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, 1998
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to _______
Commission File Number 0-24760
Orphan Medical, Inc.
--------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-1784594
--------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
13911 Ridgedale Drive, Suite 475,
Minnetonka, MN 55305 (612) 513-6900
-------------------- --------------
(Address of principal executive offices (Registrant's telephone number,
and zip code) including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes __X__ No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 par value 6,186,840
---------------------------- ---------
(Class) (Outstanding at May 8, 1998)
<PAGE>
INDEX
ORPHAN MEDICAL, INC.(R)
(A Development Stage Company)
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - March 31, 1998 and December 31, 1997. 3
Statements of Operations - Three months ended March 31, 1998 and March
31, 1997. 4
Statements of Cash Flows - Three months ended March 31, 1998 and
March 31, 1997 and for the period January 1, 1993 (inception) through
March 31, 1998. 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 7
Item 3. Quantitative and Qualitative Disclosures about Market Risks 10
PART II. OTHER INFORMATION
Items 1 through 4 have been omitted since all items are inapplicable or
answers negative.
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 11
Signature 12
Antizol(R), Antizol-Vet(R), Caprogel(TM), Busulfex(TM), Intrachol(TM),
Colomed(TM), Cystadane(R), Elliotts B(R) Solution, Sucraid(TM), Xyrem(TM), "The"
Orphan Drug Company(TM), Orphan Medical, Inc.(R) and Dedicated to Patients with
Uncommon Diseases(R) are trademarks of the Company.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BALANCE SHEETS
ORPHAN MEDICAL, INC.
(A Development Stage Company)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS (Unaudited) (Note)
Current assets:
Cash and cash equivalents $ 3,412,566 $ 2,150,877
Available-for-sale securities 2,008,627 5,018,353
Accounts receivable, less allowance for doubtful
accounts and returns of $113,725 and $22,600 617,783 238,356
Other receivables 24,754 143,581
Inventories 258,996 308,548
Prepaid expenses 112,537 41,599
------------ ------------
Total current assets 6,435,263 7,901,314
Property and equipment:
Property and equipment 518,393 494,680
Accumulated depreciation (180,030) (157,044)
------------ ------------
338,363 337,636
------------ ------------
Total assets $ 6,773,626 $ 8,238,950
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Chronimed Inc. obligation - current portion $ 759,806 $ 876,655
Accounts payable and accrued expenses 2,556,219 2,494,766
Accrued payroll and related taxes 42,728 50,179
------------ ------------
Total current liabilities 3,358,753 3,421,600
Non current liabilities:
Chromined Inc. obligation 944,070 1,171,448
Commitments
Shareholders' equity:
Common Stock, $.01 par value; 25,000,000 shares authorized;
6,181,040 and 6,099,562 shares issued and outstanding 61,810 60,996
Additional paid-in capital 30,257,970 29,783,404
Deficit accumulated during the development stage (27,847,897) (26,196,538)
------------ ------------
2,471,883 3,647,862
Unrealized gain (loss) on available-for-sale securities (1,080) (1,960)
------------ ------------
Total shareholders' equity 2,470,803 3,645,902
------------ ------------
Total liabilities and shareholders' equity $ 6,773,626 $ 8,238,950
============ ============
</TABLE>
NOTE: THE BALANCE SHEET AT DECEMBER 31, 1997 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 1993
-------------------------------- (Inception)
March 31, March 31, to March 31,
1998 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 1,521,971 $ 104,424 $ 2,193,490
Operating expenses:
Cost of sales 217,432 43,696 525,605
Research and development 1,795,678 1,137,805 20,001,094
Sales and marketing 611,288 195,838 4,341,720
General and administrative 569,074 527,162 7,136,565
------------ ------------ ------------
Loss from operations (1,671,501) (1,800,077) (29,811,494)
Other income:
Interest, net 20,142 211,294 1,963,597
------------ ------------ ------------
Net loss and deficit accumulated
during the development stage $ (1,651,359) $ (1,588,783) $(27,847,897)
============ ============ ============
Basic and diluted loss per
common share $ (0.27) $ (0.26) $ (8.11)
============ ============ ============
Weighted average number of
shares outstanding 6,107,496 6,060,910 3,435,664
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
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,
1998 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,651,359) $ (1,588,783) $(27,847,897)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 22,986 15,807 184,119
Loss on disposition of fixed assets -- -- 4,091
Changes in operating assets and liabilities:
