license or does not achieve certain minimum royalty payments. There can be
no assurance that the agreements will not be so terminated and, if terminated,
that the Company will be able to enter into similar agreements on terms as
favorable to the Company as those contained in its existing license agreements.
STRATEGIC FOREIGN ALLIANCES; NO ASSURANCE OF FOREIGN LICENSEES.
The Company's strategy for the exploitation of foreign markets for its products
is to enter into strategic alliances with various multinational and foreign
pharmaceutical companies. The Company has licensed to an unrelated Australian
company the rights to sell Cystadane in Australia and New Zealand. Revenues from
the Cystadane license for Australia and New Zealand are not expected to be
material. Revenues from strategic alliances typically consist of milestone
payments and royalty payments. However, there can be no assurance that the
Company will be able to negotiate additional strategic alliances on acceptable
terms, if at all, or that such alliances will be successful.
GOVERNMENT REGULATION; NEED FOR FDA AND OTHER REGULATORY APPROVALS.
Government regulation in the United States and abroad will be a significant
factor in the production, testing and marketing of the Company's current and
future products. Prior to marketing, each of the Company's products must undergo
an extensive regulatory approval process conducted by the United States Food and
Drug Administration (the "FDA") and by comparable agencies in other countries.
The approval process can take many years and require the expenditure of
substantial resources, and there can be no assurance that any product that the
Company may develop will be approved by the FDA or any foreign regulatory
authority in a timely manner, or at all. Generally, only a very small percentage
of newly discovered pharmaceutical compounds that enter preclinical development
are approved for sale. The Company will not be permitted to market any medicine
it may develop as a prescription product in any jurisdiction in which the
product does not receive regulatory approval.
The Company depends on external laboratories and medical institutions to conduct
its preclinical and clinical testing in compliance with clinical and laboratory
practices established by the FDA. The data obtained from preclinical and
clinical testing are subject to varying interpretations that could delay, limit
or prevent regulatory approval. In addition, delays or rejection may be
encountered based upon changes in FDA policy for drug approval during the period
of development and by the requirements for regulatory review of each submitted
New Drug Application ("NDA"). Moreover, even if the FDA approves a product, such
approval may entail commercially unacceptable limitations on the uses, or
"indications," for which a product may be marketed, and further studies may be
required to provide additional data on safety or effectiveness. The FDA also
requires post-marketing adverse event surveillance programs to monitor the
product's side effects.
An approved FDA product and the product's manufacturer are subject to continual
regulatory review and the later discovery of previously unknown problems with a
product or manufacturer may result in restrictions or sanctions on such products
or manufacturer, including the withdrawal of such product from the market. Most
changes in the manufacturing procedures for any of the Company's approved
products and any change in manufacturers will require the approval of the FDA
prior to their implementation, which could have a material adverse effect upon
the Company's ability to continue the commercialization or sale of a product.
In certain countries, the sales price of a product must also be approved after
marketing approval is granted. No assurance can be given that satisfactory
prices can be obtained in foreign markets even if marketing approval is granted
by foreign regulatory authorities.
ORPHAN DRUG STATUS.
Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs
intended to treat a "rare disease or condition," which generally is a disease or
condition that affects populations of fewer than 200,000 people in the United
States. Orphan drug designation must be requested before submitting an NDA, and
after the FDA grants orphan drug designation, the generic identity of the
therapeutic agent and its potential orphan use are publicized by the FDA. Under
current law, orphan drug designation confers United States marketing exclusivity
upon the first company to receive FDA approval to market the designated drug for
the designated indication for a period of seven years following approval of the
NDA, subject to certain limitations. Orphan drug designation does not convey any
advantage in, or shorten the duration of, the regulatory approval process.
Moreover, although obtaining FDA approval to market a product with an orphan
drug designation can be advantageous, there can be no assurance that the scope
of protection or the level of marketing exclusivity that is currently afforded
by orphan drug designation and marketing approval will remain in effect in the
future. Most of the Company's current products have received orphan drug
designations and the Company intends to seek such designations for appropriate
product candidates in the future. There can be no assurance, however, that any
product candidates will receive an orphan drug designation or that any of the
Company's products with such a designation will be the first to be approved by
the FDA for the designated indication, thereby obtaining orphan drug marketing
exclusivity. Orphan drug designation does not prevent other manufacturers from
attempting to develop the same drug for the designated indication or from
obtaining the approval of an NDA for their drug prior to the approval of the
Company's NDA. If another sponsor's NDA for the same drug and the same
indication is approved first, that sponsor is entitled to exclusive marketing
rights if that sponsor has received orphan drug designation for its drug. In
that case, the FDA would refrain from approving an application by the Company to
market its competing product for seven years, subject to certain limitations.
There can be no assurance that competing products will not receive orphan drug
designations and FDA marketing approval before the Company's products.
