SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 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
incorporation or organization) Identification Number)
13911 Ridgedale Drive, Suite 475,
Minnetonka, MN 55305 (612) 513-6900
(Address of principal executive (Registrant's telephone number,
offices 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 6,064,288
- ---------------------------- ---------
(Class) (Outstanding at July 31, 1997)
<PAGE>
INDEX
ORPHAN MEDICAL, INC.(R)
(A Development Stage Company)
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - June 30, 1997 and December 31, 1996. 3
Statements of Operations - Three month and six month periods ended June
30, 1997 and June 30, 1996 and for the period January 1, 1993
(inception) through June 30, 1997. 4
Statements of Cash Flows - Six month periods ended June 30, 1997 and
June 30, 1996 and for the period January 1, 1993 (inception) through
June 30, 1997. 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 7
PART II. OTHER INFORMATION
Items 1 through 3 have been omitted since all items are inapplicable or
answers negative.
Item 4. Submission of Matters to Vote of Security Holders 10
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 12
Signature 13
Antizol(TM), Antizol-Vet(TM), Caprogel(TM), Busulfanex(TM), Repliderm(TM),
Intrachol(TM), Colomed(TM), Cystadane(R), Elliotts B(TM) 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>
June 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS (Unaudited) (Note)
Current assets:
Cash and cash equivalents $ 3,545,875 $ 3,927,945
Available-for-sale securities 8,866,991 12,779,961
Accounts receivable 285,767 151,185
Inventory 260,463 --
Prepaid expenses 126,898 35,070
------------ ------------
Total current assets 13,085,994 16,894,161
Property and equipment, net of depreciation 297,929 256,438
------------ ------------
Total assets $ 13,383,923 $ 17,150,599
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Chronimed obligation (Note 4) $ 916,968 $ --
Accounts payable and accrued expenses 2,630,138 2,297,736
Accrued payroll and related taxes 76,417 57,532
------------ ------------
Total current liabilities 3,623,523 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;
6,063,088 and 6,056,088 shares issued and outstanding 60,631 60,561
Additional paid-in capital 29,578,370 29,543,439
Deficit accumulated during the development stage (20,879,179) (14,808,669)
------------ ------------
8,759,822 14,795,331
Unrealized gain (loss) on available-for-sale securities (3,973) --
------------ ------------
Total shareholders' equity 8,755,849 14,795,331
------------ ------------
Total liabilities and shareholders' equity $ 13,383,923 $ 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 Six Months Ended 1993
---------------------------- ---------------------------- (Inception) to
June 30, June 30, June 30, June 30, June 30,
1997 1996 1997 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 162,286 $ -- $ 266,710 $ -- $ 303,391
Operating expenses:
Cost of sales 76,986 -- 120,681 -- 131,127
Research and
development 1,674,928 1,089,031 2,812,733 2,471,559 14,536,145
Sales and marketing 2,488,634 76,438 2,684,472 144,843 3,212,378
General and
administrative 595,387 370,587 1,122,549 742,302 5,100,234
------------ ------------ ------------ ------------ ------------
Loss from operations (4,673,649) (1,536,056) (6,473,725) (3,358,704) (22,676,493)
------------ ------------ ------------ ------------ ------------
Other income: Interest 191,921 235,452 403,215 345,887 1,797,314
------------ ------------ ------------ ------------ ------------
Net loss and deficit
accumulated during the
development stage $ (4,481,728) $ (1,300,604) $ (6,070,510) $ (3,012,817) $(20,879,179)
============ ============ ============ ============ ============
Net loss per common
share $ (.74) $ (.24) $ (1.00) $ (.65) $ (6.98)
============ ============ ============ ============ ============
Weighted average
number of shares
outstanding 6,063,088 5,483,544 6,062,005 4,611,566 2,992,177
============ ============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
STATEMENTS OF CASH FLOWS
ORPHAN MEDICAL, INC.
(A Development Stage Company)
(Unaudited)
<TABLE>
<CAPTION>
Period from
For the Six Months Ended January 1, 1993
---------------------------- (Inception) to
June 30, June 30, June 30,
1997 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (6,070,510) $ (3,012,817) $(20,879,179)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation & amortization 34,098 19,668 118,740
Loss on disposition of fixed assets -- -- 4,091
Changes in operating assets and liabilities:
Increase (decrease) in payables and accruals 351,287 22,192 2,706,555
Increase (decrease) in Chronimed obligation 1,921,519 -- 1,921,519
Decrease (increase) in receivables and other (134,582) (102,674) (295,196)
Decrease (increase) in inventory (260,463) -- (260,463)
Decrease (increase) in prepaid expenses (91,829) (73,203) (126,899)
------------ ------------ ------------
Net cash provided by (used in) operating activities (4,250,480) (3,146,834) (16,810,832)
INVESTING ACTIVITIES:
Proceeds from sale of office equipment -- -- 38,192
Purchase of office equipment (75,588) (45,992) (458,143)
Purchase of short-term investments (11,072,508) (18,717,959) (35,991,256)
Maturities of short-term investments 14,981,506 5,214,645 27,120,293
------------ ------------ ------------
Net cash provided by (used in) investing activities 3,833,410 (13,549,306) (9,290,914)
FINANCING ACTIVITIES:
Net proceeds from capital contribution -- -- 5,000,000
Proceeds from stock options exercised 35,000 -- 118,625
Net proceeds from stock offerings -- 14,834,901 23,636,666
Expenses paid by Chronimed -- -- 892,330
------------ ------------ ------------
Net cash provided by financing activities 35,000 14,834,901 29,647,621
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (382,070) (1,861,239) 3,545,875
Cash and cash equivalents at beginning of
Period 3,927,945 5,029,682 --
------------ ------------ ------------
Cash and cash equivalents at end of
period $ 3,545,875 $ 3,168,443 $ 3,545,875
============ ============ ============
Supplemental cash flow information:
Interest received $ 540,296 $ 273,549 $ 1,763,405
</TABLE>
SEE ACCOMPANYING NOTES
<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 six month periods ended
June 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 as
their effect is anti-dilutive.
4. CHRONIMED OBLIGATION
On June 27, 1997, the Company and Chronimed made and entered into an Agreement
in which Chronimed agreed to terminate certain agreements that had been in
existence since the spin-off of the Company from Chronimed. Included in the
terminated agreements was the Marketing and Distribution Agreement, 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. The
Agreement provided that Chronimed would be paid $250,000 in cash on June 27,
1997, with the remaining balance of $2,250,000 payable in
<PAGE>
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. The temporary quarterly royalty payments will commence with the Company's
quarter ended September 30, 1997 and 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.
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 June 30, 1997, the Company
estimates this unpaid obligation has a value of approximately $1,921,519 based
on its estimate of royalty payments payable in future periods and its estimate
of future market values for the Company's Common Stock. Accordingly, based on
these estimates, the Company classified $916,968 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, license and research agreements, and agreements with
Chronimed. Expenditures incurred under these commitments and reported as
research and development expense totaled approximately $1,349,000 and $2,214,000
for the three and six month periods ended June 30, 1997, respectively. At June
30, 1997, the Company expects to incur approximately $5,260,000 of additional
expenditures in subsequent periods under these existing commitments. 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 June 30, 1997. These
reclassifications have no impact on the net loss or shareholders' equity as
previously reported.
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
<PAGE>
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 June 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 June 30, 1997, the Company
has incurred losses totaling $20,879,179, consisting of $14,536,145 of research
and development expenses, $3,212,378 of sales and marketing expenses, $5,100,234
of general and administrative expenses, $172,264 of gross profit on sales of
approved products and $1,797,314 of 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 June 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 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 the third quarter of 1997. In
addition, the Company expects operating losses to continue into 1999 and to
increase at least through the end of 1998.