Accounts payable and accrued expenses 54,003 (170,192) 2,598,948
Inventories 49,552 (175,483) (258,996)
Accounts receivable and current assets (331,538) (1,958) (764,503)
------------ ------------ ------------
Net cash used in operating activities (1,856,356) (1,920,609) (26,084,238)
INVESTING ACTIVITIES
Purchase of office equipment (23,713) (25,709) (563,957)
Proceeds from fixed asset sales -- -- 38,192
Purchases of short-term investments (2,046,395) (2,127,380) (39,219,028)
Maturities of short-term investments 5,057,000 3,719,500 37,209,320
------------ ------------ ------------
Net cash provided by (used in) investing activities 2,986,892 1,566,411 (2,535,473)
FINANCING ACTIVITIES:
Capital contribution -- -- 5,000,000
Chronimed Inc. obligation (344,227) -- 1,703,876
Stock option exercise proceeds 108,312 35,000 432,337
Stock issued to Chronimed 367,068 -- 367,068
Net proceeds from stock offerings -- -- 23,636,666
Expenses paid by Chronimed -- -- 892,330
------------ ------------ ------------
Net cash provided by financing activities 131,153 35,000 32,032,277
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 1,261,689 (319,198) 3,412,566
Cash and cash equivalents at beginning of
period 2,150,877 3,927,945 --
============ ============ ============
Cash and cash equivalents at end of
period $ 3,412,566 $ 3,608,747 $ 3,412,566
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash interest received $ 192,039 $ 152,311 $ 2,140,696
============ ============ ============
</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 that
acquires, develops, and markets products of high medical value intended to
address inadequately treated or uncommon diseases within selected strategic
therapeutic market segments. A drug has high medical value if it offers a major
improvement in the safety or efficacy of patient treatment and has no
substantial equivalent substitute. The Company is currently developing two
potential products and has five products that have been approved for marketing
by the Food and Drug Administration (the "FDA").
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, 1998
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. 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, 1997.
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.
Actual results could differ from those estimates.
3. LOSS PER SHARE
Basic and diluted loss per share are based upon the weighted average number of
shares outstanding during the respective period. Common stock equivalents are
not included because their effect is anti-dilutive.
4. CHRONIMED OBLIGATION
The Company and Chronimed entered into an Agreement dated June 27, 1997, in
which Chronimed agreed to terminate certain agreements that had been in
existence since the spin-off of the Company from Chronimed. Among the terminated
agreements was the Marketing and Distribution Agreement dated July 2, 1994, as
amended, under which Chronimed had the exclusive right to market and distribute
four of Orphan Medical's proposed products and receive royalties with respect to
two of Orphan Medical's products. In consideration for terminating
<PAGE>
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
Company paid $250,000 on June 27, 1997, with the remaining balance of $2,250,000
payable in quarterly installments based on a temporary royalty arrangement equal
to 3 percent of the Company's net sales beginning in the third quarter of 1997
and the issuance on a quarterly basis of Common Stock equal to 1 percent of the
Company's then issued and outstanding Common Stock beginning March 31, 1998.
Through March 31, 1998, the Company has paid Chronimed approximately $53,000 in
royalties and issued 61,178 shares of the Common Stock. At March 31, 1998, the
Company 's unpaid obligation to Chronimed has an estimated value of
approximately $1,703,876, of which $759,806 is classified as a "Current
Liability" and $944,070 is classified as a "Non Current Liability".
5. COMMITMENTS
The Company has various commitments under agreements with outside consultants,
contract drug development companies, manufacturers, technical service companies,
license and research agreements, and agreements with drug distributors.
Expenditures incurred under these commitments and reported as research and
development expense totaled approximately $1,474,000 for the three months ended
March 31, 1998. At March 31, 1998, the Company estimates that it could incur
approximately $2,037,000 of additional expenditures in subsequent periods under
existing commitments for those products remaining in the Company's development
portfolio. 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 March 31, 1998. 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" on Exhibit 99 to this Quarterly Report filed on Form 10-Q for the
three months ended March 31, 1998.
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.
