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, 1997
[ ] 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 practical date.
Common Stock, $.01 par value 6,099,562
---------------------------- ---------
(Class) (Outstanding at October 30, 1997)
<PAGE>
INDEX
ORPHAN MEDICAL, INC.(R)
(A Development Stage Company)
Page No.
--------
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements (Unaudited)
Balance Sheets - September 30, 1997 and December 31, 1996. 3
Statements of Operations - Three month and nine month periods ended
September 30, 1997 and September 30, 1996 and for the period January 1,
1993 (inception) through September 30, 1997. 4
Statements of Cash Flows - Nine month periods ended September 30, 1997
and September 30, 1996 and for the period January 1, 1993 (inception)
through September 30, 1997. 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 8
Item 3. Quantitative and Qualitative Disclosures about Market Risks 11
PART II. OTHER INFORMATION
- ---------------------------
Items 1 through 4 have been omitted since all items are inapplicable or
answers negative.
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signature 12
Antizol(TM), Antizol-Vet(TM), Caprogel(TM), Busulfanex(TM), Repliderm(TM),
Intrachol(TM), Colomed(TM), Cystadane(R), Elliotts B(R) Solution, Sucraid(TM),
Xyrem(TM), "The" Orphan Drug Company(TM), Orphan Medical, Inc.(R) and Dedicated
to Patients with Uncommon Diseases(R) are trademarks of the Company.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BALANCE SHEETS
ORPHAN MEDICAL, INC.
(A Development Stage Company)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ ------------
ASSETS (Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,691,441 $ 3,927,945
Available-for-sale securities 6,938,444 12,779,961
Accounts receivable 384,639 151,185
Inventory 163,895 --
Prepaid expenses 78,227 35,070
------------ ------------
Total current assets 10,256,646 16,894,161
Property and equipment, net of depreciation 313,072 256,438
------------ ------------
Total assets $ 10,569,718 $ 17,150,599
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Chronimed obligation (Note 4) $ 979,952 $ --
Accounts payable and accrued expenses 2,816,629 2,297,736
Accrued payroll and related taxes 77,408 57,532
------------ ------------
Total current liabilities 3,873,989 2,355,268
Non current liabilities
Chronimed obligation (Note 4) 1,004,551 --
Commitments (Note 5)
Shareholders' equity:
Common Stock, $.01 par value; 25,000,000 shares
authorized; 6,099,562 and 6,056,088 shares issued and
outstanding 60,974 60,561
Additional paid-in capital 29,756,724 29,543,439
Deficit accumulated during the development stage (24,123,281) (14,808,669)
------------ ------------
5,694,417 14,795,331
Unrealized gain (loss) on available-for-sale securities (3,239) --
------------ ------------
Total shareholders' equity 5,691,178 14,795,331
------------ ------------
Total liabilities and shareholders' equity $ 10,569,718 $ 17,150,599
============ ============
</TABLE>
NOTE: THE BALANCE SHEET AT DECEMBER 31, 1996 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.
<PAGE>
STATEMENTS OF OPERATIONS
ORPHAN MEDICAL, INC.
(A Development Stage Company)
(Unaudited)
<TABLE>
<CAPTION>
Period from
January 1,
For the Three Months Ended For the Nine Months Ended 1993
--------------------------------- --------------------------------- (Inception) to
September 30, September 30, September 30, September 30, September 30,
1997 1996 1997 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 145,815 $ -- $ 412,524 $ -- $ 449,206
Operating expenses:
Cost of sales 111,224 -- 231,905 -- 242,351
Research and
development 2,319,953 1,842,704 5,132,686 4,314,263 16,856,098
Sales and marketing 252,815 94,876 2,937,287 239,719 3,465,193
General and
administrative 798,153 533,857 1,920,702 1,276,159 5,898,387
------------ ------------ ------------ ------------ ------------
Loss from operations (3,336,330) (2,471,437) (9,810,056) (5,830,141) (26,012,823)
------------ ------------ ------------ ------------ ------------
Other income:
Interest 92,229 269,938 495,445 615,825 1,889,543
------------ ------------ ------------ ------------ ------------
Net loss and deficit
accumulated during the
development stage $ (3,244,101) $ (2,201,499) $ (9,314,611) $ (5,214,316) $(24,123,280)
============ ============ ============ ============ ============
Net loss per common
share $ (0.53) $ (0.36) $ (1.54) $ (1.02) $ (7.64)
============ ============ ============ ============ ============
Weighted average
number of shares
outstanding 6,073,391 6,039,588 6,065,842 5,091,048 3,155,656
============ ============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
STATEMENTS OF CASH FLOWS
ORPHAN MEDICAL, INC.