SIX MONTHS ENDED JUNE 30, 1997 VS. SIX MONTHS ENDED JUNE 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 $266,710 for the six
months ended June 30, 1997. Sales of Elliotts B Solution and Cystadane are in
line with expectations. Although sales of Antizol-Vet are expected to increase
in the second half of 1997, the Company estimates that sales for the full year
will be below original expectations for this product.
Cost of sales increased from zero for the six months ended June 30, 1996 to
$120,681 for the six months ended June 30, 1997. Cost of sales as a percentage
of sales will fluctuate from quarter to quarter and from 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 $ 2,471,559 (74% of the total
loss from operations) for the six months ended June 30, 1996 to $2,812,733 (43%
of the total loss from operations) for the six months ended June 30, 1997. The
$341,174 increase is largely attributable to higher levels of clinical spending
for Busulfanex and Xyrem. 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 expects
its clinical spending to
<PAGE>
increase in subsequent quarters as more human subjects are enrolled and
additional clinical sites are activated. In addition, the Company reclassified
certain drug development costs that were previously expensed as research and
development for its three approved products because these costs are allocable to
drug product inventory the Company expects to sell in 1997. Research and
development expenditures will likely increase in subsequent quarters depending
principally on the level of clinical trial activity. 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 $144,843 (4% of the total loss from
operations) for the six months ended June 30, 1996 to $2,684,472 (41% of the
total loss from operations) for the six months ended June 30, 1997. The
$2,539,629 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 $368,000
because of costs related to initiating the new distribution agreement with
Cardinal Health and marketing costs for the Company's three approved products.
Further, 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 for marketing
awareness programs for products for which the Company expects to receive FDA
clearance in 1997 and early 1998.
General and administrative expenses increased from $742,302 (22% of the total
loss from operations) for the six months ended June 30, 1996 to $1,122,549 (17%
of the total loss from operations) for the six months ended June 30, 1997. The
$380,247 increase is principally due to staff additions. General and
administrative expenses are expected to increase in subsequent quarters.
Other income increased from $345,887 for the six months ended June 30, 1996 to
$403,215 for the six months ended June 30, 1997. This increase is due solely to
interest income attributable to higher levels of investable funds, which
resulted from the Company's public sale of Common Stock in April 1996. Other
income is expected to decline as currently invested funds are principally used
to fund development activities.
Net losses for the six months ended June 30, 1997 and for the six months ended
June 30, 1996 were $(6,070,510) and $(3,012,817), respectively. Net losses per
common share for these respective periods were $(1.00) and $(.65), based on
weighted average number of common shares outstanding of 6,062,005 and 4,611,566,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
From inception through June 30, 1997, the Company has used $16,810,832 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 $15,984,769 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
<PAGE>
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 $9,462,471 at June 30, 1997. Cash and cash
equivalents, and available-for-sale securities decreased from $16,707,906 at
December 31, 1996 to $12,412,866 at June 30, 1997. The Company invests excess
cash in short-term, interest-bearing, investment grade securities.
The Company's commitments for outside development spending increased from
$4,287,000 at December 31, 1996 to $5,260,000 at June 30, 1997 (also see Note 5
to the Financial Statements). As a result, the Company expects development
expenditures to increase in subsequent quarters. In excess of 65% of the
$5,260,000 in future commitments relate to Caprogel, Busulfanex and Xyrem. The
Company expects future commitments for Xyrem to increase significantly over
current levels as additional clinical programs are commenced. In order to limit
its potential financial commitment on Xyrem, 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 has sufficient capital to fund its operations
through the first half of 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 $15,000,000 of additional
capital, assuming no internally generated funding is available. The Company
currently 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.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders
The annual meeting of the shareholders of the Company was held on May 8, 1997.
Three matters were submitted to the shareholders for approval: (1) the election
of directors, (2) a proposal to ratify an amendment to the Company's 1994 Stock
Option Plan and (3) a proposal to ratify the appointment of Ernst & Young LLP as
the independent auditors for the Company.
Seven nominees, namely John Howell Bullion, Maurice R. Taylor, II, William M.
Wardell, M.D., Ph.D., Bertram A. Spilker, Ph.D., M.D., Lawrence C. Weaver,
Ph.D., D.Sc. (Hon.), W. Leigh Thompson, Ph.D., M.D. and William B. Adams were
duly elected as directors of the Company until the next annual meeting of
shareholders. Each nominee received at least
<PAGE>
approximately ninety-nine percent of the votes cast in favor of his election.
Further results of the voting were as follows:
Votes Cast for
Director the Director Votes Withheld
- -------- ------------ --------------
John Howell Bullion 5,683,270 75,884
Maurice R. Taylor, II 5,674,470 84,684
William M. Wardell, M.D., Ph.D. 5,688,490 70,664
Bertram A. Spilker, Ph.D., M.D. 5,692,395 66,759
Lawrence C. Weaver, Ph.D., D.Sc. (Hon) 5,692,465 66,689
W. Leigh Thompson, Ph.D., M.D. 5,692,490 66,664
William B. Adams 5,689,760 69,394
The proposal to ratify amendment to the Company's 1994 Stock Option Plan was
approved by the Company's shareholders. A total of 3,427,326 shares of the
Company's common stock voted in favor of the proposal, 291,070 shares of the
Company's common stock voted against the proposal, 43,436 shares of the
Company's common stock abstained from voting and 1,997,322 shares of the
Company's common stock were not voted by brokers. The proposal to ratify the
amendment to the Company's 1994 Stock Option Plan received approximately sixty
percent of the vote cast.
The proposal to ratify the appointment of Ernst & Young LLP as the independent
auditors for the Company was approved by the Company's shareholders. A total of
5,656,978 shares of the Company's common stock voted in favor of the proposal,
96,859 shares of the Company's common stock voted against the proposal and 5,317
shares of the Company's common stock abstained from voting. There were no broker
non-voters in connection with the shareholders vote for this proposal. The
proposal to ratify the appointment of Ernst & Young LLP as the independent
auditors for the Company received approximately ninety-eight percent of the vote
cast.
Item 5. Other Information
On July 3, 1997 the Company and Chronimed announced the termination of an
agreement under which Chronimed had exclusive rights to market and distribute
certain Orphan Medical products. This action will result in the Company
compensating Chronimed, its former parent, over an estimated 12 to 24 months
with cash and common stock having a total value of $2.5 million. The Company's
Board of Directors includes three individuals who serve on both Chronimed's and
the Company's Boards of Directors. Due to a conflict of interest for these three
individuals, the Company established a committee of four disinterested Board
members, which includes the Company's President, to review and approve this
transaction. The three Board members with Board interlocks, which includes the
Company's Chief Executive Officer, were excluded from the negotiations with
Chronimed and did not vote on the resolution to approve this transaction.
<PAGE>
On July 9, 1997, the Company announced that it has entered into a three-year
exclusive agreement with Cardinal Health, Inc. 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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT INDEX
Exhibit Sequentially
Number Description Numbered Page
------ ----------- -------------
10.45 Distribution Services Agreement between OMI and
Cardinal Health dated June 1, 1997 (1)
27 Financial Data Schedule - For SEC EDGAR filing
99 Cautionary Statements
(1) Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended,
confidential portions of this Exhibit have been deleted and filed separately
with the Securities and Exchange Commission pursuant to a request for
confidential treatment.
(b) Reports on Form 8-K
A Form 8-K was filed on July 8, 1997 with respect to the termination of the
Marketing and Distribution Agreement, as amended, between the Company and
Chronimed.
<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 August 6, 1997 By /s/ John H. Bullion
John H. Bullion
Chief Executive Officer
(principal executive officer)
Exhibit 10.45
DISTRIBUTION SERVICES AGREEMENT
This agreement is made as of June 1, 1997 between Orphan Medical, Inc.,
a Minnesota corporation ("Orphan"), and Cardinal Health* ("Cardinal").
