RULE 424 (b)(3) PROSPECTUS RELATING TO
REGISTRATION STATEMENT NUMBER 333-60197
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ORPHAN MEDICAL, INC.
61,878 Shares
Common Stock
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This Prospectus relates to 61,878 shares (the "Shares") of common
stock, $.01 par value (the "Common Stock"), of Orphan Medical, Inc. ("Orphan" or
the "Company") offered for the account of Chronimed, Inc. (the "Selling
Shareholder"). The Shares may be sold from time to time by the Selling
Shareholder. The Company will not receive any of the proceeds from the sale of
the Shares. The Company has agreed to pay expenses incurred in registering the
Shares, including legal and accounting fees.
The Shares were acquired by the Selling Shareholder in a private
transaction on June 30, 1998 pursuant to a Termination Agreement dated June 27,
1997. The Shares are "restricted securities" under the Securities Act of 1933,
as amended (the "Act"), prior to their sale hereunder. This Prospectus has been
prepared for the purpose of registering the Shares under the Act to allow for
future sales by the Selling Shareholder to the public without restriction. To
the knowledge of the Company, the Selling Shareholder has made no arrangement
with any brokerage firm for the sale of the Shares. The Selling Shareholder may
be deemed to be an "underwriter" within the meaning of the Act. Any commissions
received by a broker or dealer in connection with resales of the Shares may be
deemed to be underwriting commissions or discounts under the Act. See "Plan of
Distribution."
The Shares have not been registered under the securities laws of any
state or other jurisdiction as of the date of this Prospectus. Brokers or
dealers should confirm the existence of an exemption from registration or
effectuate such registration in connection with any offer and sale of the
Shares.
The Common Stock is traded on the Nasdaq National Market under the
symbol "ORPH." On July 27, 1998, the closing sale price of the Common Stock
reported by the Nasdaq National Market was $10.375 per share.
SEE "RISK FACTORS" AT PAGES 2-12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON
STOCK OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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The date of this Prospectus is August 11, 1998
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RISK FACTORS
PROSPECTIVE INVESTORS IN THE SHARES OFFERED HEREBY SHOULD CAREFULLY
CONSIDER THE FOLLOWING RISK FACTORS, IN ADDITION TO THE OTHER INFORMATION
APPEARING IN THIS PROSPECTUS. CERTAIN STATEMENTS CONTAINED IN THIS PROSPECTUS
THAT ARE NOT RELATED TO HISTORICAL RESULTS ARE FORWARD-LOOKING STATEMENTS.
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED OR IMPLIED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING RISK FACTORS.
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 $30,265,691 as of June 30, 1998. From
inception through June 30, 1998, the Company reported Elliotts B Solution,
Cystadane, Antizol-Vet, and Antizol sales of $3,160,120 and gross profit on such
sales of $2,460,811, 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 its five approved products, including
Sucraid, 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 cash, cash equivalents, and short-term investments as of
June 30, 1998 plus the $7.1 million in net cash proceeds from the July 23, 1998
sale of a private placement are expected to be sufficient to fund the Company's
operations through 1999. However, should the Company realize any material
reduction in product revenues and/or a delay in the FDA approval and market
launch of Busulfex, the Company may require additional funding to fully
implement its development plan for Xyrem. Adequate funds for the Company's
operations, whether from financial markets or from other sources, may not be
available when needed on terms attractive to the Company, or at all. Lack of
funding could cause the Company to delay, scale back or eliminate some or all of
its products currently under development, including acquisition and licensing
programs, or prevent the commercial introduction of some or all of its products
altogether.
DEPENDENCE ON LICENSE AND ACQUISITION STRATEGY.
The Company has adopted a license and acquisition strategy to build its
product portfolio. The Company's strategy for growth is dependent upon its
continued ability to identify and acquire new pharmaceutical products targeted
at niche markets 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
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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 June 30, 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.
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
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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 and Xyrem have orphan
drug designation; while Antizol, Elliotts B Solution, Cystadane, and Sucraid
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"
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use) could adversely affect the marketing potential of products that have
received orphan drug designation and NDA approval. In addition, NDA approval of
a drug with an orphan drug designation does not provide any marketing
exclusivity in foreign markets.
