SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] Annual Report pursuant Section 13 or 15(d) of the Securities Exchange Act
of 1934 [No Fee Required]
For the fiscal year ended December 31, 1999
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
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 250,
MINNETONKA, MN 55305 (952) 513-6900
(Address of principal executive offices (Registrant's telephone number,
and zip code) including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
$.01 PAR VALUE
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of common stock held by non-affiliates of Registrant,
based upon the last sale price of the Common Stock reported on the Nasdaq
National Market tier of The Nasdaq Stock Market on March 24, 2000 was
$105,677,500. Common stock outstanding at March 24, 2000 was 8,248,000 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement filed with the
Securities and Exchange Commission in connection with the solicitation of
proxies for the Registrant's Annual Meeting of Shareholders to be held on June
6, 2000 are incorporated by reference in Part III, Items 10, 11, 12 and 13 of
this Form 10-K.
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PART I.
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1933, as amended. All forward-looking
statements are inherently uncertain as they are based on current expectations
and assumptions concerning future events or future performance of the Company.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which are only predictions and speak only as of the date hereof.
Forward-looking statements 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, and are subject to numerous known and
unknown risks and uncertainties. Actual results could differ materially from
those currently anticipated due to a number of factors, including those
identified in the "Cautionary Statements" filed as an Exhibit to this Annual
Report on Form 10-K, and in the Company's other filings with the Securities and
Exchange Commission. The Company undertakes no obligation to update or publicly
announce revisions to any forward-looking statements to reflect future events or
developments.
Antizol(R), Antizol-Vet(R), Caprogel(TM), Busulfex(R), Intrachol(TM),
Colomed(TM), Cystadane(R), Elliotts B(R) Solution, Sucraid(R), Xyrem(R), "The"
Orphan Drug Company(TM), Orphan Medical, Inc.(R) and Dedicated to Patients with
Uncommon Diseases(R) are trademarks of the Company.
Provigil(R) is a registered trademark of Cephalon, Inc.
ITEM 1. BUSINESS
OVERVIEW
Orphan Medical, Inc. (the "Company") acquires, develops and markets products of
high medical value for patients within selected strategic therapeutic market
segments ("STMS"). A drug has high medical value if it offers a major
improvement in the safety or efficacy of patient treatment. The Company
concentrates its efforts on drugs with high medical value that may be marketed
within its three selected STMS: Antidotes for poisonings, Oncology Support, and
Sleep Disorders. Antizol and Busulfex are commercially available and are the
Company's lead products in its Antidote and Oncology Support STMS, respectively.
Xyrem is an investigational drug and is expected to be the Company's lead
product in its Sleep Disorders STMS. In addition, the Company manufactures and
distributes Cystadane, Antizol-Vet, and Sucraid although these products do not
fall into any of the three selected STMS. However, the Company expects to
continue offering Cystadane, Antizol-Vet, and Sucraid because these products
have high medical value and require limited resources to market and distribute.
Each STMS defined by the Company is characterized by a well-defined patient
population and treated by a well-defined group of medical specialists. The
Company believes this approach makes a large specialized sales force unnecessary
to market the Company's products because its marketing efforts can be focused on
a limited number of medical specialists or patients. The high medical value of
the Company's products is expected to facilitate marketing efforts directed
toward users and prescribers. Through its sales force supported by marketing and
sales methods available through the use of computer systems and the Internet,
the Company intends to promote awareness of the key advantages of Orphan Medical
brand products within the Antidote, Oncology Support, and Sleep Disorders STMS.
The Company's marketing and sales efforts will differentiate products on the
basis of quality, potentially improved medical outcomes, and cost effectiveness.
The Company uses established distributors of pharmaceutical products for its
products in a manner similar to that of most other pharmaceutical companies.
The Company believes its approach to pharmaceutical product development reduces
the time, costs and risks traditionally involved in bringing pharmaceutical
products to market. The Company does not conduct basic research and does not
attempt to discover new drugs. Instead, the Company acquires licenses to
develop, and possibly market, products that preferably have some existing
clinical data that indicate therapeutic value and safety. In addition, the
Company may consider acquiring products that have already received marketing
approval from the FDA. The Company uses contract development, manufacturing, and
consulting companies to assist it in its product development activities. This
approach avoids the costs and financial risks associated with developing these
capabilities internally.
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The Company operates within a single industry segment: pharmaceutical product
marketing, sales and development. To date, the Company has obtained marketing
approval from the U. S. Food and Drug Administration (the "FDA") on all six of
its New Drug Applications ("NDA"). These six products are commercially available
in the United States and several foreign countries. Revenues from the Company's
approved products outside the United States were approximately 10% of total 1999
revenues.