Background Information
A. Orphan is, among other things, in the business of licensing,
developing and marketing pharmaceutical products in the United States, the
District of Columbia and Puerto Rico (the "Domestic Territory") and
internationally (the "International Territory").
B. Cardinal, through its subsidiary, CORD Logistics, Inc. ("CORD"), is,
among other things, in the business of distributing pharmaceutical products to
wholesalers, specialty distributors, physicians, clinics, hospitals, retail
pharmacies, and other health care providers in the Domestic Territory and the
International Territory (sometimes hereinafter referred to collectively as the
"Territories"), and of providing Information Systems and other services that
support its customers' use of its distribution capabilities.
C. Orphan desires to engage CORD as its primary distribution agent
(described below) for the Products (defined in the attached Exhibit A) and to
perform certain other services described in this agreement, all upon the terms
and conditions set forth in this agreement.
Statement of Agreement
Orphan and Cardinal (the "Parties") hereby acknowledge the accuracy of
the above Background Information and agree as follows:
ss.1. Appointment. Upon the terms and conditions described in this
agreement, Orphan hereby appoints CORD: (a) as its exclusive distribution agent
in and for the Domestic Territory for distribution of the Products directly to
physicians' offices, clinics, hospitals, retail pharmacies, and other health
care providers ("Direct Customers") located in the Domestic Territory in the
event that Orphan begins selling the Products or providing samples to Direct
Customers in the Domestic Territory; (b) as its exclusive distribution agent in
and for the Domestic Territory for distribution of the Products (including
samples) to wholesalers, specialty distributors and other distributors located
in the Domestic Territory who purchase the Products from Orphan ("Domestic
Wholesale Customers"); (c) as its exclusive distribution agent to distribute the
Products (including samples) to distributors located in the International
Territory ("International Distributors") when commercially reasonable for a
distribution agent located in the Domestic Territory to perform such services;
and (d) to perform the other services as described in this agreement (the
services described in clauses (a), (b), (c) and (d) of this section hereinafter
collectively referred to as the "Services", and Domestic Wholesale Customers,
International Distributors and Direct Customers sometimes hereinafter referred
to collectively, as "Customers"). Notwithstanding the foregoing, CORD may
decline appointment under clause (c) if CORD determines that distribution to any
distributor located in any International Territory
<PAGE>
would be contrary to the laws or regulations of any country (including the
United States) or impractical from a business perspective. Exhibit A may be
amended from time to time by mutual written agreement of the Parties to add or
delete products covered by this agreement.
The Services shall be implemented pursuant to the Implementation
Schedule attached as Exhibit B to this agreement (the "Implementation
Schedule"), with distribution of the Products to begin on the date specified in
that Schedule (the "Commencement Date").
ss.2. Product Supply, Warehousing and Storage. Orphan shall ship the
Products to CORD at CORD's distribution facility currently located at 2700
Interstate Drive, Lakeland Florida 33805 or to such other distribution facility
as may be designated by CORD (individually or collectively, the "CORD
Facility"), in sufficient quantities to meet Orphan's anticipated Customer
orders. CORD shall visually inspect each shipment of the Products for external
damage or loss in transit and notify Orphan that such damage or loss has
occurred promptly following discovery of such damage or loss by CORD.
Orphan shall provide CORD with projections of the Products' volume
requirements not less often than quarterly, at least 30 days in advance of the
quarter. As part of the pre-launch preparation, CORD shall store Product volume
sufficient to handle six months forward marketing demand. CORD shall store the
Products in the CORD Facility and comply with the storage and handling
requirements applicable to the Products, as such requirements may be
supplemented or amended from time to time by Orphan with reasonable prior notice
to CORD and its prior approval, which approval shall not be unreasonably
withheld. If CORD notifies Orphan in good faith that any such supplement or
amendment will require any material modification to the CORD Facility or CORD's
procedures or requirements which are unique and specific to the Products or the
Services resulting in a material increase to CORD's anticipated costs and
expenses, then Orphan and CORD shall consult regarding such reasonable costs and
expenses (hereinafter, simply "unique costs") and Orphan shall pay such unique
costs resulting from that modification.
Orphan shall pay all costs and expenses of delivering the Products to
the CORD Facility. Orphan shall retain title to all Product inventory in the
CORD Facility until the Products are shipped to the Customers (including without
limitation purchases by any subsidiary or affiliate of Cardinal or CORD ).
ss.3. Standard Product Distribution. All Customer orders shall be taken
by CORD as described in the Operating Guidelines (defined in ss.6, below). CORD
shall confirm the receipt of and process each order and, so long as the ordered
Products are then in stock at the CORD Facility and the orders are received no
later than 2:00 p.m. local time at the CORD Facility, routinely have that order
available for shipment within 24 hours of CORD's receipt of the order (exclusive
of holidays and weekends) or such longer period as may be designated or
permitted by Orphan with the courier selected by Orphan. Orphan shall reimburse
CORD for all costs and expenses of the Courier, or, if acceptable to the Courier
and CORD, Orphan may be billed directly by the Courier for the delivery charges.
In addition and except for Elliotts B, Orphan shall reimburse CORD for all costs
and expenses of packaging material used for shipping the Products. The Products
shall be shipped on a first expiration date-first out basis or as otherwise
<PAGE>
directed by Orphan. In addition, CORD shall establish (and Orphan shall approve)
procedures for the processing and shipment of emergency orders on weekends and
holidays, provided that Orphan shall separately pay all increased costs
resulting from such orders.
In the event that CORD does not or is unable to have any order
available for shipment with 72 hours of CORD's receipt of the order (exclusive
of holidays and weekends) for any reason other than a reason set forth in
Section 28, then Orphan shall have the right to engage a third party to ship
th4e Products which CORD has failed to ship until such time as CORD is again
able and willing to resume shipment of such Products for Orphan. In the event
that Orphan engages a third party under this section, CORD shall reimburse
Orphan an amount equal to the difference between the per-line fee charged by the
third party (up to *** per line) and the per-line fee charged by CORD for the
Products shipped by the third party.
ss.4. Product Prices. Upon execution of this agreement, Orphan shall
deliver to CORD a Products price list for Customers who purchase the Products
(the "Customer Price List"). Orphan shall notify CORD of any change in the
Customer Price List not less than 10 business days prior to the effective date
of any such change. The Parties hereby acknowledge that Orphan, and not CORD, is
the seller of the Products to Customers.
ss.5. Customer Billing and Collection Services.
(a) CORD shall perform the billing services described in the
Operating Guidelines in accordance with the policies and procedures set
forth therein.
(b) CORD shall have no obligation to pay for the Products or
to reimburse Orphan for any losses incurred in connection with the
failure of any Customer to pay Orphan any amount due.
(c) Customers shall be directed to make payments for the
Products directly to Orphan.
ss.6. Operating Guidelines. As soon as practicable after the date of
this agreement, CORD and Orphan shall develop operating guidelines relating to
the Products and the Services, which guidelines (the "Operating Guidelines")
will be in writing, in a form satisfactory to CORD and Orphan, and will define
and document the responsibilities of CORD and Orphan in support of the
relationship described in this agreement. CORD and Orphan shall comply in all
material respects with the Operating Guidelines. All Operating Guidelines shall
be implemented in good faith and in a commercially reasonable manner, subject to
the qualifications set forth therein; provided that in the event of any
inconsistency between the Operating Guidelines and the other provisions of this
agreement, the other provisions of this agreement shall control. The Operating
Guidelines may be amended from time to time upon the mutual agreement of CORD
and Orphan.
- -------------------
*** Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
<PAGE>
ss.7. Returns and Recalls. CORD shall accept and process Product
returns, including recall returns, pursuant to this agreement and any applicable
Operating Guidelines. The fees to be paid to CORD for these return services are
described inss.8 of this agreement.