The possible amendment of the Orphan Drug Act by the United States
Congress has been the subject of frequent discussion. Although no significant
changes to the Orphan Drug Act have been made for a number of years, members of
Congress have from time to time proposed legislation that would limit the
application of the Orphan Drug Act. There can be no assurance as to the precise
scope of protection that may be afforded by orphan drug designation and
marketing approval in the future or that the current level of exclusivity will
remain in effect.
RELIANCE ON PATENTS AND OTHER PROPRIETARY RIGHTS.
The pharmaceutical industry places considerable importance on obtaining
patent and trade secret protection for new technologies, products and processes.
The Company's success will depend, in part, on its ability to enjoy, obtain and
enforce protection for its products under United States and foreign patent laws
and other intellectual property laws, preserve the confidentiality of its trade
secrets and operate without infringing the proprietary rights of third parties.
The patent position of pharmaceutical firms is often highly uncertain and
generally involves complex legal and factual questions. At June 30, 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
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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 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.
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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.
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, Antizol, and
Sucraid 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, Antizol, Sucraid 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
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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 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.
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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.
YEAR 2000 READINESS ISSUE.
The Company has assessed and continues to assess the impact of the so
called "Year 2000 Readiness Issue" on its reporting systems and operations. The
Year 2000 Readiness Issue relates to the ability of computer hardware, software,
and firmware products to accurately process date/time data (including
calculating, comparing, and sequencing) from, into, and between the twentieth
and twenty-first centuries, and the years 1999 and 2000 and leap year
calculations. In addition, it relates to the ability to properly exchange
time/date data between such products. When the year 2000 occurs, systems that
are not year 2000 compliant might recognize the year 2000 as the year 1900, or
not at all. This inability to recognize or properly treat the year 2000 may
cause the Company's systems, or the systems used by the Company's suppliers,
distributors, customers or regulatory agencies (i.e., FDA) to process critical
financial and operational information incorrectly, or not at all.
The Company's strategy is and has been to replace its older,
inefficient systems with current technology, which is both year 2000 compliant
and more efficient. In addition, the Company has purchased and implemented
financial and operational software upgrades that are year 2000 compliant.
Because the Company has been active in upgrading computer systems, including
related operating and application software, to provide for greater employee
efficiency and customer responsiveness, direct expenses related to specific Year
2000 Readiness Issues should not be material to the Company's financial
statements. In addition, the Company has confirmed with its principal vendors
and distributors that they have implemented Year 2000 Readiness programs.
However, there can be no assurance that the systems of third parties on which
the Company currently relies or may rely on in the future will be year 2000
compliant, or that the failure of a third party's system due to the Year 2000
Readiness Issue would not have a material adverse effect on the Company and its
prospects.
RESTRICTIONS, COVENANTS AND RIGHTS RELATED TO SENIOR CONVERTIBLE PREFERRED
STOCK.
On July 23, 1998 (the "First Issuance Date"), the Company completed the
sale to UBS Capital II LLC ("UBS Capital") of a private placement of $7.5
million of Senior Convertible Preferred Stock (the "Preferred Shares"). The
private placement agreement also gives UBS Capital the right to invest up to an
additional $4.5 million within 90 days of the First Issuance Date. In
conjunction with the issuance of the Preferred Shares, the Company agreed to
several restrictions and covenants, and granted certain voting and other rights
to the holders of the Preferred Shares, including but not limited to the
following:
1. The Company is restricted from issuing additional equity securities,
including convertible debt instruments, warrants, and stock options, except for
"Permitted Issuances," which are limited to: (A) shares of Common Stock issued
after the First Issuance Date to Chronimed, Inc. pursuant to the terms of the
Termination Agreement between the Company and Chronimed, Inc., (B) shares of
Common Stock issued upon exercise of stock options that are outstanding on the
First Issuance Date, (C) stock options granted and shares of Common Stock
issuable upon exercise of such options pursuant to the terms of stock option
plans approved by the Company's Board of Directors; provided that the aggregate
number of shares of Common Stock issued, or issuable, under (A), (B) and (C)
shall not exceed two million shares,
- 9 -
<PAGE>
(D) Common Stock issued upon the exercise of currently outstanding warrants
that, as of June 30, 1998, entitled holders to purchase an aggregate of 213,255
shares of Common Stock, (E) Common Stock issued upon the conversion of the
Preferred Shares, and (F) securities issued pursuant to any public offering of
the Company's securities registered under the Securities Act. In addition, the
sale of any private placement of equity securities must be approved by a
majority vote of the holders of the Preferred Shares and, if approved by the
holders, UBS Capital has the right of first refusal with respect to the purchase
or sale of any such securities.