NDA approval of a drug with an orphan drug designation does not prevent the FDA
from approving the same drug for a different indication, or a molecular
variation of the same drug for the same indication. Because doctors are not
restricted by the FDA from prescribing an approved drug for uses not approved by
the FDA, it is also possible that another company's drug could be prescribed for
indications for which the Company's product has received orphan drug designation
and NDA approval. Such prescribing of approved drugs for unapproved uses
(commonly referred to as "off label" use) could adversely affect the marketing
potential of products that have received orphan drug designation and NDA
approval. In addition, NDA approval of a drug with an orphan drug designation
does not provide any marketing exclusivity in foreign markets.
The possible amendment of the Orphan Drug Act by the United States Congress has
been the subject of frequent discussion. Although no significant changes to the
Orphan Drug Act have been made for a number of years, members of Congress have
from time to time proposed legislation that would limit the application of the
Orphan Drug Act. There can be no assurance as to the precise scope of protection
that may be afforded by orphan drug designation and marketing approval in the
future or that the current level of exclusivity will remain in effect.
RELIANCE ON PATENTS AND OTHER PROPRIETARY RIGHTS.
The pharmaceutical industry places considerable importance on obtaining patent
and trade secret protection for new technologies, products and processes. The
Company's success will depend, in part, on its ability to enjoy, obtain and
enforce protection for its products under United States and foreign patent laws
and other intellectual property laws, preserve the confidentiality of its trade
secrets and operate without infringing the proprietary rights of third parties.
The patent position of pharmaceutical firms is often highly uncertain and
generally involves complex legal and factual questions. The use of four of the
current products or treatment methods that the Company has licensed are covered
by United States patents, and applications for additional United States patents
covering the use of certain of its other current products have been or are
expected to be filed. The Company evaluates the desirability of seeking patent
or other forms of protection for its products in foreign markets based on the
expected costs and relative benefits of attaining such protection. There can be
no assurance that any patents will be issued from any applications or that any
issued patents will afford adequate protection to the Company. Further, there
can be no assurance that any issued patents will not be challenged, invalidated,
infringed or circumvented or that any rights granted thereunder will provide
competitive advantages to the Company. Parties not affiliated with the Company
have obtained or may obtain United States or foreign patents or possess or may
possess proprietary rights relating to the Company's current products. There can
be no assurance that patents now in existence or hereafter issued to others will
not adversely affect the development or commercialization of the Company's
current products or that the Company's planned activities will not infringe
patents owned by others.
The Company could incur substantial costs in defending itself in infringement
suits brought against it or any of its licensors or in asserting any
infringement claims that the Company may have against others. The Company could
also incur substantial costs in connection with any suits relating to matters
for which the Company has agreed to indemnify its licensors or distributors. An
adverse outcome in any such litigation could have a material adverse effect on
the Company's business and prospects. In addition, the Company could be required
to obtain licenses under patents or other proprietary rights of third parties.
No assurance can be given that any such licenses would be made available on
terms acceptable to the Company, or at all. If the Company is required to, and
does not obtain any such required licenses, it could be prevented from, or
encounter delays in, developing, manufacturing or marketing one or more of its
products.
All of the Company's current products, except for Cystadane and Elliotts B
Solution, are in the development stage. Even if the development of such products
is successful and approval for sale is obtained, there can be no assurance that
applicable patent coverage, if any, will not have expired or will not expire
shortly after such approval. Any such expiration could have a material adverse
effect on the sales and profitability of such product. Further, some of the
compounds the Company has developed or intends to develop (Cystadane, Elliotts B
Solution, Antizol, cartilage powder, Xyrem and Sucraid) are believed to be in
the public domain or not presently subject to patent protection in the United
States.
The Company also seeks to protect its proprietary information and technology in
part by confidentiality agreements and inventors' rights agreements with its
employees. There can be no assurance that these agreements will not be breached,
that the Company will have adequate remedies for any breach or that the
Company's trade secrets will not otherwise be disclosed to or discovered by its
competitors.
COMPETITION; RAPID TECHNOLOGICAL CHANGE.
Competition in the pharmaceutical industry is intense. Potential competitors in
the United States are numerous and include pharmaceutical, chemical and
biotechnology companies, most of which have substantially greater capital
resources, marketing experience, research and development staffs, and facilities
than the Company. Although the Company seeks to limit potential sources of
competition by developing products that are eligible for orphan drug designation
and NDA approval or other forms of protection, there can be no assurance that
the Company's competitors will not succeed in developing similar technologies
and products more rapidly than the Company or that these competing technologies
and products will not be more effective than any of those that are being or will
be developed by the Company.
The Company is aware of products being developed by potential competitors that
have received orphan drug designations for the same respective indications as
three of the Company's current products. If these drugs are approved for
marketing before the Company's products, the Company would be required to obtain
a license from these entities before its own competing products could be
marketed. There can be no assurance that any required license would be available
on commercially acceptable terms, or at all.