(A Development Stage Company)
(Unaudited)
<TABLE>
<CAPTION>
Period from
For the Nine Months Ended January 1, 1993
--------------------------------- (Inception) to
September 30, September 30, September 30,
1997 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (9,314,611) $ (5,214,316) $(24,123,280)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation & amortization 54,089 32,631 138,731
Loss on disposition of fixed assets -- -- 4,091
Changes in operating assets and liabilities:
Increase (decrease) in payables and accruals 538,769 47,701 2,894,037
Increase (decrease) in Chronimed obligation 1,984,503 -- 1,984,503
Decrease (increase) in receivables and other (233,454) (316,447) (394,068)
Decrease (increase) in inventory (163,895) -- (163,895)
Decrease (increase) in prepaid expenses (43,159) (30,423) (78,229)
------------ ------------ ------------
Net cash provided by (used in) operating activities (7,177,758) (5,480,854) (19,738,110)
INVESTING ACTIVITIES:
Proceeds from sale of office equipment -- -- 38,192
Purchase of office equipment (110,722) (117,334) (493,277)
Purchase of short-term investments (11,178,493) (18,717,959) (36,097,241)
Maturities of short-term investments 17,016,772 7,426,121 29,155,559
------------ ------------ ------------
Net cash provided by (used in) investing activities 5,727,557 (11,409,172) (7,396,767)
FINANCING ACTIVITIES:
Net proceeds from capital contribution -- -- 5,000,000
Proceeds from stock options exercised 213,697 -- 297,322
Net proceeds from stock offerings -- 14,834,901 23,636,666
Expenses paid by Chronimed -- -- 892,330
------------ ------------ ------------
Net cash provided by financing activities 213,697 14,834,901 29,826,318
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (1,236,504) (2,055,125) 2,691,441
Cash and cash equivalents at beginning of
Period 3,927,945 5,029,682 --
------------ ------------ ------------
Cash and cash equivalents at end of
period $ 2,691,441 $ 2,974,557 $ 2,691,441
============ ============ ============
Supplemental cash flow information:
Interest received $ 629,675 $ 386,968 $ 1,847,714
SEE ACCOMPANYING NOTES
</TABLE>
<PAGE>
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 well-defined 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
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, these financial statements do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. 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 month and nine month periods
ended September 30, 1997 are not necessarily indicative of the results that may
be expected for the year ended December 31, 1997. For further information, refer
to the audited financial statements and accompanying notes contained in the
Company's Annual Report filed on Form 10-K for the year ended December 31, 1996.
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 because
their effect is anti-dilutive.
4. CHRONIMED OBLIGATION
The Company and Chronimed entered into an Agreement dated June 27, 1997, in
which Chronimed agreed to terminate certain agreements that had been in
existence since the spin-off of the Company from Chronimed. Among the terminated
agreements was the Marketing and Distribution Agreement dated July 2, 1994, as
amended, under which Chronimed had the exclusive right to market and distribute
four of Orphan Medical's proposed products and receive royalties with respect to
two of Orphan Medical's current products. In consideration for terminating these
agreements, the Company agreed to pay Chronimed compensation equal to
$2,500,000, consisting of cash and shares of the Company's Common Stock.