<PAGE>
From inception through March 31, 1998, the Company has incurred losses totaling
$27,847,897, consisting of $20,001,094 of research and development expenses,
$4,341,720 of sales and marketing expenses, $7,136,565 of general and
administrative expenses, $1,667,885 of gross profit on sales of approved
products and $1,963,597 of net interest income. The Company's activities have
consisted primarily of obtaining the rights for pharmaceutical products, hiring
the personnel required to implement the Company's business plan, managing the
development of these products, preparing for the commercial introduction of five
products and fund raising. At March 31, 1998, four 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 two products were in development. The Company has
not generated sufficient levels of revenue from its approved products to date to
fund its operating activities and has sustained significant operating losses
each year since inception. The Company expects to continue reporting as a
development stage company at least through 1998. In addition, the Company
expects operating losses to continue into 1999.
THREE MONTHS ENDED MARCH 31, 1998 VS. THREE MONTHS ENDED MARCH 31, 1997
Sales increased from $104,424 for the three months ended March 31, 1997 to
$1,521,971 for the three months ended March 31, 1998. The $1,417,547 increase is
attributable to Antizol sales, which the Company commenced shipping for the
first time in December 1997. While Antizol sales were higher than expected,
sales will fluctuate from quarter to quarter depending, in part, on the
Company's continued success in informing the toxicology and emergency room
communities about the merits of Antizol. Sales of Elliotts B Solution,
Cystadane, and Antizol-Vet are consistent with the Company's expectations.
Cost of sales increased from $43,696 for the three months ended March 31, 1997
to $217,432 for the three months ended March 31, 1998. The increase of $173,736
is attributable to Antizol sales. 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 expense increased from $1,137,805 (63% of the total
loss from operations) for the three months ended March 31, 1997 to $1,795,678
(107% of the total loss from operations) for the three months ended March 31,
1998. The $657,873 increase is largely attributable to higher levels of clinical
trial spending for Busulfex and Xyrem. The Company expects research and
development expense, principally clinical trial and toxicology spending, for
Busulfex and Xyrem to increase significantly in the second half of the year.
Clinical trial spending for Busulfex and Xyrem will be dependent on a number of
factors, including among others: the number of human subjects required for a
trial, the number of human subjects screened and enrolled in a trial, and the
number of active clinical sites. The Company's product development schedule for
Busulfex and Xyrem, and additional products, if any, that it may develop in the
future will be influenced by regulatory decisions, competitive pressures and the
availability of funding.
Sales and marketing expenses increased from $195,838 (11% of the total loss from
operations) for the three months ended March 31, 1997 to $611,288 (37% of the
total loss from operations)
<PAGE>
for the three months ended March 31, 1998. The $415,450 increase is principally
attributable to the addition of a five person sales force during the fourth
quarter of 1997 and Antizol sales and marketing program costs. Sales and
marketing expenses will likely increase in subsequent quarters as product sales
increase.
General and administrative expenses increased from $527,162 (29% of the total
loss from operations) for the three months ended March 31, 1997 to $569,074 (34%
of the total loss from operations) for the three months ended March 31, 1998.
The $41,912 increase is principally related to executive management consulting
services. General and administrative expenses are not expected to increase
significantly in subsequent quarters.
Other income is the sum of interest income from investment activities less
interest expense from financing activities. Other income decreased from $211,294
for the three months ended March 31, 1997 to $20,142 for the three months ended
March 31, 1998. The decrease of $191,152 is due to less interest income
resulting from lower levels of investable funds and interest expense of
approximately $67,000 incurred during the quarter related to the Company's
obligation to Chronimed. Other income is expected to decline in subsequent
quarters as currently invested funds are used to fund Busulfex and Xyrem
development activities, working capital requirements, and as the Company accrues
a non-cash charge for interest expense related to the Chronimed obligation.
Net losses for the three months ended March 31, 1998 and for the three months
ended March 31, 1997 were $(1,651,359) and $(1,588,783), respectively. Basic and
diluted loss per common share for these respective periods were $(.27) and
$(.26), based on weighted average number of common shares outstanding of
6,107,496 and 6,060,910, respectively.
LIQUIDITY AND CAPITAL RESOURCES
From inception through March 31, 1998, the Company has used $26,084,238 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
$4,479,714 at December 31, 1997 to $3,076,510 at March 31, 1998. Cash and cash
equivalents, and available-for-sale securities decreased from $7,169,230 at
December 31, 1997 to $5,421,193 at March 31, 1998. The Company invests excess
cash in short-term, interest-bearing, investment grade securities.
