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 March 31, 1997
___ Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to _______
Commission File Number 0-24760
Orphan Medical, Inc.
(Exact name of registrant as specified in its charter)
Minnesota 41-1784594
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
13911 Ridgedale Drive, Suite 475,
Minnetonka, MN 55305 (612) 513-6900
(Address of principal executive offices (Registrant's telephone number,
and zip code) including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes __X__ No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value 6,063,588
---------------------------- ---------
(Class) (Outstanding at May 7, 1997)
INDEX
ORPHAN MEDICAL, INC.(R)
(A Development Stage Company)
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - March 31, 1997 and December 31, 1996. 3
Statements of Operations - Three months ended March 31, 1997
and March 31, 1996 and for the period January 1, 1993
(inception) through March 31, 1997. 4
Statements of Cash Flows - Three months ended March 31, 1997
and March 31, 1996 and for the period January 1, 1993
(inception) through March 31, 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 4 have been omitted since all items are inapplicable
or answers negative.
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signature 11
Antizol(TM), Antizol-Vet(TM), Caprogel(TM), Busulfanex(TM), Repliderm(TM),
Intrachol(TM), Colomed(TM), Cystadane(TM), 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.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BALANCE SHEETS
ORPHAN MEDICAL, INC.
(A Development Stage Company)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS (Unaudited) (Note)
Current assets:
Cash and cash equivalents $ 3,608,747 $ 3,927,945
Available-for-sale securities 11,185,862 12,779,961
Accounts receivable 33,704 151,185
Inventory 175,483 --
Prepaid expenses 154,509 35,070
------------ ------------
Total current assets 15,158,305 16,894,161
Property and equipment, net of depreciation 266,340 256,438
------------ ------------
Total assets $ 15,424,645 $ 17,150,599
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,119,564 $ 2,297,736
Accrued payroll and related taxes 65,512 57,532
------------ ------------
Total current liabilities 2,185,076 2,355,268
Commitments (Note 4)
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 (16,397,452) (14,808,669)
------------ ------------
13,241,549 14,795,331
Unrealized gain (loss) on available-for-sale securities (1,980) --
------------ ------------
Total shareholders' equity 13,239,569 14,795,331
------------ ------------
Total liabilities and shareholders' equity $ 15,424,645 $ 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.
STATEMENTS OF OPERATIONS
ORPHAN MEDICAL, INC.
(A Development Stage Company)
(Unaudited)
<TABLE>
<CAPTION>
Period from
For the Three Months Ended January 1,
------------------------------ 1993 (Inception)
March 31, March 31, to March 31,
1997 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Sales $ 104,424 $ -- $ 141,105
Operating expenses:
Cost of sales 43,696 -- 54,142
Research and development 1,137,805 1,382,527 12,861,217
General and administrative 723,000 440,121 5,228,591
------------ ------------ ------------
Loss from operations (1,800,077) (1,822,648) (18,002,845)
------------ ------------ ------------
Other income:
Interest 211,294 110,435 1,605,393
------------ ------------ ------------
Net loss and deficit accumulated
during the development stage $ (1,588,783) $ (1,712,213) $(16,397,452)
============ ============ ============
Net loss per common share $ (.26) $ (.46) $ (5.83)
============ ============ ============
Weighted average number of
shares outstanding 6,060,910 3,739,588 2,812,001
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
STATEMENTS OF CASH FLOWS
ORPHAN MEDICAL, INC.