A Treatment Investigational New Drug ("IND") application for Xyrem was approved
by the FDA in December 1998 and the Company began shipping Xyrem in February
1999 for use in its Treatment IND clinical trials. The Treatment IND allows the
Company to seek payments for Xyrem used by patients enrolled in the Treatment
IND clinical trials and to obtain additional clinical safety data in support of
an NDA for Xyrem, which the Company expects to file as early as the second half
of 2000. In addition, in February 1999 the FDA approved the Company's NDA for
Busulfex and the Company began shipping Busulfex during the same month. The
Company has discontinued reporting as a development stage company beginning in
fiscal 1999. The Company did not achieve profitability in 1999 and does not
expect to do so in 2000.
As an emerging and growing specialty pharmaceutical company, the Company has
significant capital requirements to support product development efforts until
substantial profitability is achieved. To that end the Company recently
completed two financing transactions.
In February 2000, the Company completed the sale of 1.365 million newly issued
shares of common stock for net proceeds of $10.7 million. The Company has
committed to register the shares under the Securities Act of 1933, as amended.
This new capital strengthens the Company's financial position and funds the
development plan for Xyrem.
On August 2, 1999, the Company completed a $5.0 million financing transaction in
a private placement. The funding consists of $2.95 million of the Company's
Series B Convertible Preferred Stock and a commitment of $2.05 million of debt
in the form of a line of credit. The Series B Convertible Preferred Stock may be
converted prior to August 2, 2009 into common shares at a price of $6.50 per
share. The debt bears an interest rate of 7.5% and matures on August 2, 2002.
In connection with the financing, the Company also issued two seven-year
warrants. One of the warrants entitles the holder to receive, upon payment of
the $2.05 million exercise price, either $2.05 million of Series C Convertible
Preferred Stock (which is similar to the Series B Convertible Preferred Stock
and also has a conversion price of $6.50 per share) or 315,385 shares of Series
D Non-Voting Preferred Stock (which is equivalent to common stock except that it
has no voting rights). The other warrant, issued in relation to the debt,
entitles the holder to purchase 282,353 shares of Series D Non-Voting Preferred
Stock at an exercise price of $4.25 per share. The Company can require the
exercise of the warrants under certain conditions.
The financing triggered antidilution provisions relating to the $8.1 million of
the Senior Preferred Stock outstanding as of August 1, 1999 (after giving effect
to the semi-annual in-kind dividend distributions, the most recent of which was
August 1, 1999), which resulted in a decrease in the conversion price of those
shares from $8.50 to $8.14 per share.
STRATEGIC BACKGROUND
In the 1950s and early 1960s, drug development was relatively inexpensive and
regulatory approval was straightforward. Pharmaceutical companies through sales
forces marketed their products directly to physicians who generally had
independent responsibility for prescription and purchase decisions. In the
1970s, however, regulatory standards and competition increased and the price of
research and development and manufacturing rose dramatically. In the 1980s and
1990s, physicians were constrained on their prescription decisions by managed
care entities and drug companies revised their targeted rates-of-return or
financial "hurdle rates", as well as other selection criteria, to avoid
developing drugs whose incremental profit contributions were considered
insufficient to provide acceptable returns on investment. Many of the drugs that
did not meet these criteria were drugs for smaller patient populations. As a
consequence, new drugs for such patient populations were less likely to be
developed by larger companies.
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Some research institutions, universities and small companies, however, have
continued to develop and conduct clinical trials on these types of drugs.
The Company's strategy is based on several factors relating to these and other
changes in the health care and pharmaceutical industries:
* Larger pharmaceutical companies generally have increased their financial
hurdle rates, seek new products with annual revenues greater than $200
million and avoid developing new products that address diseases outside
their therapeutic area of focus. As a result, the Company believes many
developmental products of high medical value are available for licensing on
favorable terms. If these products are intended to address smaller markets,
they may be eligible for orphan drug designation. Many of these products
have already been developed to the point where the time and cost required
to bring the product to market can be reasonably estimated.
* Because of "downsizings" in pharmaceutical companies, skilled employees
experienced in the research, development, manufacturing or
commercialization of new medicines are available on a contract basis. These
individuals have often formed or joined contract clinical research
organizations ("CROs"), contract manufacturing companies or drug
development and marketing consulting firms. Thus, the knowledge and skills
required to address many aspects of drug development are available on a
contract basis from outside companies or individuals.