Under normal operating conditions, CORD shall process all Customer
return requests which comply with the terms of this agreement (including any
applicable Operating Guidelines) within 5 business days following receipt of the
returned Products and dispose of the returned Products as required by this
agreement and applicable law. In addition, CORD shall assist Orphan in all ways
reasonably requested by Orphan with respect to the processing of customer
complaints relating to any returned Products or the handling of those returned
Products.
If Orphan is required to recall, or, on its own initiative, recalls any
Products, CORD will assist Orphan with that recall in all ways reasonably
requested by Orphan; provided that Orphan shall pay to CORD an amount equal to
all costs incurred by CORD in connection with any such recall.
ss.8. Fees. As compensation for the Services, Orphan shall pay CORD the
fees described below and as more fully detailed in the attached Exhibit D (the
"Fees").
(a) DISTRIBUTION FEES. Orphan shall pay a storage/distribution fee
to CORD for the Products as set forth in Exhibit D. The
per-line fees set forth in Exhibit D exclude freight in all
cases; the per-line fees include Customer invoicing, and, in
the case of Elliotts B Solution, packaging materials and
Customer Service support. Orphan shall reimburse CORD for any
additional charges incurred as a result of any Products
requiring special handling and/or packaging materials. Returns
will be charged per line at the same rate indicated for
outgoing shipments.
(b) INFORMATION SYSTEMS DEVELOPMENT FEE. Orphan shall pay to CORD
an Information Systems Development Fee equal to ***, which
will include installation of a communications line, all
activities required to make the Information System operational
for Orphan, reasonable user training, a reasonable number of
copies of the System documentation and a copy of the Master
Validation Plan. Orphan shall make payment of the Information
Systems Development Fee to CORD as follows: (i) *** upon
Orphan's initial use of the System as evidenced by the first
entry of inventory into the System and (ii) *** upon launch of
the second Product under this agreement. For purposes of this
agreement: (i) the second Product will be deemed launched upon
FDA approval of any Product, including any Treatment IND
approval by the FDA for which CORD will perform distribution
services under this agreement, and (ii) distribution of the
Products Cystadane and Antizol Vet in any International
Territory or for Veterans Administration sales within the
Domestic Territory will not be deemed to be the launch of a
second Product.
- -----------------
*** Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
<PAGE>
(c) INFORMATION SYSTEMS AND SERVICES USE FEE. Upon launch of the
second Product and for the remainder of the term of this
agreement, Orphan shall pay to CORD as compensation for the
use of the information systems and services provided by CORD
or an affiliate of CORD, regardless of the number of Products
in addition to the first Product being distributed: (i) ***
per month (the "Monthly Fee"), plus (ii) ***, up to a maximum
monthly total of the Monthly Fee and *** . ***.
(d) CUSTOMER SERVICE FEES. Upon Orphan's launch of the second
Product and for the remainder of the term of this agreement,
Orphan will pay to CORD as compensation for the Customer
Services performed pursuant to the Operating Guidelines the
fees specified in Exhibit D.
Following the end of each calendar month, CORD shall issue an invoice
to Orphan for the Fees payable with respect to CORD's performance of the
Services. The Fees or other amounts payable by Orphan to CORD under this
agreement shall be payable within 30 days of the date of CORD's invoice for such
Fees or other amounts. If the Fees or other amounts payable to CORD under this
agreement are not paid when due, then CORD shall have the right to impose a
service charge on the unpaid amount calculated at the rate of 1.5% per month (or
the maximum rate permitted by law if such rate is less than 1.5% per month)
until such amount is paid in full.
In addition to any other fee increases provided for in this agreement,
if CORD can reasonably demonstrate that the costs for providing the Services
have materially increased, or are likely to increase in the coming year due to
the adoption of any applicable law or regulation, or any material change in the
interpretation or administration thereof (a "Cost Adjustment"), then CORD may
propose an increase to the Distribution Fee as of any anniversary of the
Commencement Date by an amount reasonably designed to eliminate any Cost
Adjustment; provided that the costs used for determining such increases shall be
reasonably determined under Generally Accepted Accounting Principles and cost
allocation methods applied on a consistent basis, and such costs shall not
include any special charges or amounts which are allocated disproportionately to
the costs of the Services when compared to the other business operations of
CORD. CORD shall notify Orphan of any such proposed Cost Adjustment not less
than 90 days in advance, and the Parties shall meet to discuss any Cost
Adjustment.
ss.9. Use of the Information System. To facilitate the Services, CORD
shall provide to Orphan access to CORD's or an affiliate of CORD's Information
System, consisting of the computer hardware and software and other components
described in the attached Exhibit E (the "System"), and shall provide the
services relating to Orphan's use of the System which are described in that
Exhibit. Access to the System shall be provided pursuant to a System Access
Agreement in the form of the attached Exhibit F, which agreement (the "System
Access Agreement") shall be executed by the Parties concurrently with this
agreement. As
- -----------------
*** Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
<PAGE>
consideration for its use of the System, Orphan shall pay to CORD the
information systems development, monthly and unit of measure fees described in
ss.8 of this agreement and listed on the attached Exhibit D. The System shall be
made available to Orphan's Facility (including provision of up to five CRT
terminals or terminal emulation cards for personal computers), so long as Orphan
first has in place a local area network sufficient to support all Orphan
terminals and personal computers which will have access to the System and a
centralized server sufficient for data storage related to Orphan' use of the
System. All costs and expenses associated with establishing initial hook-up of
all communication and electronic information lines necessary for interface of
the System with Orphan's information systems located in Minnetonka, Minnesota
will be included in the Information Systems Development Fee; provided that
Orphan will pay all such costs and expenses should Orphan choose to relocate the
CORD computer terminals or re-direct the flow of information from its current
location in Minnetonka, Minnesota. Orphan shall have sole responsibility for
payment of all costs and expenses of maintaining all such communication and
electronic information lines. CORD shall designate an employee of it or one of
its affiliates who shall be responsible for acting as liaison between Orphan and
CORD, and providing support and maintenance to Orphan, in connection with its
use of the System. CORD and Orphan shall each assign knowledgeable and qualified
employees of that party or its affiliates, as reasonably determined by that
party, to facilitate the use of the System as contemplated by this agreement.
ss.10. EDI Transmission & Customer Orders. Those Customers utilizing
CardinalCHOICE(R) in the normal course of their business will be able to order
Products directly through CardinalCHOICE. CORD will exercise reasonable efforts
to facilitate EDI transmission or orders from Customers utilizing EDI software
other than CardinalCHOICE. Such facilitation may include additional charges.
ss.11. Term and Termination. (a) The initial term of this agreement
(the "Initial Term") shall begin on the date of this agreement and continue
until the third anniversary of the Commencement Date, unless or until terminated
sooner pursuant to the other provisions of this section. After the Initial Term,
this agreement shall renew automatically for successive renewal terms of one
year each unless notice of termination is given by any Party at least 90 days
prior to the end of the term then in effect, in which case this agreement shall
terminate at the end of that term. Any reference in this agreement to the "term
of this agreement" shall include the Initial Term and any such renewal terms.
(b) Either Party shall have the right to terminate this agreement upon
the breach by the other Party of a material provision of this agreement and that
Party's failure to cure such breach within 30 days following written notice
thereof from the non-breaching Party or, in the event such failure is not
capable of being cured within such 30-day period, the non-breaching Party's
failure to continue to diligently prosecute such cure thereafter; provided,
that, with respect to any failure to make any payment when due under this
agreement, such period in which to cure shall be reduced to 10 days.
(c) Either Party shall have the right to terminate this agreement
immediately upon notice to the other Party following the commencement of any
bankruptcy or insolvency proceeding (whether voluntary or involuntary) with
respect to such other Party or its assets, the general
<PAGE>
assignment for the benefit of creditors by such other Party, or the appointment
of a receiver, trustee or liquidator by or for such other Party.