2. As of the First Issuance Date, the Preferred Shares are convertible, at
the option of the holders, into shares of the Company's Common Stock at a per
share price equal to the lesser of $11.78 or 110% of the average last sale price
of the 20 trading days prior to October 21, 1998, but not less than $8.50 per
share. If and whenever, on or after the First Issuance Date, the Company issues
or sells, or is deemed to have issued or sold, any shares of its Common Stock
for consideration per share less than the conversion price in effect for the
Preferred Shares immediately prior to the time of such issue or sale, then,
unless such issuance or sale was a Permitted Issuance (as described above),
immediately upon such issue or sale or deemed issue or sale the conversion price
shall be reduced to the conversion price determined by dividing (i) the sum of
(1) the product derived by multiplying the conversion price in effect
immediately prior to such issue or sale by the number of shares of Common Stock
deemed outstanding immediately prior to such issue or sale, plus (2) the
consideration, if any, received by the Company upon such issue or sale, by (ii)
the number of shares of Common Stock deemed outstanding immediately after such
issue or sale.
3. The dividend rate on the Preferred Shares is 7.5 percent per annum,
which is payable at the option of the Company in either cash or by issuing
additional Preferred Shares (on the first four dividend payment dates) or by
issuing Common Stock (after the fourth dividend payment date). However, unless
waived by a majority of the holders of Preferred Shares, the dividend rate will
increase to 20 percent per annum, payable solely in cash, if either (i) at any
time during any 730-day period individuals who constituted the Board of
Directors at the beginning of such period, or the First Issuance Date (whichever
is later), cease for any reason to constitute a majority of the Board of
Directors then in office or (ii) the Board of Directors fails to declare and pay
in full, on any semi annual Dividend Payment Date (as defined in Section 4 (c)
of Exhibit 3.1.1).
4. The Company is restricted from incurring any indebtedness unless after
giving effect to the additional indebtedness the aggregate indebtedness of the
Corporation and its subsidiaries outstanding as of the date of such incurrence,
excluding financing that is secured by accounts receivable but not by the
Corporation's intellectual property licenses or other intellectual property
rights, does not exceed two and one-half times EBITDA of the Company for the
twelve month period immediately prior to the date of such incurrence for which
there are quarterly financial statements available. For purposes of this
restriction, EBITDA shall mean the sum of (i) net income, (ii) interest expense
(iii) depreciation and amortization, and other non-cash items properly deducted
in determining net income and (iv) federal, state and local income taxes,
computed and calculated in accordance with generally accepted accounting
principles.
5. The Company is restricted from paying with respect to its issued and
outstanding Common Stock any cash dividends, cash distributions not classified
as dividends, or cash payments on the redemption of such Common Stock. This
restriction shall apply as long as at least 20 percent of the issued Preferred
Shares remain outstanding.
6. For as long as 20% of the Initial Shares (as defined under Section 7(b)
of Exhibit 3.1.1) remain outstanding, the holders of a majority of the Preferred
Shares, voting separately as a single class in the election of directors of the
Company, to the exclusion of all other classes of the Company's Common Stock and
with each share of the Preferred Shares entitled to one vote, shall be entitled
to elect one (1) director to serve on the Company's Board of Directors until his
successor is duly elected by holders of a majority of the Preferred Shares or he
is removed from office by holders of a majority of the Preferred Shares.
- 10 -
<PAGE>
7. The holders of the Preferred Shares shall vote separately as a single
class, and approval of holders of a majority of the outstanding shares of
Preferred Shares shall be required, whenever a shareholder vote is required
pursuant to Section 302A.671 of the Minnesota Business Corporation Act, or any
successor provision thereto, for the purpose of according voting rights with
respect to shares acquired or to be acquired in a control share acquisition (as
defined in Section 302A.011 Subdivision 38 of the Minnesota Business Corporation
Act). In addition, holders of Preferred Shares are entitled to vote on all other
matters requiring shareholder approval on an "as if" converted basis.