The pharmaceutical industry has experienced rapid and significant technological
change. The Company expects that pharmaceutical technology will continue to
develop rapidly, and the Company's future success will depend, in large part, on
its ability to develop and maintain a competitive position. Technological
development by others may result in the Company's products becoming obsolete
before they are marketed or before the Company recovers a significant portion of
the development and commercialization expenses incurred with respect to such
products. In addition, alternative therapies or new medical treatments could
alter existing treatment regimes, and thereby reduce the need for one or more of
the Company's products, which would adversely affect the Company's business and
prospects.
RISKS OF NEW PRODUCT DEVELOPMENT; MARKET UNCERTAINTY.
Only two of the Company's current products have been approved for marketing by
regulatory authorities in the United States or elsewhere. Even if the balance of
the Company's current products are approved for sale, there can be no assurance
that they will be commercially successful or that they will obtain the results
expected. The Company may encounter unanticipated problems relating to the
development, manufacturing, distribution and marketing of its products, some of
which may be beyond the Company's financial and technical capacity to solve. The
failure to adequately address any such problems could have a material adverse
effect on the Company's business and prospects.
No drug development portfolio can be completely insulated from potential
failures, and it is likely that some products selected for development by the
Company will not produce the results expected during clinical studies or receive
FDA approval. The Company has terminated the development of two products from
its portfolio since inception: L-Cycloserine in 1994 and Glucaric Acid in 1996.
Three of the Company's current products under development are being evaluated in
small scale pilot clinical trials, which, if successful, will be developed
further. Although the Company seeks to minimize its product development risk by
spreading its product development efforts and resources over a number of
products, the termination of the development of any one or more of the Company's
current products could have a material adverse effect on the Company and its
prospects.
Most orphan drugs have a potential United States market of less than $10 million
annually and many address annual markets of less than $1 million. There can be
no assurance that the Company's sales of its products will be profitable even if
accepted and used by patients and medical specialists.
DEPENDENCE UPON OTHERS FOR CLINICAL TESTING, MANUFACTURING AND DISTRIBUTION.
The Company does not have and does not intend to establish any internal product
testing, manufacturing or distribution capabilities. Accordingly, the Company
will be required to enter into arrangements with other companies for the
clinical testing, manufacture and distribution of its products. The inability of
the Company to retain third parties for these purposes on acceptable terms could
adversely affect the Company's ability to develop and market its products. Any
failures by third parties to adequately perform their responsibilities may delay
the submission of products for regulatory approval, impair the Company's ability
to deliver its products on a timely basis or otherwise impair the Company's
competitive position. In addition, the Company's dependence on third parties for
the development, manufacture and distribution of its products may adversely
affect its potential profit margins and its ability to develop and deliver its
products on a timely basis.
The manufacture of drugs can be an expensive, time consuming and complex process
and may require the use of materials with limited availability or a dependence
on sole suppliers. In addition, most of the current products have not yet been
manufactured in commercial quantities, and there can be no assurance that such
products can be so manufactured in a cost-effective manner. Manufacturers of the
Company's products will be subject to applicable good manufacturing practices
("GMP") prescribed by the FDA or other rules and regulations prescribed by
foreign regulatory authorities. There can be no assurance that the Company will
be able to enter into or maintain relationships either domestically or abroad
with manufacturers whose facilities and procedures comply or will continue to
comply with GMP or applicable foreign requirements. Should manufacturing
agreements be entered into, the Company will be dependent on such manufacturers
for continued compliance with GMP and applicable foreign standards. Failure by a
manufacturer of the Company's products to comply with GMP or applicable foreign
requirements could result in significant time delays or the inability of the
Company to commercialize or continue to market a product and could have a
material adverse effect on the Company and its prospects. In the United States,
failure to comply with GMP or other applicable legal requirements can lead to
federal seizure of violative products, injunctive actions brought by the federal
government, and potential criminal and civil liability on the part of a company
and its officers and employees.
Chronimed Inc. ("Chronimed") has the exclusive right to distribute Caprogel,
Busulfanex, Cystadane, Antizol and Colomed (collectively, the "Exclusive
Products") for a period of at least three years following the date of first
delivery of a commercial shipment of any such product, and Chronimed may acquire
the exclusive right to distribute additional products. The Company will,
therefore, be substantially dependent upon Chronimed's ability to successfully
distribute its products. In addition, if Chronimed elects not to distribute a
product, the Company would be forced to seek another distributor. There can be
no assurance that other distribution sources would be available on commercially
acceptable terms, or at all.
UNCERTAIN EXTENT OF PRICE FLEXIBILITY AND THIRD-PARTY REIMBURSEMENT.