(d) Sections 15 and 17 through 20, inclusive, of this agreement shall
survive the termination of this agreement, and no termination of this agreement
shall affect any liabilities arising, or based upon acts or omissions occurring,
prior to the date of such termination.
ss.12. Advisory Board. Promptly following the Commencement Date, the
Parties shall form an Advisory Board consisting of four members. CORD and Orphan
shall each appoint two members to the Advisory Board. The Advisory Board shall
meet from time to time as mutually agreed upon by CORD and Orphan to discuss the
relationship established between the Parties by this agreement and any related
issues.
ss.13. Audits. Orphan shall have the right during normal business hours
(i.e., 8:00 a.m. to 5:00 p.m. local time), upon reasonable prior notice, to: (a)
review and audit CORD's shipping and receiving records relating directly to
Products received at and shipped from the CORD Facility; and (b) conduct,
together with representatives of CORD, an inventory of the Products at the CORD
Facility.
ss.14. Compliance With Laws. Each Party shall conduct its activities in
connection with this agreement in substantial compliance with all applicable
laws.
ss.15. Representations and Warranties. Each Party represents and
warrants to the other that: (a) it has full power and authority to enter into
this agreement and perform and observe all obligations and conditions to be
performed or observed by it under this agreement without any restriction by any
other agreement or otherwise; (b) the execution, delivery and performance of
this agreement have been duly authorized by all necessary corporate action of
that Party; and (c) this agreement constitutes the legal, valid and binding
obligation of that Party. Orphan further represents and warrants to Cardinal
that the Products are and shall be manufactured in conformity with the Food,
Drug, and Cosmetic Act, as amended, and all other applicable laws.
ss.16. Taxes. Orphan shall pay when due all sales, use, gross receipts,
excise, personal property taxes associated with the Products (excluding any
personal property tax associated with CORD's equipment used in connection with
the Services), and other taxes or similar charges now or hereafter imposed as a
result of the transactions contemplated by this agreement, none of which have
been included in the fees payable to CORD under this agreement; provided that
the amounts payable by Orphan under this section shall not include taxes based
on the net income of CORD. CORD shall maintain the records necessary for Orphan
to complete all such sales, use, gross receipts, excise, property, and other
taxes and similar charges.
ss.17. Trademarks. Neither Party shall have the right to use the name
of the other Party or any affiliate of the other Party, or the other Party's or
such affiliates' trademarks, service marks, logos, or other similar marks in any
manner except with the prior written approval of that Party; provided that the
foregoing shall not prohibit CORD's use of Orphan' names or marks in connection
with the performance of the Services in a manner consistent with this agreement,
the past practices of the Parties or their affiliates, or the practices within
the industry.
<PAGE>
ss.18. Confidentiality. Each Party acknowledges that as a result of
this agreement it may learn and have access to trade secrets and other
confidential and proprietary information of the other Party, including without
limitation financial information, information regarding business practices and
techniques, and systems and technology information (the "Confidential
Information"); provided that, for purposes of this agreement, Confidential
Information shall not include information disclosed by one Party to the other to
the extent that such information: (a) is or becomes generally available in the
industry in which the disclosing Party engages in business without any violation
of this agreement by the other Party; (b) is already legally known to the other
Party or any of its affiliates at the time of its disclosure by the disclosing
Party; or (c) is independently developed by the other Party or any of its
affiliates. The specific material terms of this agreement shall be deemed to be
the Confidential Information of each Party.
Neither Party shall, directly or indirectly, at any time: (i) disclose
to any person or entity any Confidential Information of the other Party (whether
learned before or after the date of this agreement), or (ii) use, or permit or
assist any person or entity to use, any such Confidential Information, excepting
only: (A) disclosures required by law, as reasonably determined by the
disclosing Party or its legal counsel, and (B) disclosures on a confidential
basis to directors, officers, employees, and agents of that Party or its
affiliates who have a reasonable need to know such Confidential Information in
the normal course of business of that Party or any of that Party's affiliates.
The obligations of confidentiality hereunder shall survive the
termination of this agreement for a period of three (3) years.
Upon termination of this agreement (for any reason) each Party shall
promptly: (i) return to the other Party all documentation and other materials
(including copies of original documentation or other materials) containing any
confidential information of the other Party; or (ii) with the other Party's
consent, which consent will not be unreasonably withheld, certify to the other
Party, pursuant to a certificate in form and substance satisfactory to the other
Party, as to the destruction of all such documentation and other materials.
ss.19. Indemnification. Each Party shall indemnify and hold harmless
the other and its affiliates, directors, officers, employees, agents, and
representatives from and against all claims, liabilities, losses, damages,
costs, and expenses (including without limitation reasonable attorneys' fees)
arising directly or indirectly out of any failure of that Party to perform and
observe fully all obligations and conditions to be performed or observed by that
Party pursuant to this agreement or any breach of any warranty made by that
Party in this agreement.
NOTWITHSTANDING THE FOREGOING, OR ANY OTHER PROVISION OF THIS AGREEMENT
TO THE CONTRARY, NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR ANY
CONSEQUENTIAL, INCIDENTAL, INDIRECT, SPECIAL, OR OTHER SIMILAR DAMAGES ARISING
OUT OF OR IN CONNECTION WITH THIS AGREEMENT.
ss.20. Insurance. (a) During the term of this agreement, Orphan shall
maintain: (i) product liability and commercial general liability insurance
having a limit of not less than $3
<PAGE>
million (which amount Orphan will use reasonable efforts to increase as Orphan's
product portfolio increases); and (ii) property damage insurance at replacement
value for the Products located at the CORD Facility or in transit to or from the
CORD Facility, pursuant to one or more insurance policies with reputable
insurance carriers. Cardinal Health, Inc. and its subsidiaries shall be
designated as "additional insureds" under the product liability and commercial
general liability insurance policy(ies) and as "loss payees" under the property
damage insurance policy(ies). Prior to the Commencement Date, Orphan shall
deliver to CORD certificates evidencing such insurance. Orphan shall not cause
or permit such insurance to be canceled or modified to materially reduce its
scope or limits of coverage during the term of this agreement. Except for any
losses resulting solely from the negligence or intentional misconduct of CORD,
Orphan shall bear all risk of loss or damage with respect to the Products,
whether located at the CORD Facility or otherwise.
(b) During the term of this agreement, CORD shall maintain, pursuant to
one or more insurance policies with reputable insurance carriers, property
damage insurance at replacement value for the Products located at the CORD
Facility or in transit to or from the CORD Facility, which insurance shall be
applicable only in the event of loss or damage resulting solely from the
negligence or intentional misconduct of CORD. Orphan shall be designated as a
"loss payee" under such property damage insurance policy(ies). Prior to the
Commencement Date, CORD shall deliver to Orphan certificates evidencing such
insurance. CORD shall not cause or permit such insurance to be canceled or
modified to materially reduce its scope or limits of coverage during the term of
this agreement.
ss.21. Relationship of the Parties. The relationship among the Parties
is and shall be that of independent contractors. This agreement does not
establish or create a partnership or joint venture among the Parties.
ss.22. Notices. Any notice or other communication required or desired
to be given to any Party under this agreement shall be in writing and shall be
deemed given: (a) three business days after such notice is deposited in the
United States mail, first-class postage prepaid, and addressed to that Party at
the address for such Party set forth at the end of this agreement; (b) one
business day after delivered to Federal Express, Airborne, or any other similar
express delivery service for delivery to that Party at that address; or (c) when
sent by facsimile transmission, with electronic confirmation, to that Party at
its facsimile number set forth at the end of this agreement. Any notice
delivered by facsimile transmission will be deemed delivered upon electronic
confirmation provided the notice is also deposited in the U.S. mail, first-class
postage prepaid. Any Party may change its address or facsimile number for
notices under this agreement by giving the other Parties notice of such change.
ss.23. Arbitration. Subject to ss.24, below, any and all disagreements
or controversies arising out of or with respect to this agreement or the System
Access Agreement shall be settled by binding arbitration to be held, and the
award made, in Chicago, Illinois, pursuant to the then-applicable rules of the
American Arbitration Association (to the extent not inconsistent with this
agreement). Each Party shall bear the costs and expenses of preparing and
presenting its case at the arbitration. All other costs and expenses of
arbitration shall be borne by the Parties as determined in the arbitration.