The Company's commitments for outside development spending decreased from
approximately $2,700,000 at December 31, 1997 to approximately $2,037,000 at
March 31, 1998. The $663,000 decrease resulted principally from completing two
clinical trials evaluating Busulfex. The Company expects future commitments for
Busulfex and Xyrem to increase significantly over current levels.
<PAGE>
The Company has experienced recurring losses from operations and has generated
an accumulated deficit from inception through March 31, 1998 of $27,847,897.
These conditions give rise to the question about the Company's ability to
generate positive cash flow and fund operations. The Company believes that its
current working capital and anticipated gross profits from product sales will be
sufficient to fund its operations through December 31, 1998. These assumptions
are based upon the Company maintaining expenses at current levels and increasing
revenues from the sale of its Antizol product. Any material reduction in
projected revenues will require the Company to seek additional equity or debt
financing or substantially reduce the Company's expense structure through in
personnel and research and development. The Company believes that, if necessary,
it would be able to continue to meet its ongoing financial obligations and
operate through December 31, 1998 solely by reducing its current expense level
through reductions in personnel and research and development.
The Company estimates it will need to raise at least $7,000,000 of additional
capital to fully implement the Company's current business plan through 1999. The
Company has no assurance that such capital will be available or, if available,
on acceptable terms.
The Company's ability to raise additional capital and/or raise capital on
acceptable terms could be negatively affected in the event it no longer meets
the Nasdaq's requirements for continued listing on the National Market tier. For
continued listing on the Nasdaq National Market, a company must satisfy a number
of requirements, which in the Company's case includes either: (1) net tangible
assets in excess of $4.0 million or (2) a market capitalization of at least
$50.0 million. At March 31, 1998, the Company's net tangible assets equaled
approximately $2,470,000 and it had a market capitalization of approximately
$67.0 million. Should the Company fail to satisfy either requirement, the
Company's Common Stock would no longer qualify for listing on the Nasdaq
National Market, but would qualify for quotation on the Nasdaq Small Cap Market.
Item 3. Quantitative and Qualitative Disclosures about Market Risks Not
Applicable
PART II - OTHER INFORMATION
Item 5. Other Information
On April 9, 1998, the Company announced that it had received marketing clearance
from the FDA for Sucraid. The Company expects to begin selling Sucraid in the
domestic market during the third quarter of 1998. Sales of Sucraid are expected
to be under $500,000 annually due to the small potential market for this
product.
During the quarter ended March 31, 1998, the Company exercised its rights to
terminate the "Collaborative Development Agreement regarding Clonidine between
the Company and Medtronic, Inc." and the "License Agreement regarding Catrix
between the Company and
<PAGE>
Lescarden, Inc." The decision to terminate Clonindine and Catrix development
activities was previously reported by the Company with its Quarterly Report for
the three month period ended September 30, 1997.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
- ------------------ -----------------------------------------
Exhibit
Number Description
- ------------------ -----------------------------------------------
27 Financial Data Schedule - For SEC EDGAR filing
- ------------------ -----------------------------------------------
99 Cautionary Statements
- ------------------ -----------------------------------------------
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 1998.
<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 May 8, 1998 By /s/ John H. Bullion
------------------ -------------------
John H. Bullion
Chief Executive Officer
(Principal executive, financial
and accounting officer)
EXHIBIT 99
ORPHAN MEDICAL, INC.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements to encourage companies to provide prospective
information without fear of litigation so long as statements are identified as
forward-looking and are accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those projected. The Company desires to take advantage of these
"safe harbor" provisions and is filing this Exhibit 99 in order to do so.
Accordingly, when used in this Annual Report on Form 10-K and in future filings
by the Company with the Securities and Exchange Commission, quarterly reports,
press releases and in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result", "look for", "may
result", "will continue", "is anticipated", "expect", "project", or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from historical earnings and those presently anticipated or
projected. The Company hereby cautions readers that the following important
factors, among others, could affect the Company's financial performance and
could cause the Company's actual results for future periods to differ materially
from any forward-looking statements made by or on behalf of the Company.