Chronimed was
<PAGE>
paid $250,000 in cash on June 27, 1997, with the remaining balance of $2,250,000
payable in quarterly installments based on a temporary royalty arrangement equal
to 3 percent of the Company's sales and the issuance of Common Stock equal to 1
percent of the Company's issued and outstanding Common Stock at each quarter
end. For the quarter ended September 30, 1997, as provided by the Agreement, the
Company paid Chronimed approximately $3,300 in royalties. The issuance of Common
Stock will commence with the Company's quarter ended March 31, 1998. The
quarterly installments of cash royalty payments and the quarterly issuance of
the Company's Common Stock will continue until Chronimed has realized cumulative
compensation, including the $250,000 cash payment, valued at $2,500,000. With
respect to this transaction, the Company recorded a sales and marketing expense
of approximately $2,172,000 for the quarter ended June 30, 1997. The difference
between the amount the Company agreed to pay Chronimed ($2,500,000) and the
amount recorded as an expense ($2,172,000) equals $328,000, which will be
accrued and reported as interest expense in subsequent quarters. For the quarter
ended September 30, 1997, the Company accrued interest expense of $66,300 and
will continue to accrue interest in subsequent quarters until its obligation to
Chronimed is fully satisfied.
The Company estimates that its unpaid obligation of $2,250,000 may take between
12 and 24 months, if not longer, to fully satisfy. At September 30, 1997, the
Company 's unpaid obligation to Chronimed has an estimated value of
approximately $1,984,503 based on its estimate of royalties payable in future
periods and its estimate of future market values for the Company's Common Stock.
Accordingly, based on these estimates and amounts incurred for the quarter ended
September 30, 1997, the Company classified $979,952 as a "Current Liability" and
$1,004,551 as a "Non Current Liability".
5. COMMITMENTS
The Company has various commitments under agreements with outside consultants,
contract drug development and technical service companies, bulk drug suppliers,
distribution companies and license and research agreements. Expenditures
incurred under these commitments and reported as research and development
expense totaled approximately $1,938,000 and $4,142,000 for the three and nine
month periods ended September 30, 1997, respectively. At September 30, 1997, the
Company estimates that it could incur approximately $3,288,000 of additional
expenditures in subsequent periods under existing commitments for those products
remaining in the Company's development portfolio. The $3,288,000 value for
future commitments does not include the one-time charge of $780,000 for the
estimated cost of phasing out the development commitments for nine of the
Company's products. Commitments for research and 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
clinical development programs.
6. RECLASSIFICATIONS
Certain prior period balances have been reclassified in order to conform with
the presentation for the three months ended September 30, 1997. These
reclassifications have no impact on the net loss or shareholders' equity as
previously reported.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
CAUTIONARY STATEMENT
This Quarterly Report on Form 10-Q contains statements that
are not descriptions of historical facts. The words or phrases "will likely
result", "look for", "may result", "will continue", "is anticipated", "expect",
"project", or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements 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 Company's "Cautionary Statements" on Exhibit 99 to this Quarterly Report
filed on Form 10-Q for the quarter ended September 30, 1997.
GENERAL
Orphan Medical, Inc., a development stage company, was incorporated on June 17,
1994 in order to carry on the business previously conducted by the Orphan
Medical Division of Chronimed. From inception through September 30, 1997, the
Company has incurred losses totaling $24,123,280, consisting of $16,856,098 of
research and development expenses, $3,465,193 of sales and marketing expenses,
$5,898,387 of general and administrative expenses, $206,855 of gross profit on
sales of approved products and $1,889,543 of net interest income. The Company's
activities have consisted primarily of obtaining the rights for pharmaceutical
products, hiring the personnel required to implement the Company's business
plan, managing the development of these products, preparing for the commercial
introduction of three products and fund raising. At September 30, 1997, three of
the Company's products have been approved by the Food and Drug Administration
("FDA") for marketing and are commercially available, new drug applications
("NDAs") for two products were pending before the FDA and eleven products were
in various stages of development. The Company has decided to concentrate its
resources on three products, which the Company believes have the most attractive
marketing potential. Therefore, nine of the Company's development products will
be phased out and not developed by the Company for marketing. The Company has
not generated material levels of revenue from its approved products to date and
has sustained significant operating losses each year since inception. The
Company expects to continue reporting as a development stage company at least
through 1997. In addition, the Company expects operating losses to continue into
1999.