8. Ten years from the First Issuance Date, the Company is required to
elect to either (1) require the holder to convert all remaining unconverted
Preferred Shares into Common Stock upon the payment by the Company of a
Conversion Fee to the holder, payable in cash or Common Stock, or (2) redeem for
cash the holder's unconverted Preferred Shares for $1,000 per share plus accrued
dividends. The conversion fee cannot exceed $3.0 million and will be reduced
prorata to the extent the number of unconverted Preferred Shares at the end of
the ten year term is less than the number of Preferred Shares issued to the
holders during the ten year term.
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.
The Company paid $250,000 on signing the Termination Agreement in June
1997, and had 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 are to be based on a 3 percent temporary royalty on the
Company's product sales, which the Company began paying quarterly on September
30, 1997. Unregistered shares of Common Stock equal to 1 percent of the
Company's outstanding shares at each quarter end, which the Company began
issuing on March 31, 1998, are to be issued quarterly to Chronimed. The Company
is obligated to continue paying the royalties and issuing Common Stock until the
sum of all royalty payments and the market value (as defined below) of all
issued Common Stock equals $2,250,000. 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. Through
June 30, 1998, the Company has paid Chronimed approximately $81,000 in royalties
and issued 123,056 shares of Common Stock, of which 61,178 shares have been sold
by Chronimed in market transactions for net cash proceeds of $576,183. At June
30, 1998, the Company's unpaid obligation to Chronimed has an estimated value of
approximately $1,146,666, which is classified as a "Current Liability".
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<PAGE>
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 as reported
on Form 10-Q or Form 10-K or (2) a market capitalization of at least $50.0
million. At June 30, 1998, the Company's net tangible assets equaled $669,579
and its market capitalization was approximately $66.0 million (based on the last
sale price of $10.563 and 6,249,718 shares outstanding as of June 30, 1998). Net
tangible assets are defined as total assets less total liabilities. Market
capitalization is defined as total outstanding shares multiplied by the last
sales price quoted by Nasdaq. After giving effect to the July 23, 1998 private
placement of Preferred Shares, which netted the Company approximately $7.1
million in additional net tangible assets (i.e., cash), the Company estimates
that it will have net tangible assets in excess of the $4.0 million (thereby
satisfying Nasdaq's net tangible asset listing requirement) through at least the
end the third quarter of 1998. In the event UBS Capital exercises its right,
which expires on October 21, 1998, to invest up to an additional $4.5 million,
the Company's estimated net tangible assets are expected to exceed $4.0 million
through the end of 1998. Should the Company fail to satisfy at least one of the
two aforementioned Nasdaq listing requirements at any time after the third
quarter of 1998 (or after 1998 in the event of an additional investment by UBS
Capital of at least $2.0 million), 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 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.
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<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's regional offices at Seven
World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission, such as Orphan. The address of such site is
"http://www.sec.gov."
The Common Stock is traded on the Nasdaq National Market under the
symbol "ORPH." Reports, proxy and information statements and other information
concerning Orphan can be inspected at the offices of the National Association of
Securities Dealers, 1735 K. Street N.W., Washington, D.C. 20006.
The Company has filed with the Commission a registration statement on
Form S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the offering
of the Company's Common Stock hereby. This Prospectus does not contain all of
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock offered
hereby, reference is hereby made to the Registration Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
hereby incorporated by reference in this Prospectus:
(a) the Company's Annual Report on Form 10-K for the year ended
December 31, 1997;
(b) the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998;
(c) the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998; and
(d) the description of the Common Stock contained in any
registration statement or report filed by the Company under
the Exchange Act, including any amendment or report filed for
the purpose of updating such description filed subsequent to
the date of this Prospectus and prior to the termination of
the offering described herein.
In addition, all documents filed by the Company pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the Common Stock
hereby shall be deemed to be incorporated by reference into this Prospectus and
to be a part hereof from the respective dates of filing of such documents. Any
statement contained herein or in a document all or part of which is incorporated
or deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
- 13 -
<PAGE>
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon the written or oral
request of such person, a copy of any or all of the documents incorporated
herein by reference other than exhibits to such documents (unless such exhibits
are specifically incorporated by reference in such documents). Such requests
should be directed to John Howell Bullion, Chief Executive Officer, Orphan
Medical, Inc., 13911 Ridgedale Drive, Suite 475, Minnetonka, Minnesota 55447,
telephone: (612) 513-6900.