LACK OF REVENUES AND PROFITABLE OPERATIONS; UNCERTAINTY OF FUTURE FINANCIAL
RESULTS.
The Company has been unprofitable since its inception in January 1993 and had an
accumulated deficit of $27,847,897 as of March 31, 1998. From inception through
March 31, 1998, the Company reported Elliotts B Solution, Cystadane,
Antizol-Vet, and Antizol sales of $2,193,490 and gross profit on such sales of
$1,667,885, which is not sufficient to sustain future product development or
business growth. The Company expects operating losses to continue into 1999
because gross profit from new product introductions is not expected to offset
additional spending required to complete the development plans for Busulfex and
Xyrem, and for additional sales and marketing spending for the new product
introductions. The amount of these losses may vary significantly from
year-to-year and quarter-to-quarter and will depend on, among other factors, the
timing of product development and regulatory approval. There can be no assurance
that the Company will ever generate material product revenues or achieve
profitability.
DEVELOPMENT STAGE COMPANY.
The Company is in the development stage and its operations and the development
of its proposed products are subject to all of the risks inherent in the
establishment of a new business enterprise, including reliance on key personnel,
the lack of fully-developed products, insufficient capital, a competitive
environment characterized by numerous well-established and well-capitalized
competitors, expected operating losses into 1999, a market subject to extensive
regulatory oversight, and reliance on outside contractors for the manufacture
and distribution of its proposed products. The likelihood of the success of the
Company must be considered in light of the problems, expenses and delays
frequently encountered in connection with the development of new pharmaceutical
products or medical products and the competitive and regulatory environment in
which the Company operates.
FUTURE CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL WILL BE AVAILABLE.
The Company's current cash, cash equivalents, and short-term investments are
expected to be sufficient to fund the Company's operations into early 1999.
Thereafter, to fully implement the Company's current business plan through 1999,
the Company believes it will need to raise at least $7,000,000 of additional
capital, assuming no internally generated funding is available. Adequate funds
for the Company's operations, whether from financial markets or from other
sources, may not be available when needed on terms attractive to the Company, or
at all. Lack of funding could cause the Company to delay, scale back or
eliminate some or all of its products currently under development, including
acquisition and licensing programs, or prevent the commercial introduction of
some or all of its products altogether.
<PAGE>
DEPENDENCE ON LICENSE AND ACQUISITION STRATEGY.
The Company has adopted a license and acquisition strategy to build its product
portfolio. The Company's strategy for growth is dependent upon its continued
ability to identify and acquire new pharmaceutical products targeted at niche
markets within selected strategic therapeutic market segments ("STMS"). 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 within a selected STMS or to promote and market commercially successful
products within an existing STMS could have a material adverse effect on the
Company's business and its prospects.
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 March 31, 1998, the Company has
entered into distribution agreements to sell Cystadane in Australia and New
Zealand, and Antizol in Europe. Sales of Cystadane for Australia and New Zealand
have not been nor are they expected to be material. Distribution of Antizol in
Europe will initially be done on a "named patient" or "emergency use" basis
until full regulatory approval is obtained, and the Company does not expect such
"emergency use" distribution to result in material sales. Distribution of
Antizol in Europe through normal or the usual distribution channels will not
commence until the product has received marketing approval in each European
country into which the distributor expects to sell the product. The Company
typically receives upfront fees for entering into such arrangements and expects
to realize future benefits because the Company will be the exclusive supplier of
the product sold to the distributor in these foreign markets. However, there can
be no assurance that the Company will be able to negotiate additional alliances
for its other products on acceptable terms, if at all, or that such alliances
will be successful. The Company will be substantially dependent upon the
companies it has contracted with to date for the successful distribution of
Cystadane and Antizol outside the U.S. and, if these companies are unsuccessful
in their distribution efforts, it would be difficult for the Company to contract
with other distributors for these products within the licensed territories.
GOVERNMENT REGULATION; NEED FOR FDA AND OTHER REGULATORY APPROVALS.
Government regulation in the United States and abroad will be a significant
factor in the production, testing and marketing of the Company's current and
future products. Prior to marketing, each of the Company's products must undergo
an extensive regulatory approval process conducted by the United States Food and
Drug Administration (the "FDA") and by comparable agencies in other countries.