<PAGE>
ss.24. Remedies. Each Party acknowledges that in the event of any
violation by that Party of any of the provisions of ss.18 of this agreement, the
other Party would suffer irreparable harm and its remedies at law would be
inadequate. Accordingly, in the event of any violation or attempted violation of
any such provisions by either Party, the other Party shall be entitled to a
temporary restraining order, temporary and permanent injunctions, specific
performance, and other equitable relief, without any showing of irreparable harm
or damage or the posting of any bond. The rights and remedies of each Party
under this agreement shall be cumulative and in addition to any other rights or
remedies available to such Party, whether under any other agreement, at law, or
in equity.
ss.25. Governing Law. All questions concerning the validity or meaning
of this agreement or relating to the rights and obligations of the Parties with
respect to performance under this agreement shall be construed and resolved
under the laws of the State of Ohio.
ss.26. Severability. The intention of the Parties is to comply fully
with all laws and public policies, and this agreement shall be construed
consistently with all laws and public policies to the extent possible. If and to
the extent that any court of competent jurisdiction determines that it is
impossible to construe any provision of this agreement consistently with any law
or public policy and consequently holds that provision to be invalid, such
holding shall in no way affect the validity of the other provisions of this
agreement, which shall remain in full force and effect.
ss.27. Non-waiver. No failure by either Party to insist upon strict
compliance with any term of this agreement, to exercise any option, to enforce
any right, or to seek any remedy upon any default of the other Party shall
affect, or constitute a waiver of, the first Party's right to insist upon strict
compliance, to exercise that option, to enforce that right, or to seek that
remedy with respect to that default or any prior, contemporaneous, or subsequent
default. No custom or practice of the Parties at variance with any provision of
this agreement shall affect, or constitute a waiver of, that Party's right to
demand strict compliance with all provisions of this agreement.
ss.28. Force Majeure. If the performance of any part of this agreement
by either Party shall be affected for any length of time by fire or other
casualty, government restrictions, war, riots, strikes or labor disputes, lock
out, transportation delays, and acts of God, or any other causes which are
beyond the control of the Parties, such Party shall not be responsible for delay
or failure of performance of this agreement for such length of time, provided,
however, that the obligation of one Party to pay amounts due to any other Party
shall not be subject to the provisions of this section. During any suspension of
performance by CORD under this section, Orphan shall have the right to engage a
third party to perform the Services not being performed by CORD as a result of
the force majeure until such time as CORD resumes performance of the Services.
CORD and Orphan will use reasonable efforts to work together to effect the
transition of Orphan's business to a third party during such temporary period
affected by such force majeure.
<PAGE>
ss.30. Genders and Numbers. Where permitted by the context, each
pronoun in this agreement includes the same pronoun in the other genders or
numbers and each noun used in this agreement includes the same noun in other
genders.
ss.31. Complete Agreement. This agreement (together with the exhibits
attached hereto and the other documents referred to herein, all of which are
hereby incorporated herein by reference) contains the entire agreement between
the Parties and supersedes all prior or contemporaneous discussions,
negotiations, representations, warranties, or agreements relating to the subject
matter of this agreement. No changes to this agreement shall be made or be
binding on either Party unless made in writing and signed by both Parties. The
Parties anticipate that addenda may be added to this agreement to effect the
provision of additional services by Cardinal to Orphan.
ss.32. Successors. Except as set forth in this ss.32, neither Party
shall have the right to assign this agreement or any of such Party's rights or
obligations under this agreement without the prior written consent of the other
Party, which consent shall not be unreasonably withheld; provided that CORD
shall have the right to assign or delegate from time to time this agreement or
any or all of its rights under this agreement to any other wholesale distributor
of pharmaceutical products that is a subsidiary of Cardinal Health, Inc., an
Ohio corporation. Subject to the preceding sentence, this agreement shall be
binding upon, inure to the benefit of, and be enforceable by and against the
respective successors and assigns of the Parties.
ORPHAN MEDICAL, INC. CARDINAL HEALTH
By /s/ Patti A. Engel By /s/ Lisa Dolan
(Name) (Name)
V.P. Marketing & Sales Senior Vice President
(Title) (Title)
Address and facsimile number: Address and facsimile number:
13911 Ridgedale Drive 5555 Glendon Court
Minnetonka, MN 55305 Dublin, Ohio 43016
Attn: Patti A. Engel Attention: Senior Vice President,
Facsimile No. 612-541-9209 Specialty Cos.
Facsimile No. (614) 717-6000
* The terms "Cardinal and "Cardinal Health" shall include the following
affiliated operating companies: CORD Logistics, Inc., an Ohio corporation
(Dublin, Ohio); Medical Strategies, Inc., a Massachusetts corporation (Dublin,
Ohio); Assisted Care Partners, Inc., an Ohio corporation (Dublin, Ohio);
Cardinal Syracuse, Inc., a New York corporation (Syracuse, New York); Williams
Drug Distributors, Inc., a Delaware corporation (Zanesville, Ohio); Marmac
Distributors, Inc., a Connecticut corporation (Hartford,
<PAGE>
Connecticut); James W. Daly, Inc., a Massachusetts corporation (Peabody,
Massachusetts); Ohio Valley-Clarksburg, Inc., a Delaware corporation (Wheeling,
West Virginia); Chapman Drug Company, a Tennessee corporation (Knoxville,
Tennessee); Cardinal Florida, Inc., a Florida corporation (Lakeland, Florida);
Cardinal Mississippi, Inc., a Mississippi corporation (Richland, Mississippi);
Solomons Company, a Georgia corporation (Savannah, Georgia); Whitmire
Distribution Corporation, a Delaware corporation (Folsom, California);
Humiston-Keeling, Inc., an Illinois corporation (Calumet City, Illinois);
Behrens Inc., a Texas corporation (Waco, Texas); Nexus Healthcare, Inc. (Dublin,
Ohio); and any other subsidiary of Cardinal Health, Inc., an Ohio corporation
("CHI"), as may be designated by CHI.
<PAGE>
LIST OF EXHIBITS
Exhibit A List of Products
Exhibit B Implementation Schedule
Exhibit C Operating Guidelines
Exhibit D Fee Schedule
Exhibit E Order Entry System
Exhibit F System Access Agreement
<PAGE>
EXHIBIT A
List of Products
Products means:
(a) Elliotts B(TM) Solution (buffered intrathecal electolyte/dextrose
injection), and
(b) All other Orphan products except for products: (i) subject to Orphan's
relationship existing as of the Commencement Date with Chronimed and (ii) which
Orphan may license, develop or distribute where the licensor has an exclusive
distribution agent at the time such license is granted to Orphan provided Orphan
has used reasonable efforts to obtain such licensor's agreement to assign or
otherwise transfer to CORD the right to act as the primary distribution agent
for such products.
<PAGE>
EXHIBIT B
IMPLEMENTATION SCHEDULE
This Schedule will be revised from time to time as specific
issues, tasks, and timing are defined by and agreed to by the CORD/Orphan
Project Team.
Critical implementation steps are outlined as follows:
1. Preparation of the Operating Guidelines.
2. Nashville Facility readiness - sometime between April 1 and June 30,
1997.
3. Commencement Date - Date of first shipment of Product (December 1996).
4. Follow-up on issues, expansion, corrective action by Project Team --
on-going.
5. Formalized training on computer system - by June 30, 1997.
6. Commencement of Daily Reports - by June 30, 1997.
7. Implementation of EDI with CardinalCHOICE(R)customers - by Sept. 30,
1997.