NINE MONTHS ENDED SEPTEMBER 30, 1997 VS. NINE MONTHS ENDED SEPTEMBER 30, 1996
The Company has been shipping Elliotts B Solution and Cystadane since December
1996 and commenced shipping Antizol-Vet in January 1997. The Company had no
sales during the comparable period in 1996. Sales were $412,524 for the nine
months ended September 30, 1997. Sales of Elliotts B Solution and Cystadane are
in line with expectations. However, the Company expects sales of Antizol-Vet to
decrease in the fourth quarter and to fall short of full year expectations.
Cost of sales increased from zero for the nine months ended September 30, 1996
to $231,905 for the nine months ended September 30, 1997. For the three month
period ended September 30, 1997, the Company recorded a charge of $70,000 to
cost of sales for excess Antizol-Vet inventories. Cost of sales as a percentage
of sales will fluctuate from quarter to quarter and from
<PAGE>
year to year depending on, among other factors, demand for the Company's
products, new product introductions and the mix of approved products shipped.
Research and development expenses increased from $ 4,314,263 (74% of the total
loss from operations) for the nine months ended September 30, 1996 to $5,132,686
(52% of the total loss from operations) for the nine months ended September 30,
1997. The $818,423 increase is largely attributable to higher levels of clinical
spending for Busulfanex and Xyrem. In addition, for the three month period ended
September 30, 1997, the Company recorded a one-time charge of $780,000 for the
estimated cost of phasing out nine development products. The Company took this
action in order to focus its development efforts on those products that fit into
the antidote market segment where Antizol is expected to be an important
product, or that could be complementary to the market segments where Busulfanex
or Xyrem could be important products. Based on the Company's current development
portfolio of products that it expects to market, research and development
expense should decrease in subsequent periods, but the amount of such decrease
in subsequent periods will depend principally on the level of Busulfanex and
Xyrem clinical trial activity. The Company's clinical spending for a product is
dependent on a number of factors, including among others: the number of human
subjects required for a trial, the number of human subjects screened and
enrolled in a trial and the number of active clinical sites. 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.
Sales and marketing expenses increased from $239,719 (4% of the total loss from
operations) for the nine months ended September 30, 1996 to $2,937,287 (30% of
the total loss from operations) for the nine months ended September 30, 1997.
The $2,697,568 increase is principally due to a one-time $2,172,000 expense
related to the June termination of an agreement under which Chronimed had
exclusive rights to distribute certain Orphan Medical products. Without this
one-time $2,172,000 expense, sales and marketing expense increased approximately
$526,000 because of costs related to initiating the new distribution agreement
with Cardinal Health and marketing costs for the Company's three approved
products. Excluding one-time expenses, sales and marketing expenses are expected
to increase in subsequent quarters principally due to sales and marketing
programs associated with the Company's three approved products and due to the
addition in the fourth quarter of a small, focused sales force for Antizol,
which could receive marketing authorization from the FDA as early as the end of
1997.
General and administrative expenses increased from $1,276,159 (22% of the total
loss from operations) for the nine months ended September 30, 1996 to $1,920,702
(19% of the total loss from operations) for the nine months ended September 30,
1997. The $644,543 increase is principally due to staff additions. General and
administrative expenses are not expected to increase in subsequent quarters.