The approval process can take many years and require the expenditure of
substantial resources, and there can be no assurance that any product that the
Company may develop will be approved by the FDA or any foreign regulatory
authority in a timely manner, or at all. Generally, only a very small percentage
of newly discovered pharmaceutical compounds that enter pre-clinical development
are approved for sale. The Company will not be permitted to market any medicine
it may develop as a prescription product in any jurisdiction in which the
product does not receive regulatory approval. Once approved, the Division of
Drug Marketing, Advertising and Communication ("DDMAC"), the FDA's marketing
surveillance department within the Center for Drugs, must approve marketing
claims, which are the basis for a product's labeling, advertising and promotion.
There can be no assurance that the claims the Company is seeking 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.
<PAGE>
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 status is conferred upon the first company to receive
FDA approval to market the designated drug for the designated indication, which
also grants United States marketing exclusivity for a period of seven years
following approval by 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 orphan drug status 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 status and marketing approval will remain in
effect in the future. Busulfex, Xyrem, and Sucraid have orphan drug designation;
while Antizol, Elliotts B Solution and Cystadane have orphan drug status. There
can be no assurance, however, that any product candidates will receive an orphan
drug designation or that any of the Company's products with such a designation
will be the first to be approved by the FDA for the designated indication,
thereby obtaining orphan drug status (i.e., marketing exclusivity). Orphan drug
designation does not prevent other manufacturers from attempting to develop the
same drug for the designated indication or from obtaining the approval of an NDA
for their drug prior to the approval of the Company's NDA. If another sponsor's
NDA for the same drug and the same indication is approved first, that sponsor is
entitled to exclusive marketing rights if that sponsor has received orphan drug
designation for its drug. In that case, the FDA would refrain from approving an
application by the Company to market its competing product for seven years,
subject to certain limitations. There can be no assurance that competing
products will not receive orphan drug designations and FDA marketing approval
before the Company's products.
NDA approval of a drug with an orphan drug designation does not prevent the FDA
from approving the same drug for a different indication, or a molecular
variation of the same drug for the same indication. Because doctors are not
restricted by the FDA from prescribing an approved drug for uses not approved by
the FDA, it is also possible that another company's drug could be prescribed for
indications for which the Company's product has received orphan drug designation
and NDA approval. Such prescribing of approved drugs for unapproved uses
(commonly referred to as "off label" use) could adversely affect the marketing
potential of products that have received orphan drug designation and NDA
approval. In addition, NDA approval of a drug with an orphan drug designation
does not provide any marketing exclusivity in foreign markets.
<PAGE>
The possible amendment of the Orphan Drug Act by the United States Congress has
been the subject of frequent discussion. Although no significant changes to the
Orphan Drug Act have been made for a number of years, members of Congress have
from time to time proposed legislation that would limit the application of the
Orphan Drug Act. There can be no assurance as to the precise scope of protection
that may be afforded by orphan drug designation and marketing approval in the
future or that the current level of exclusivity will remain in effect.
RELIANCE ON PATENTS AND OTHER PROPRIETARY RIGHTS.
The pharmaceutical industry places considerable importance on obtaining patent
and trade secret protection for new technologies, products and processes. The
Company's success will depend, in part, on its ability to enjoy, obtain and
enforce protection for its products under United States and foreign patent laws
and other intellectual property laws, preserve the confidentiality of its trade
secrets and operate without infringing the proprietary rights of third parties.
The patent position of pharmaceutical firms is often highly uncertain and
generally involves complex legal and factual questions. At March 31, 1998,
Busulfex is the only product that the Company has under development for which
the use of or treatment methods licensed by the Company are covered by United
States patents. The Company evaluates the desirability of seeking patent or
other forms of protection for its products in foreign markets based on the
expected costs and relative benefits of attaining such protection. There can be
no assurance that any patents will be issued from any applications or that any
issued patents will afford adequate protection to the Company. Further, there
can be no assurance that any issued patents will not be challenged, invalidated,
infringed or circumvented or that any rights granted thereunder will provide
competitive advantages to the Company. Parties not affiliated with the Company
have obtained or may obtain United States or foreign patents or possess or may
possess proprietary rights relating to the Company's products. There can be no
assurance that patents now in existence or hereafter issued to others will not
adversely affect the development or commercialization of the Company's products
or that the Company's planned activities will not infringe patents owned by
others.