<PAGE>
EXHIBIT D
FEE SCHEDULE
<TABLE>
<CAPTION>
FEE SCHEDULE:
At Launch of
At Launch 2nd Product
of Available
Total Elliotts B to Cardinal ADDITIONAL INFORMATION
----- ---------- ----------- ----------------------
<S> <C> <C> <C> <C>
INFORMATION SYSTEMS:
- --------------------
A. SYSTEM DEVELOPMENT FEE *** *** *** - ORPHAN'S MONTHLY FEE FOR
INFORMATION SYSTEMS AND SERVICES
UNDER THIS AGREEMENT WILL BE
CALCULATED AS THE SUM OF *** PER
MONTH (B), PLUS *** (C), UP TO A
MAXIMUM OF *** PER MONTH INCLUDING
ALL PRODUCTS. ***.
B. Per-Month Fee (for all products) *** ***
C. *** *** *** - INCLUDES STANDARD SYSTEM REPORTS (SALES,
INVENTORY, ETC.).
- INCLUDES INSTALLATION OF
COMMUNICATION LINE.
- HARDWARE AND MONTHLY LINE FEES WILL
BE THE RESPONSIBILITY OF ORPHAN
MEDICAL.
- INCLUDES EDI ORDER ENTRY CAPABILITIES FOR
ALL CARDINAL HEALTH CUSTOMERS ORDERING
ORPHAN MEDICAL PRODUCTS THROUGH
CARDINALCHOICE(R). EDI ORDER ENTRY
CAPABILITIES FOR NON-CARDINAL CUSTOMERS
MAY INCLUDE ADDITIONAL CHARGES.
STORAGE/DISTRIBUTION: - BRACKETS ARE CALCULATED MONTHLY AND ARE
- --------------------- - BASED ON TOTAL VOLUME FOR ALL PRODUCTS.
Ambient Products, Per Line: - FREIGHT CHARGES WILL BE THE
RESPONSIBILITY OF AND BILLED DIRECTLY TO
ORPHAN MEDICAL.
0 - 1,000 Lines *** *** - PER-LINE FEES INCLUDE CUSTOMER INVOICING.
1,001 - 2,500 Lines *** *** - PER-LINE FEE FOR ELLIOTTS B OF *** FOR
THE TERM OF THE AGREEMENT INCLUDES
CUSTOMER SERVICE AND PACKAGING MATERIALS.
2,501 - 5,000 Lines *** *** - PRODUCTS REQUIRING SPECIAL HANDLING
AND/OR PACKAGING MATERIALS MAY REQUIRE
ADDITIONAL CHARGES, INCLUDING ALL
NON-AMBIENT PRODUCTS.
> 5,000 Lines *** *** - PRODUCT RETURNS WILL BE CHARGED PER LINE
AT THE SAME RATES INDICATED FOR OUTGOING
SHIPMENTS.
Refrigerated Products, Per Line *** ***
CUSTOMER SERVICE:
- -----------------
Monthly Fee *** *** - FOR ALL PRODUCTS EXCEPT ELLIOTTS B.
Fee Per Call: *** *** CUSTOMER SERVICE FOR ELLIOTTS B IS
INCLUDED IN THE PER-LINE DISTRIBUTION
FEE.
- -----------------
*** Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
</TABLE>
<PAGE>
The monthly Distribution Fee is for physical distribution and return (including
returns due to recall) of the Products, including:
1. Receipt, Inspection, Segregation
2. Warehousing and Storage
3. Picking
4. Shipping
5. Return Goods processing, Destruction and Record Keeping
<PAGE>
EXHIBIT E
ORDER ENTRY SYSTEM BASE PACKAGE
A. System Access
Includes access to Cardinal's AS/400 Hardware, operating system, disk drives,
printers, and computer operators Monday through Friday, excluding holidays, 12
hours per day (5:30am to 5:30pm, Pacific local time). The base package covers
concurrent access by Orphan to Cardinal's system from up to five (5) terminals
located at Orphan' offices.
B. Software Access and Maintenance
Includes access to CORD's or an affiliate of CORD's standard software. CORD or
an affiliate of CORD shall perform necessary modification to bring the systems
in compliance with the standard functionality described below.
* Customer service
* Chargebacks
* Performance-based and/or Medicaid Rebates
* Billing (Customized invoicing/packing slips)
* Inventory control
* Contracts
* Lot tracking
* Order entry
* Warehousing
* Returns processing
* Report writer
* All Standard reports
* Customized reports (5) to be mutually agreed upon by both parties
* Security Shipping Order Entry Verification Pricing
SYSTEMS DEVELOPMENT/ADDITIONAL SERVICES:
Orphan bears financial responsibility only for customization that would go
beyond the standard systems functionality described above. Such customization
performed by CORD or its representatives (exclusive of the base package) in
connection with this agreement shall be billed to Orphan as follows:
<PAGE>
* Systems and software development--*** per hour per person, plus travel.
* On-site training--*** per hour/person, plus travel.
Supplies, equipment and other, to be agreed upon by both parties.
- --------------
*** Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
<PAGE>
EXHIBIT F
SYSTEM ACCESS AGREEMENT
This agreement is made as of December 1, 1996, between CORD Logistics,
Inc., an Ohio corporation ("Licensor"), and Orphan Medical, Inc., a
Minnesota_corporation ("Licensee"), who hereby agree as follows:
System Access; Maintenance Obligations. On the terms and subject to the
conditions described in this agreement and the Distribution Services Agreement
having the same date as this agreement between Licensor and Licensee (the
"Distribution Agreement"), Licensor hereby grants to Licensee a nonexclusive
license (the "License") to utilize Licensor's Order Entry System, consisting of
the computer hardware, software, and other components described in Exhibit E to
the Distribution Agreement (collectively, the "System"), for the information
processing needs of Licensee in connection with the Services to be provided by
Licensor under the Distribution Agreement. Licensee shall maintain during the
term of this agreement the network and local area network (including without
limitation centralized server) requirements for the System described in the
Distribution Agreement.
During the term of this agreement, Licensee shall employ reasonable
security measures and policies designed to safeguard the integrity,
accessibility, and confidentiality of all of Licensee's data resident on the
System and establish reasonable disaster and emergency recovery plans designed
to minimize disruption from System operation interruptions. Licensee shall have
the right to review the operation of the System from time to time upon
reasonable prior notice from Licensor to Licensee; provided that such reviews
shall be conducted in a manner to avoid disruption of Licensor's business
operations to the extent possible.
Proprietary Rights. Licensee shall have the right to use the System
during the term of this agreement as expressly provided in paragraph 1 of this
agreement, but not otherwise. Licensee shall not assign or otherwise transfer,
disclose, copy, modify, or decompile the System or any part thereof. The System
and all parts thereof, in all of their tangible and intangible manifestations,
all existing or new enhancements, developments, derivative works, and other
adaptions or modifications to the System (or any part thereof), and all related
proprietary rights, are and shall remain the exclusive property of Licensor.
Except for the License, Licensee shall have no right, title, or interest in or
to the System or any part thereof. Upon termination of this agreement, Licensee
shall promptly return to Licensor all portions of the System then in Licensee's
possession or under its control.
Warranties. Licensee acknowledges that it has had adequate opportunity
to review the System and its features and operation, and Licensee accepts the
System "AS IS" for its use as contemplated in the Distribution Agreement.
LICENSOR MAKES NO REPRESENTATIONS OR WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS
ALL REPRESENTATIONS AND WARRANTIES, EXPRESS OR IMPLIED, RELATING DIRECTLY OR
INDIRECTLY TO THE SYSTEM OR ANY PART THEREOF, INCLUDING WITHOUT LIMITATION ANY
WARRANTIES OF QUALITY, PERFORMANCE, MERCHANTABILITY, OR FITNESS FOR A PARTICULAR
PURPOSE.