Other income is the sum of interest income from investment activities less
interest expense from financing activities. Other income decreased from $615,825
for the nine months ended September 30, 1996 to $495,445 for the nine months
ended September 30, 1997. This decrease is due to less interest income resulting
from lower levels of investable funds and interest expense incurred
<PAGE>
in the third quarter related to the Company's obligation to Chronimed. Other
income is expected to decline in subsequent quarters as currently invested funds
are used to fund development, and marketing and sales activities, and as the
Company accrues a non-cash charge for interest expense related to the Chronimed
obligation.
Net losses for the nine months ended September 30, 1997 and for the nine months
ended September 30, 1996 were $(9,314,611) and $(5,214,316), respectively. Net
losses per common share for these respective periods were $(1.54) and $(1.02),
based on weighted average number of common shares outstanding of 6,065,842 and
5,091,048, respectively.
LIQUIDITY AND CAPITAL RESOURCES
From inception through September 30, 1997, the Company has used $19,738,110 to
fund operating activities. 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 $18,912,047 to fund operating activities. Since
July 2, 1994, the effective date the Company was spun-off from Chronimed, it has
financed its operations principally from initial working capital balances, the
net proceeds from the 1995 and 1996 public offerings, interest income and
product sales. The 1995 and 1996 public offerings resulted in aggregate net
proceeds, after commissions and expenses, of $23,636,666.
Net working capital (current assets less current liabilities) decreased from
$14,538,893 at December 31, 1996 to $6,382,657 at September 30, 1997. Cash and
cash equivalents, and available-for-sale securities decreased from $16,707,906
at December 31, 1996 to $9,629,885 at September 30, 1997. The Company invests
excess cash in short-term, interest-bearing, investment grade securities.
The Company's commitments for outside development spending decreased from
$4,287,000 at December 31, 1996 to $3,288,000 at September 30, 1997 (also see
Note 5 to the Financial Statements). The $999,000 decrease resulted principally
from the Company's decision to phase out nine products from its development
portfolio. The Company estimates that more than 84% of the $3,288,000 in future
commitments relate to Busulfanex and Xyrem. The Company expects future
commitments for Xyrem to increase significantly over current levels as
additional clinical programs are commenced.
The Company believes that it has sufficient capital to fund its operations
through 1998. The Company's future liquidity and capital requirements will
depend on, among other factors, the extent to which the Company's FDA approved
products gain market acceptance, the timing of regulatory actions regarding
future products, the costs and timing of sales, marketing and manufacturing
activities, the results of clinical trials and competition. However, to fully
implement the Company's current business plan through 1999, the Company believes
it will need to raise at least $7,000,000 of additional capital, assuming no
internally generated funding is available. The Company has no assurance that
such capital will be available on acceptable terms, or at all. In the event that
the Company is unable to raise additional capital on a timely basis, it expects
to reduce or defer the amount allocated to planned development activities.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risks
Not Applicable
PART II - OTHER INFORMATION
Item 5. Other Information
On November 10, 1997, the Company announced that it had received notice from the
Food and Drug Administration (FDA) that the new drug application for Sucraid is
approvable pending final product labeling and acceptable responses to FDA
chemistry questions. The Company expects to begin selling Sucraid in the
domestic market during the first quarter of 1998.
In early November 1997, the Company exercised its rights under a license
agreement with Lescarden, Inc. (the "Licensor"), whereby, it notified the
Licensor that it will not develop nor market any products which use the
Licensor's bovine cartilage powder for topical use in humans in all therapeutic
applications. The Company's tradename for the product licensed from the Licensor
was Repliderm Wound Dressing. The Company had previously announced in January
1997 that the FDA granted 510(k) marketing clearance of Repliderm Wound
Dressing, but the Company would not market the product without additional
clinical trials because the 510(k) did not fully support indications the Company
considered important.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
- ------------------ ----------------------------------------------- -------------
Exhibit Number Sequentially
Description Numbered Page
- ------------------ ----------------------------------------------- -------------
27 Financial Data Schedule - For SEC EDGAR filing
- ------------------ ----------------------------------------------- -------------
99 Cautionary Statements
- ------------------ ----------------------------------------------- -------------
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30, 1997.