The Company could incur substantial costs in defending itself in infringement
suits brought against it or any of its licensors or in asserting any
infringement claims that the Company may have against others. The Company could
also incur substantial costs in connection with any suits relating to matters
for which the Company has agreed to indemnify its licensors or distributors. An
adverse outcome in any such litigation could have a material adverse effect on
the Company's business and prospects. In addition, the Company could be required
to obtain licenses under patents or other proprietary rights of third parties.
No assurance can be given that any such licenses would be made available on
terms acceptable to the Company, or at all. If the Company is required to, and
does not obtain any such required licenses, it could be prevented from, or
encounter delays in, developing, manufacturing or marketing one or more of its
products.
Busulfex and Xyrem are in the development stage. Even if the development of such
products is successful and marketing clearance from the FDA is obtained, there
can be no assurance that applicable patent coverage, if any, will not have
expired or will not expire shortly after such approval. Any such expiration
could have a material adverse effect on the sales and profitability of such
product. Further, some of the compounds the Company has developed or intends to
develop (Cystadane, Elliotts B Solution, Antizol, Antizol-Vet, Xyrem and
Sucraid) are believed to be in the public domain or not presently subject to
patent protection in the United States.
The Company also seeks to protect its proprietary information and technology in
part by confidentiality agreements and inventors' rights agreements with its
employees. There can be no assurance that these agreements will not be breached,
that the Company will have adequate remedies for any breach or that the
Company's trade secrets will not otherwise be disclosed to or discovered by its
competitors.
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
<PAGE>
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
Busulfex and Xyrem. 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 five of the Company's products have been approved for marketing by
regulatory authorities in the United States or elsewhere. Even if the balance of
the Company's products are approved for sale, there can be no assurance that
they will be commercially successful or that they will obtain the results
expected. The Company may encounter unanticipated problems relating to the
development, manufacturing, distribution and marketing of its products, some of
which may be beyond the Company's financial and technical capacity to solve. The
failure to adequately address any such problems could have a material adverse
effect on the Company's business and its prospects.
No drug development portfolio can be completely insulated from potential
failures, and it is likely that some products selected for development by the
Company will not produce the results expected during clinical studies, not
receive FDA approval or fail to generate product sales of an acceptable level.
The Company has terminated the development of eleven products from its portfolio
since inception: L-Cycloserine in 1994, Glucaric Acid in 1996, and nine products
in 1997. With respect to the nine products terminated in 1997, the Company took
this action in order to focus its development efforts on those products that fit
within three selected STMS: Antidote, Oncology Support, and Sleep Disorders. The
Company recorded a one-time charge of $780,000 in the third quarter of 1997 for
the estimated cost of winding down the development plans for nine development
products. In addition, the Company believes that several of the products
terminated in 1997 may have value to another pharmaceutical company and it will
seek to license or sell its rights relating to these products. The termination
of the development of any one or more of the Company's current products could
have a material adverse effect on the Company and its prospects.
Most orphan drugs have a potential United States market of less than $10 million
annually and many address annual markets of less than $1 million. There can be
no assurance that the Company's sales of its products will be profitable even if
accepted and used by patients and medical specialists.
DEPENDENCE UPON OTHERS FOR CLINICAL TESTING 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.
<PAGE>
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, several of the Company's 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 an exclusive agreement with Cardinal Health, Inc. ("Cardinal"),
whereby Cardinal, through its Specialty Companies, will provide a variety of
services to support the effective distribution of Orphan Medical's products.
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 and Antizol are currently
distributed by Cardinal; which also will distribute the Company's proposed
products should those products receive marketing clearance from the FDA in the
future. The Company will, therefore, be substantially dependent upon Cardinal's
ability to successfully distribute Elliotts B Solution and Antizol and all of
the Company's proposed products that receive marketing clearance from the FDA.
Cystadane is currently distributed in the U.S. by Chronimed Inc. ("Chronimed"),
which 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. The management of this product and reliance
on the sales efforts of a contract distributor has proven to be more difficult
than the Company originally expected and the Company is presently reviewing its
options with respect to the Antizol-Vet product, which could include the sale or
licensing of its rights to this product.
There can be no assurance that other distribution companies would be available
or continue to be available on commercially acceptable terms, if at all. The
loss of a distributor or failure to renew agreements with an existing
distributor could have a material adverse effect on the Company and its
prospects.