(A Development Stage Company)
(Unaudited)
<TABLE>
<CAPTION>
Period from
For the Three Months Ended January 1, 1993
------------------------------ (Inception) to
March 31, March 31, March 31,
1997 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (1,588,783) $ (1,712,213) $(16,397,452)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation & amortization 15,807 9,483 100,449
Loss on disposition of fixed assets -- -- 4,091
Changes in operating assets and liabilities:
Increase (decrease) in payables and accruals (170,192) 404,126 2,185,076
Decrease (increase) in receivables and other 117,481 (13,015) (43,133)
Decrease (increase) in inventory (175,483) -- (175,483)
Decrease (increase) in prepaid expenses (119,439) (365,264) (154,509)
------------ ------------ ------------
Net cash provided by (used in) operating activities (1,920,609) (1,676,883) (14,480,961)
INVESTING ACTIVITIES:
Proceeds from sale of office equipment -- -- 38,192
Purchase of office equipment (25,709) (2,772) (408,264)
Purchase of short-term investments (2,127,380) (1,559,991) (27,046,128)
Maturities of short-term investments 3,719,500 -- 15,858,287
------------ ------------ ------------
Net cash provided by (used in) investing activities 1,566,411 (1,562,763) (11,557,913)
FINANCING ACTIVITIES:
Net proceeds from capital contribution -- -- 5,000,000
Proceeds from stock options exercised 35,000 -- 118,625
Net proceeds from stock offerings -- -- 23,636,666
Expenses paid by Chronimed -- -- 892,330
------------ ------------ ------------
Net cash provided by financing activities 35,000 -- 29,647,621
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (319,198) (3,239,646) 3,608,747
Cash and cash equivalents at beginning of
period 3,927,945 5,029,682 --
------------ ------------ ------------
Cash and cash equivalents at end of
period $ 3,608,747 $ 1,790,036 $ 3,608,747
============ ============ ============
Supplemental cash flow information:
Interest received $ 152,311 $ 81,583 $ 1,370,350
</TABLE>
SEE ACCOMPANYING NOTES
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 period ended March 31, 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. 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 $865,000 for the three
months ended March 31, 1997. At March 31, 1997, the Company expects to incur
approximately $4,820,000 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.
5. RECLASSIFICATIONS
Certain prior period balances have been reclassified in order to conform with
the presentation for the three months ended March 31, 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 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" filed with the Securities and Exchange Commission. For further
information, refer to Exhibit 99 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
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 March 31, 1997, the
Company has incurred losses totaling $16,397,452, consisting of $12,861,217 of
research and development expenses, $5,228,591 of general and administrative
expenses, $86,963 of gross profit on sales of approved products and $1,605,393
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 March 31, 1997, three of the Company's products have been approved
by the Food and Drug Administration ("FDA") for marketing and are commercially
available, a new drug application ("NDA") for one product was pending before the
FDA and thirteen 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.
THREE MONTHS ENDED MARCH 31, 1997 VS. THREE MONTHS ENDED MARCH 31, 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 $104,424 for the three
months ended March 31, 1997. The Company expects quarterly sales for Antizol-Vet
and Cystadane to increase.
Cost of sales increased from zero for the three months ended March 31, 1996 to
$43,696 for the three months ended March 31, 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 decreased from $1,382,527 (76% of the total
loss from operations) for the three months ended March 31, 1996 to $1,137,805
(63% of the total loss from operations) for the three months ended March 31,
1997. The $244,722 decrease is attributable to significantly lower levels of
technical development and toxicology spending, which is partially offset by
higher clinical spending. Generally, the development plan for a product provides
for significant technical development and toxicology spending before the
commencement of any clinical program. 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. For the three
months ended March 31, 1997, the Company's clinical spending was significantly
higher than the comparable period in 1996, but was more than offset by decreased
technical drug development and toxicology spending for products that have since
commenced clinical trials. The Company expects its clinical spending to increase
significantly in subsequent quarters as more human subjects are enrolled and
additional clinical sites are activated. In addition, the Company reclassified
certain technical 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.
General and administrative expenses increased from $440,121 (24% of the total
loss from operations) for the three months ended March 31, 1996 to $723,000 (40%
of the total loss from operations) for the three months ended March 31, 1997.
The $282,879 increase is principally due to sales and marketing costs for the
Company's three approved products and regulatory staff additions. General and
administrative 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.
Other income increased from $110,435 for the three months ended March 31, 1996
to $211,294 for the three months ended March 31, 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 used to fund
development activities.