Limitation On Liability. LICENSOR SHALL NOT BE LIABLE FOR ANY
CONSEQUENTIAL, INDIRECT, SPECIAL, OR OTHER SIMILAR DAMAGES ARISING DIRECTLY OR
INDIRECTLY OUT OF THE USE OR INABILITY TO USE THE SYSTEM OR ANY PART THEREOF,
EVEN IF INFORMED OF THE POSSIBILITY OF SUCH DAMAGES, WHETHER CLAIMED UNDER
CONTRACT, TORT, OR ANY OTHER LEGAL THEORY.
IF ANY OF THE LIMITATIONS ON THE LIABILITY OF LICENSOR CONTAINED IN
THIS AGREEMENT ARE FOUND TO BE INVALID OR UNENFORCEABLE FOR ANY REASON, THEN
LICENSOR AND LICENSEE EXPRESSLY AGREE THAT THE MAXIMUM AGGREGATE LIABILITY OF
LICENSOR FOR ALL CLAIMS RELATING TO THE SYSTEM SHALL NOT EXCEED 100% OF THE
AGGREGATE BASE PACKAGE FEES PAID BY LICENSEE TO LICENSOR FOR LICENSEE'S USE OF
THE SYSTEM UNDER THE DISTRIBUTION AGREEMENT.
<PAGE>
Taxes. Licensee shall pay when due all sales, use, gross receipts,
excise, property, and other taxes or similar charges (other than taxes based
upon Licensor's net income) now or hereafter imposed as a result of the
transactions contemplated by this agreement.
Term. The term of this agreement shall begin upon Licensee's initial
use of the System as evidenced by the first entry of inventory into the System
(which may be a date earlier than the Commencement Date specified for the
Distribution Agreement) and shall end: (a) automatically upon the termination of
the Distribution Agreement (for any reason), or (b) on any earlier date
specified by Licensee in notice to Licensor given not less than 180 days prior
to the specified termination date; provided that: (i) paragraph 2 through 5,
inclusive, and paragraph 8 of this agreement shall survive the termination of
this agreement, and (ii) no termination of this agreement shall affect any
liabilities arising, or based upon acts or omissions occurring, prior to such
termination.
Licensee shall continue to have access to the System for a reasonable
period of time (not be exceed 60 days) following termination of this agreement
solely for purposes of retrieving and transferring to a separate system
Licensee's data relating to its pre-termination operations, and Licensor shall
reasonably cooperate with Licensee to preserve the integrity and accessibility
of Licensee's data during such period; provided that, during such period,
Licensee shall continue to pay the full Base Package and other fees payable by
Licensee under the Distribution Agreement and comply with all other requirements
imposed upon Licensee under this agreement.
Notices. Any notice or other communication required or desired to be
given to either party under this agreement shall be in writing and shall be
deemed given: (a) three days after mailing, if deposited in the United States
mail, first-class postage prepaid, and addressed to that party at its address
set forth at the end of this agreement; (b) when received if delivered to
Federal Express or any other similar overnight delivery service for delivery to
that party at that address; or (c) when sent by facsimile transmission, with
electronic confirmation, to that party at its facsimile number set forth at the
end of this agreement. Either party may change its address or facsimile number
for notices under this agreement by giving the other party notice of such
change.
Remedies. Licensee each shall indemnify Licensor and its affiliates,
directors, officers, employees, agents, and representatives against all claims,
liabilities, losses, damages, costs, and expenses (including without limitation
reasonable attorneys' fees) arising directly or indirectly out of any failure of
Licensee to perform and observe fully all obligations and conditions to be
performed or observed by Licensee pursuant to this agreement. Licensee
acknowledges that in the event of any violation by it of any of the provisions
of paragraph 2 of this agreement, Licensor would suffer irreparable harm and its
remedies at law would be inadequate. Accordingly, in the event of any violation
or attempted violation of any such provisions by Licensee, Licensor shall be
entitled to a temporary restraining order, temporary and permanent injunctions,
specific performance, and other equitable relief, without any showing of
irreparable harm or damage or the posting of any bond, in addition to any other
rights or remedies which may be available to Licensor.
Force Majeure. Notwithstanding any other provisions of this agreement
or the Distribution Agreement to the contrary, each party's obligations under
this agreement (exclusive of payment obligations) shall be excused if and to the
extent that any delay or failure to perform such obligations is due to fire or
other casualty, material shortages, strikes or labor disputes, acts of God, or
other causes beyond the reasonable control of that party.
Successors. Licensee shall not assign or otherwise transfer this
agreement or any of its rights or obligations under this agreement without the
prior written consent of Licensor, which consent shall not be unreasonably
withheld. Subject to the preceding sentence, this agreement shall be binding
upon, inure to the benefit of, and be enforceable by and against the respective
successors and assigns of each party.
Interpretation. This agreement shall be governed by and construed in
accordance with the laws of the State of Ohio. If and to the extent that any
court of competent jurisdiction determines that it is impossible to construe any
provision of this agreement consistently with any law or public policy and
consequently holds that provision to be invalid, such holding shall in no way
affect the validity of the other provisions of this agreement, which shall
remain in full force and effect.
Complete Agreement. This agreement (together with the Distribution
Agreement, which is hereby incorporated herein by reference) constitutes the
entire agreement between the parties with respect to the subject matter of this
agreement and supersedes all prior or contemporaneous discussions, negotiations,
representations, warranties, or agreements relating to
<PAGE>
the subject matter of this agreement. This agreement may not be amended or
otherwise modified except by a written instrument signed by each party.
ORPHAN MEDICAL, INC. CORD LOGISTICS, INC.
By /s/ Patti A. Engel By /s/ Lisa Dolan
Its V.P Marketing & Sales Its President
Address: Address:
13911 Ridgedale Drive 5555 Glendon Court
Minnetonka, MN 55305 Dublin, Ohio 43016
Telecopy: 612-541-9209 Telecopy: (614) 717-6000
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 $20,879,179 as of June 30, 1997. From inception through
June 30, 1997, the Company reported Elliotts B Solution, Cystadane and
Antizol-Vet sales of $303,391 and gross profit on such sales of $172,264, which
the Company considers immaterial for purposes of funding future product
development or business growth. The Company expects operating losses to continue
into 1999 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 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
first half of 1998. Thereafter, to fully implement the Company's current
business plan through 1999, the Company believes it will need to raise at least
$15,000,000 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 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.
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 June 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
<PAGE>
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 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. 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
<PAGE>
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, Elliotts B
Solution, and Antizol-Vet, 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, Repliderm, 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
<PAGE>
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
its prospects.
RISKS OF NEW PRODUCT DEVELOPMENT; MARKET UNCERTAINTY.
Only three 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 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 two products from its portfolio since
inception: L-Cycloserine in 1994 and Glucaric Acid in 1996. Five of the
Company's Current Products under development are being evaluated in small scale
pilot clinical trials, which, if successful, may 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.
<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.
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
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. 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 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
<PAGE>
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 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 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 JUNE 30, 1997, AND THE
RELATED STATEMENTS OF OPERATIONS FOR THE THREE AND
SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,545,875
<SECURITIES> 8,866,991
<RECEIVABLES> 285,767
<ALLOWANCES> 0
<INVENTORY> 260,463
<CURRENT-ASSETS> 13,085,994
<PP&E> 412,580
<DEPRECIATION> 114,651
<TOTAL-ASSETS> 13,383,923
<CURRENT-LIABILITIES> 3,623,523
<BONDS> 0
0
0
<COMMON> 60,631
<OTHER-SE> 8,695,218
<TOTAL-LIABILITY-AND-EQUITY> 13,383,923
<SALES> 266,710
<TOTAL-REVENUES> 266,710
<CGS> 120,681
<TOTAL-COSTS> 120,681
<OTHER-EXPENSES> 6,619,754
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (403,215)
<INCOME-PRETAX> (6,070,510)
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<INCOME-CONTINUING> (6,070,510)
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