UNCERTAIN EXTENT OF PRICE FLEXIBILITY AND THIRD-PARTY REIMBURSEMENT.
The Company's ability to commercialize its products successfully will depend in
part on the price it may be able to charge for its products and on the extent to
which reimbursement for the cost of such products and related treatment will be
available from government health administration authorities, private health
insurers and other third-party payors. Government officials and private health
insurers are increasingly challenging the price of medical products and
services. Significant uncertainty exists as to the pricing flexibility suppliers
will have with respect to, and the reimbursement status of, newly approved
health care products.
In the United States, the Company expects that there will continue to be a
number of federal and state proposals to implement government control of pricing
and profitability of prescription pharmaceuticals. Cost controls, if mandated by
a government agency, could decrease the price the Company receives for its
products or products it may develop in the future and, by preventing the
recovery of development costs, which could be substantial, and an
<PAGE>
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 on 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 $10
million for all claims made in any policy year. Although to date the Company has
not been the subject of any product liability or other claims, there can be no
assurance that the Company will be able to maintain product liability insurance
on acceptable terms or that its insurance will provide adequate coverage against
potential claims. The successful assertion of any uninsured product liability or
other claim against the Company could have a material adverse effect on the
Company's business and prospects.
DEPENDENCE ON CERTAIN OFFICERS AND KEY MANAGEMENT PERSONNEL.
The Company's success will be largely dependent upon the efforts of its
executive officers and key management personnel. The loss of the services of an
executive officer or one or more key employees, or the inability of the Company
to attract and retain skilled management and marketing personnel in the future,
could have a material adverse effect on the Company and its prospects.
RELATIONSHIP WITH CHRONIMED.
Although the Company believes the agreements that it had with Chronimed since
its July 1, 1994 spin-off were commercially reasonable, such agreements were not
the product of arms-length negotiations. In June 1997, the 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,
<PAGE>
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 AND REDUCED LIQUIDITY OF THE MARKET FOR THE
STOCK - LOSS OF NASDAQ NATIONAL MARKET LISTING.
There is risk that the market value and the liquidity of the public float for
the Company's Common Stock could be adversely affected in the event the Company
no longer meets the Nasdaq's requirements for continued listing on the National
Market tier. For continued listing on the Nasdaq National Market, a company must
satisfy a number of requirements, which in the Company's case includes either:
(1) net tangible assets in excess of $4.0 million or (2) a market capitalization
of at least $50.0 million. At March 31, 1998, the Company's net tangible assets
equaled approximately $2,470,803 and its market capitalization was approximately
$67.0 million (based on the last sale price of $10.875 and 6,181,040 shares
outstanding). Net tangible assets means total assets less total liabilities and
market capitalization means total outstanding shares multiplied by the last
sales price quoted by Nasdaq. Should the Company fail to satisfy either
requirement, among others, the Company's would no longer qualify for listing on
the Nasdaq National Market, but would qualify for quotation on the Nasdaq Small
Cap Market provided it had net tangible assets in excess of $2.0 million. The
Company's ability to raise additional capital and the market value of the
Company's Common Stock could be adversely affected by failing to meet Nasdaq's
requirements for listing on either the National Market or the Small Cap Market.
The realization of any one or combination of these risks 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 MARCH 31, 1998 AND THE
RELATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,412,566
<SECURITIES> 2,008,627
<RECEIVABLES> 756,262
<ALLOWANCES> 113,725
<INVENTORY> 258,996
<CURRENT-ASSETS> 6,435,263
<PP&E> 518,393
<DEPRECIATION> 180,030
<TOTAL-ASSETS> 6,773,626
<CURRENT-LIABILITIES> 3,358,753
<BONDS> 0
0
0
<COMMON> 61,810
<OTHER-SE> 2,408,993
<TOTAL-LIABILITY-AND-EQUITY> 6,773,626
<SALES> 1,521,971
<TOTAL-REVENUES> 1,521,971
<CGS> 217,432
<TOTAL-COSTS> 217,432
<OTHER-EXPENSES> 2,976,040
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (20,142)
<INCOME-PRETAX> (1,651,359)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,651,359)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,651,359)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> (.27)
</TABLE>