The Company's ability to commercialize its current products successfully will
depend in part on the price it may be able to charge for its products and on the
extent to which reimbursement for the cost of such products and related
treatment will be available from government health administration authorities,
private health insurers and other third-party payors. Government officials and
private health insurers are increasingly challenging the price of medical
products and services. Significant uncertainty exists as to the pricing
flexibility suppliers will have with respect to, and the reimbursement status
of, newly approved health care products.
In the United States, the Company expects that there will continue to be a
number of federal and state proposals to implement government control of pricing
and profitability of prescription pharmaceuticals. Cost controls, if mandated by
a government agency, could decrease the price the Company receives for its
current products or products it may develop in the future and, by preventing the
recovery of development costs, which could be substantial, and an appropriate
profit margin, could have a material adverse effect on the Company. Furthermore,
federal and state regulations govern or influence the reimbursement to health
care providers in connection with medical treatment of certain patients. If any
actions are taken by federal and/or state governments, such actions could
adversely affect the prospects for sales of the Company's products. There can be
no assurance that actions taken by federal and/or state governments, if any,
with regard to health care reform will not have a material adverse effect on the
Company and its prospects.
Certain third-party payors may attempt to further control costs by selecting
exclusive providers of their pharmaceutical products. If such arrangements were
made with competitors of the Company, such payors would not reimburse patients
for purchases of the Company's competing products. This lack of reimbursement
would diminish the market for the Company's products and could have a material
adverse effect the Company and its prospects.
RISK OF PRODUCT RECALL
Product recalls may be issued at the discretion of the Company, the FDA, the
U.S. Federal Trade Commission, or other government agencies having regulatory
authority for product sales, and may occur due to disputed labeling claims,
manufacturing issues, quality defects, or other reasons. The Company expects to
make its first sales late in 1996 and, therefore, has not been subject to this
risk to date. However, no assurance can be given that, once the Company begins
making sales of its products, product recalls will not occur. The Company does
not carry any insurance to cover the risk of a potential product recall. Any
product recall could have a material adverse effect on the Company and its
prospects.
PRODUCT LIABILITY AND INSURANCE RISKS.
The testing and sale of human health care products by the Company entails an
inherent risk that product liability claims may be asserted against the Company.
As the Company expands the scope of its clinical testing, the Company will be
exposed to increasing potential liabilities. The pharmaceutical industry has
experienced increasing difficulty in maintaining product liability insurance
coverage at reasonable levels, and substantial increases in insurance premium
costs in many cases have rendered coverage economically impractical. The Company
currently carries product liability coverage in the aggregate amount of $3
million for all claims made in any policy year. Although to date the Company has
not been the subject of any product liability or other claims, there can be no
assurance that the Company will be able to maintain product liability insurance
on acceptable terms or that its insurance will provide adequate coverage against
potential claims. The successful assertion of any uninsured product liability or
other claim against the Company could have a material adverse effect on the
Company's business and prospects.
DEPENDENCE ON CERTAIN OFFICERS AND KEY MANAGEMENT PERSONNEL.
The Company's success will be largely dependent upon the efforts of John Howell
Bullion, its Chief Executive Officer, and Bertram A. Spilker, Ph.D., M.D., its
President. The loss of the services of either Mr. Bullion or Dr. Spilker could
have a material adverse effect on the Company's strategic direction and its
prospects. The Company is also dependent upon several other key management
personnel. The loss of the services of one or more key employees, or the
inability of the Company to attract and retain skilled management and marketing
personnel in the future, could have a material adverse effect on the Company and
its prospects. The Company has a $1 million key-man life insurance policy for
Dr. Spilker, and has no life insurance for Mr. Bullion or any other key
employee.
RELATIONSHIP WITH CHRONIMED.
Although the Company believes its agreements with Chronimed are commercially
reasonable, such agreements were not the product of arms-length negotiations.
Several of the Company's directors and executive officers are current or former
employees, shareholders and/or directors of Chronimed. All future material
affiliated transactions and loans will be made or entered into on terms that are
no less favorable to the Company than those that can be obtained from
unaffiliated third parties. In addition, all future material affiliated
transactions and loans, and any forgiveness of loans, will be approved by a
majority of independent outside members of the Company's Board of Directors who
do not have an interest in the transactions.
POSSIBLE VOLATILITY OF STOCK PRICE.
There is generally significant volatility in the market prices of securities of
early stage pharmaceutical companies. Contributing to this volatility are
various factors and events, such as the announcements by the Company or its
competitors of new product developments, clinical testing results, governmental
approvals, regulations or actions, developments or disputes relating to patents
or proprietary rights, public concern over the safety of therapies and
fluctuations in financial performance from period to period. These and other
factors and events may have a significant impact on the Company's business and
on the market price of the Common Stock.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING BALANCE SHEETS OF ORPHAN MEDICAL, INC. AS OF SEPTEMBER 30, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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