<PAGE>
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 12, 1997 By /s/ John H. Bullion
-------------------
John H. Bullion
Chief Executive Officer
(principal executive officer)
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. The Company desires to take advantage of these
"safe harbor" provisions and is filing this Exhibit 99 in order to do so.
Accordingly, when used in this Annual Report on Form 10-K and in future filings
by the Company with the Securities and Exchange Commission, quarterly reports,
press releases and in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result", "look for", "may
result", "will continue", "is anticipated", "expect", "project", or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from historical earnings and those presently anticipated or
projected. The Company hereby cautions readers that the following important
factors, among others, could affect the Company's financial performance and
could cause the Company's actual results for future periods to differ materially
from any forward-looking statements made by or on behalf of the Company.
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 $24,123,281 as of September 30, 1997. From inception
through September 30, 1997, the Company reported Elliotts B Solution, Cystadane
and Antizol-Vet sales of $449,206 and gross profit on such sales of $206,855,
which the Company considers immaterial for purposes of funding future product
development or business growth. The Company expects operating losses to continue
into 1999 because gross profit from new product introductions is not expected to
offset additional spending required to complete the development plans for
Busulfanex and Xyrem, and for additional sales and marketing spending for the
new product introductions. 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 material product 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 operating losses into 1999, a market subject to extensive
regulatory oversight, and reliance on outside contractors for the manufacture
and distribution 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
end of 1998. Thereafter, to fully implement the Company's current business plan
through 1999, the Company believes it will need to raise at least $7,000,000 of
additional capital, assuming no internally generated funding is available.
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.
<PAGE>
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 its 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 product
portfolio 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.
FOREIGN MARKETING ALLIANCES; NO ASSURANCE OF FOREIGN LICENSEES.
The Company's strategy for the exploitation of foreign markets for its products
is to enter into marketing alliances with multinational and foreign
pharmaceutical companies. From inception through September 30, 1997, the Company
has licensed the rights to sell Cystadane in Australia and New Zealand and has
entered into agreements with two companies for the distribution of Antizol in
Europe. Sales of Cystadane for Australia and New Zealand have not been nor are
they expected to be material. Distribution of Antizol in Europe will initially
be done on a "named patient" or "emergency use" basis until full regulatory
approval is obtained, and the Company does not expect such "emergency use"
distribution to result in material sales. Distribution of Antizol in Europe
through normal or the usual distribution channels will not commence until the
product has received marketing approval in each European country into which the
distributor expects to sell the product. The Company typically receives upfront
fees for entering into such arrangements and expects to realize future benefits
because the Company will be the exclusive supplier of the product sold to the
distributor in these foreign markets. However, there can be no assurance that
the Company will be able to negotiate additional alliances for its other
products on acceptable terms, if at all, or that such alliances will be
successful. The Company will be substantially dependent upon the companies it
has contracted with to date for the successful distribution of Cystadane and
Antizol outside the U.S. and, if these companies are unsuccessful in their
distribution efforts, it would be difficult for the Company to contract with
other distributors for these products within the licensed territories.
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 pre-clinical 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. Once approved, the Division of
Drug Marketing, Advertising and Communication ("DDMAC"), the FDA's marketing
surveillance department within the Center for Drugs, must approve marketing
claims, which are the basis for a product's labeling, advertising and promotion.
There can be no assurance that the claims the Company is seeking
<PAGE>
will be approved by DDMAC. The failure to obtain acceptable marketing claims on
a product from DDMAC could have a material adverse effect on the Company and its
prospects.
The Company depends on external laboratories and medical institutions to conduct
its pre-clinical and clinical testing in compliance with clinical and laboratory
practices established by the FDA. The data obtained from pre-clinical 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 Obtaining the FDA's approval for a change in
manufacturing procedures or change in manufacturers could cause production
delays and loss of sales, which would have a material adverse effect the
Company's business and its prospects.