Net losses for the three months ended March 31, 1997 and for the three months
ended March 31, 1996 were $(1,588,783) and $(1,712,213), respectively. Net
losses per common share for these respective periods were $(.26) and $(.46),
based on weighted average number of common shares outstanding of 6,060,910 and
3,739,588, respectively.
LIQUIDITY AND CAPITAL RESOURCES
From inception through March 31, 1997, the Company has used $14,480,961 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 $13,654,898 to fund operating activities. Since
July 2, 1994, the effective date the Company was spun-off from Chronimed, it has
financed its operations principally from initial working capital balances, the
net proceeds from the 1995 and 1996 public offerings, interest income and
product sales. The 1995 and 1996 public offerings resulted in aggregate net
proceeds, after commissions and expenses, of $23,636,666.
Net working capital (current assets less current liabilities) decreased from
$14,538,893 at December 31, 1996 to $12,973,229 at March 31, 1997. Cash and cash
equivalents, and available-for-sale securities decreased from $16,707,906 at
December 31, 1996 to $14,794,609 at March 31, 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 $4,820,000 at March 31, 1997 (also see Note 4
to the Financial Statements). As a result, the Company expects development
expenditures to increase in subsequent quarters. A significant portion of the
$4,820,000 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's
future capital requirements take into account the expected delay in the market
introduction and the added development costs resulting from the FDA's
requirement to broaden clinical data to be submitted with the NDA for
Busulfanex, as well as the development costs for the new products the Company
licensed during 1996. 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 5. Other Information
The Marketing and Distribution Agreement (the "Agreement"), as amended, between
the Company and Chronimed grants Chronimed exclusive domestic distribution
rights with respect to four of the Company's products. In addition, Chronimed is
the primary domestic distributor of Cystadane and has royalty rights on three of
the Company's products for which it does not have exclusive distribution rights
in the event such products are distributed by another party. Presently, the
Company and Chronimed are reviewing their relationship and their respective
obligations under the Agreement, including the provisions that grant Chronimed
royalty rights on products it does not distribute. The Company expects to
negotiate changes to the current relationship with Chronimed, which may include
the buy-out of Chronimed's royalty rights and other rights it has under the
Agreement. There can be no assurance that the negotiations between the Company
and Chronimed will result in a definitive agreement.
Elliotts B Solution is distributed through a subsidiary of Cardinal Health. The
Company and Cardinal Health are currently negotiating a definitive distribution
services agreement that, if finalized, would make Cardinal Health the exclusive
domestic, first line distribution agent of the Company's current and proposed
products that are not subject to a pre-existing distribution arrangement with
another company. This arrangement would allow the Company to distribute its
products to various markets, including direct to patients and hospitals, either
directly or through other pharmaceutical product distributors.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT INDEX
Exhibit Sequentially
Number Description Numbered Page
------- ----------- -------------
27 Financial Data Schedule - For SEC EDGAR filing
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 1997.
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 May 7, 1997 By /s/ John H. Bullion
-------------------
John H. Bullion
Chief Executive Officer
(principal executive officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING BALANCE SHEETS OF ORPHAN MEDICAL, INC. AS OF MARCH 31, 1997, AND
THE RELATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,608,747
<SECURITIES> 11,185,862
<RECEIVABLES> 33,704
<ALLOWANCES> 0
<INVENTORY> 175,483
<CURRENT-ASSETS> 15,158,305
<PP&E> 362,700
<DEPRECIATION> 96,724
<TOTAL-ASSETS> 15,424,645
<CURRENT-LIABILITIES> 2,185,076
<BONDS> 0
0
0
<COMMON> 60,631
<OTHER-SE> 13,178,938
<TOTAL-LIABILITY-AND-EQUITY> 15,424,645
<SALES> 104,424
<TOTAL-REVENUES> 104,424
<CGS> 43,696
<TOTAL-COSTS> 43,696
<OTHER-EXPENSES> 1,860,805
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (211,294)
<INCOME-PRETAX> (1,588,783)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,588,783)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,588,783)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
</TABLE>