SELLING SHAREHOLDER
The Shares offered hereby are being sold pursuant to this Prospectus
by the Selling Shareholder. The following table sets forth certain information
with respect to the ownership of the Company's Common Stock by the Selling
Shareholder as of June 30, 1998 and as adjusted to reflect the sale of the
Shares.
Maximum
Number Number
of Shares of Shares
Beneficially to be Sold Shares
Owned Prior Pursuant to Beneficially Owned
Name to Offering (1) this Prospectus After Offering (2)
- --------------- --------------- --------------- ------------------
Chronimed, Inc. 0 61,878 0
- ----------
(1) Consists of 61,878 shares of Common Stock issued to Chronimed pursuant
to a Termination Agreement dated June 27, 1997.
(2) Assumes the sale of all of the Shares offered by this Prospectus.
PLAN OF DISTRIBUTION
The Shares to which this Prospectus relates will be offered and sold by
the Selling Shareholder for its own accounts. The Company will not receive any
proceeds from the sale of the Shares pursuant to this Prospectus. All expenses
of registration of the Shares, estimated to be approximately $8,000 shall be
borne by the Company.
The Selling Shareholder may offer and sell the Shares from time to time
on the Nasdaq National Market in regular brokerage transactions, in transactions
directly with market makers or in privately negotiated transactions at prices
relating to prevailing market prices or at negotiated prices, as applicable.
Sales may be made to or through brokers or dealers who may receive compensation
in the form of discounts, concessions or commissions from the Selling
Shareholder or the purchasers of Shares for whom such brokers or dealers may act
as agent or to whom they may sell as principal, or both. As of the date of this
Prospectus, the Company is not aware of any agreement, arrangement or
understanding between any broker or dealer and the Selling Shareholder. There is
no assurance that the Selling Shareholder will sell any or all of the Shares
offered by it.
The Selling Shareholder and any brokers or dealers who participate in
the sale of the Shares may be deemed to be "underwriters" within the meaning of
the Securities Act, and any commissions received by them and any profits
realized by them on the resale of Shares may be deemed to be underwriting
discounts or commissions under the Securities Act.
The Company has agreed to maintain the effectiveness of this
Registration Statement until the earlier of nine months from the date on which
the Selling Shareholder acquired the Shares (June 30, 1998) or the resale of all
the Shares registered hereunder.
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<PAGE>
LEGAL MATTERS
Certain legal matters relating to the validity of the Common Stock
offered hereby will be passed upon for the Company by Dorsey & Whitney LLP,
Minneapolis, Minnesota.
EXPERTS
The financial statements of Orphan Medical, Inc. appearing in the
Orphan Medical, Inc.'s Annual Report (Form 10-K) for the year ended December 31,
1997, have been audited by Ernst & Young LLP, independent auditors, as set forth
in their report thereon included therein and incorporated herein by reference.
Such financial statements are incorporated herein by reference in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
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<PAGE>
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No dealer, salesperson or any other person has been authorized to give
any information or to make any representations other than those contained in
this Prospectus, and, if given or made, such information or representations must
not be relied upon as having been authorized by the Company, the Selling
Shareholder or any other person. This Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy to any person in any jurisdiction in
which such offer or solicitation would be unlawful or to any person to whom it
is unlawful. Neither the delivery of this Prospectus nor any offer or sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of the Company or that the information contained
herein is correct as of any time subsequent to the date hereof.
----------
TABLE OF CONTENTS
Page
Risk Factors ............................................................... 2
Available Information ...................................................... 13
Incorporation of Certain Documents
by Reference .......................................................... 13
Selling Shareholder ........................................................ 14
Plan of Distribution ....................................................... 14
Legal Matters .............................................................. 15
Experts .................................................................... 15
================================================================================
================================================================================
ORPHAN MEDICAL, INC.
61,878 SHARES
COMMON STOCK,
PAR VALUE $.01 PER SHARE
---------------
PROSPECTUS
---------------
AUGUST 11, 1998
================================================================================