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. Busulfanex, Xyrem, Antizol and Sucraid have orphan drug designation;
while Elliotts B Solution and Cystadane have orphan drug status. 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
<PAGE>
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. At September 30, 1997,
Busulfanex is the only product that the Company has under development for which
the use of or treatment methods licensed by the Company are covered by United
States patents. 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
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 products, except for Cystadane, Elliotts B Solution,
Antizol-Vet, and Sucraid 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, Antizol-Vet, 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.
<PAGE>
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
its prospects.
RISKS OF NEW PRODUCT DEVELOPMENT; MARKET UNCERTAINTY.
Only three of the Company's products have been approved for marketing by
regulatory authorities in the United States or elsewhere. Even if the balance of
the Company's 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 its 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, not
receive FDA approval or fail generate product sales of an acceptable level. The
Company has terminated the development of eleven products from its portfolio
since inception: L-Cycloserine in 1994, Glucaric Acid in 1996, and nine products
in the third quarter of 1997. With respect to the nine products terminated in
1997, the Company took this action in order to focus its development efforts on
those products that fit into the antidote market segment where Antizol is
expected to be an important product, or that could be complementary to the
market segments where Busulfanex or Xyrem could be important products. The
Company recorded a one-time charge of $780,000 in the third quarter of 1997 for
the estimated cost of winding down the development plans for nine development
products. In addition, the Company believes that several of the products
terminated in 1997 may have value to another pharmaceutical company and it will
seek to license or sell its rights relating to these products. 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 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.
<PAGE>
DEPENDENCE UPON OTHERS FOR CLINICAL TESTING AND MANUFACTURING.
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.
DEPENDENCE UPON OTHERS FOR DISTRIBUTION.
The Company has entered into a three-year exclusive agreement with Cardinal
Health, Inc. ("Cardinal"), whereby Cardinal, through its Specialty Companies,
will provide a variety of services to support the effective commercialization of
Orphan Medical's pharmaceutical product portfolio. Cardinal will provide
integrated distribution and operations services to process and support
transactions between Orphan Medical and wholesalers, specialty distributors, and
direct customers; reimbursement management; patient assistance and information
hotline services; and specialty distribution and marketing services to physician
practices. Elliotts B Solution is currently distributed exclusively by Cardinal
and, with this agreement, Cardinal will distribute the Company's products that
receive marketing approval from the FDA in the future. The Company will,
therefore, be substantially dependent upon Cardinal's ability to successfully
distribute Elliotts B Solution and all of the Company's products that receive
marketing approval from the FDA within the next three years.
Cystadane is currently distributed in the U.S. by Chronimed Inc. ("Chronimed"),
who distributes this product directly to patients through its mail order
pharmacy. The Company is substantially dependent upon Chronimed's ability to
successfully distribute Cystadane directly to patients in the U.S.
Antizol-Vet is currently distributed exclusively through W.A. Butler Company
("Butler"), the largest distributor of veterinary pharmaceuticals in the United
States. The Company is substantially dependent upon Butler's ability to
successfully distribute Antizol-Vet. Marketing a veterinary product has proven
to be more difficult than the Company originally expected and the Company is
presently reviewing its options with respect to the Antizol-Vet product, which
could include the sale of its rights to this product.
There can be no assurance that other distribution companies would be available
or continue to be available on commercially acceptable terms, if at all. The
loss of a distributor or failure to come to terms with an existing distributor
could have a material adverse effect on the Company and its prospects.
<PAGE>
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
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. No assurance can be
given that 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 $5
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 its
executive officers and key management personnel. The loss of the services of an
executive officer or 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.
RELATIONSHIP WITH CHRONIMED.
Although the Company believes the agreements that it had with Chronimed since
its July 1, 1994 spin-off were commercially reasonable, such agreements were not
the product of arms-length negotiations. In June 1997, the
<PAGE>
Company terminated these agreements (the "Termination Agreement"), except for
the Cystadane Agreement. The Termination Agreement provides that the Company pay
Chronimed compensation equal to $2,500,000, consisting of cash and shares of the
Company's Common Stock. The October 1996 Cystadane Agreement between the Company
and Chronimed applies solely to the domestic distribution of Cystadane. Several
of the Company's directors and executive officers are current or former
employees, shareholders and/or directors of Chronimed. The Termination Agreement
and the October 1996 Cystadane Agreement were approved by all of the independent
outside members of the Company's Board of Directors.
POSSIBLE VOLATILITY OF STOCK PRICE AND DILUTION OF STOCK - TERMINATION AGREEMENT
WITH CHRONIMED.
Pursuant to the terms of the Termination Agreement, the Company has a remaining
obligation to compensate Chronimed with cash and Common Stock having a total
value of $2,250,000. Cash payments against this remaining obligation will be
based on a 3 percent temporary royalty on the Company's product sales, payable
quarterly, beginning September 30, 1997. Unregistered shares of Common Stock
equal to 1 percent of the Company's outstanding shares at each quarter end,
beginning March 31, 1998, will be issued quarterly to Chronimed until the sum of
all temporary royalty payments and the market value (as defined below) of all
issued Common Stock equals $2,250,000, at which time the Company's obligation to
make temporary royalty payments will cease. The Company is obligated file a
registration statement with the Securities and Exchange Commission to register
such shares. The market value of shares issued to Chronimed as payment against
the remaining obligation of $2,250,000 will be determined as follows: (i) the
market value of any such shares sold within 90 days after the effective date of
a registration statement covering such shares will be equal to the net proceeds
realized by Chronimed from the sale of such shares, or (ii) the market value of
any such shares not sold within 90 days after the effective date of a
registration statement covering such shares will be equal to the average last
bid price for shares of the Company's Common Stock as reported on Nasdaq for the
last five days within the 90 day period. The Company anticipates Chronimed will
sell in the open market the shares it receives from the Company within the 90
day period. The Company has the option, regardless of the market price of its
Common Stock, to buy-out for cash the remaining obligation to Chronimed.
There is risk that the Company's current shareholders' ownership could be
substantially diluted and/or the market value of their shares adversely affected
in the event any one or a combination of the following events occur: (1) sales
by Chronimed of the Company's Common Stock cause the price of the Company's
Common Stock to decrease; (2) in the event of a decline in the value of the
Company's Common Stock, the Company would be required to issue more shares in
subsequent periods to satisfy its remaining obligation to Chronimed; or (3) the
Company's sales of future products are significantly less than forecast, which
would decrease the temporary royalty payments that would be applied against the
remaining obligation and, thereby, increase the number of shares required to be
issued to Chronimed. The realization of any one or combination of these risks,
or the decision by the Company to exercise its option to effect a cash buy-out
of the remaining obligation, could have a material adverse effect on the
Company's business, its prospects and its shareholders.
POSSIBLE VOLATILITY OF STOCK PRICE - GENERAL.
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, 1997,
and the related statements of operations for the three and nine months ended
September 30, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,694,441
<SECURITIES> 6,938,444
<RECEIVABLES> 384,639
<ALLOWANCES> 0
<INVENTORY> 163,895
<CURRENT-ASSETS> 10,256,646
<PP&E> 447,714
<DEPRECIATION> 134,642
<TOTAL-ASSETS> 10,569,718
<CURRENT-LIABILITIES> 3,873,989
<BONDS> 0
0
0
<COMMON> 60,974
<OTHER-SE> 5,630,204
<TOTAL-LIABILITY-AND-EQUITY> 10,569,718
<SALES> 412,524
<TOTAL-REVENUES> 412,524
<CGS> 231,905
<TOTAL-COSTS> 231,905
<OTHER-EXPENSES> 9,990,675
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (495,445)
<INCOME-PRETAX> (9,314,611)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,314,611)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,314,611)
<EPS-PRIMARY> (1.54)
<EPS-DILUTED> (1.54)
</TABLE>