* To address rapidly changing market forces, alternative means of marketing
and distributing pharmaceuticals have been created. The advent of the
Internet has dramatically increased the availability of information,
including information related to health and health care products. Many
products, particularly those targeted to smaller, well-defined markets, do
not require a large, specialized sales force and can be marketed through
direct means such as continuing medical education programs, exhibits at
professional meetings, direct mailings, telemarketing, and the Internet. In
addition, these products can be effectively distributed through companies
proficient in distribution of pharmaceutical products to smaller patient
populations.
In response to these changes, the Company has adopted a business strategy that
is centered on products of high medical value within well-defined strategic
therapeutic market segments, uses the knowledge and skills available on a
contract basis from outside sources, and uses alternative marketing and
distribution channels.
BUSINESS STRATEGY
The Company focuses on products of high medical value intended to address
inadequately treated or uncommon diseases within a selected STMS. A drug has
high medical value if it offers a major improvement in the safety or efficacy of
patient treatment. In addition to products with high medical value, the Company
seeks pharmaceuticals that will likely be eligible for insurance reimbursement,
have readily measured clinical endpoints, existing positive clinical data,
proprietary attributes, and offer attractive financial returns. The Company does
not conduct basic research and does not attempt to discover new drugs, but
instead seeks to acquire and further develop products that already have some
clinical data that indicate the presence of therapeutic value and safety. The
Company's strategy of developing and marketing high medical value drugs with
these clinical characteristics is intended to achieve the following benefits.
* REGULATORY REQUIREMENTS AND REVIEW - Drugs of high medical value have a
greater likelihood of receiving expedited review by the FDA. If such drugs
also have smaller patient populations, the number of patients required for
clinical trials is generally reduced.
* REDUCTION OF PRODUCT DEVELOPMENT TIME AND COST - While the safety and
efficacy of every drug must be established to the satisfaction of the FDA,
the amount of data required to bring a new drug of high medical value to
market is generally less than for a drug that is available in similar
dosage forms or formulations and that is intended for very large markets.
Furthermore, the Company generally attempts to concentrate resources and
project management attention on a single medical indication in order to
limit the amount of clinical information required by the FDA to clear a
product for marketing. The time and cost of development is directly related
to the amount of clinical information required for regulatory approval.
* LIMITED INFRASTRUCTURE - The Company believes that high quality
pharmaceutical products can be developed efficiently and economically using
well established independent contractors to assist its experienced staff.
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Accordingly, the Company uses the available pool of contract development,
manufacturing, distribution and consulting companies to assist in product
development and marketing activities. This approach allows the Company to
avoid the costs, time and financial risks associated with developing an
extensive infrastructure in support of these capabilities internally.
* MARKETING STRATEGY - The Company focuses on products of high medical value
intended to address inadequately treated or uncommon diseases within
selected STMS. An STMS is a subset of a therapeutic area where one or more
products can be grouped to satisfy unmet needs. To assess the viability of
an STMS, the Company considers the following questions:
* Are there unmet therapeutic needs as defined by the customer (the
patient or the health care practitioner)?
* Do product development or product acquisition opportunities exist in
order to build a profitable business in a particular STMS?
* Can the Company build brand recognition and command significant market
share in a particular STMS?
* DIRECT SALES - The Company has built a small, specialized sales force to
promote Antizol and Busulfex. The sales force has extensive knowledge of
the Antidote and Oncology Support STMS, as well as extensive marketing and
business experience. The Company's sales force utilizes a consultative,
customer oriented approach to selling, which is aided by high quality
information systems. The Company expects to utilize a similar sales force
approach with the Sleep Disorders STMS.
* ALLIANCES - The high medical value of the Company's products has interested
other companies seeking to market the Company's products outside the U.S.
To date, the Company has agreements with six distributors relating to five
of the Company's products. The Company also believes that its relationships
with these distribution partners, among others, may provide strategic
benefits; possibly in the area of product acquisition opportunities or in
market share penetration programs.
* ATTRACTION OF POTENTIAL NEW PRODUCTS - As the Company's strategy and focus
on pharmaceutical products of high medical value within a selected STMS
becomes better known and understood by others in the research and
development community and as the Company proves its ability to market and
sell into an STMS, the Company expects more product development or
acquisition opportunities will be presented to it in the future.
RISK MANAGEMENT
The Company's strategy is designed, in part, to manage its overall business
risk. The Company is pursuing three distinct STMS rather than concentrating
financial, development and marketing resources on a single STMS or a single
platform technology. To reduce its product development risk, the Company
generally seeks to develop products that (1) are known to the medical community
and to the FDA, (2) have a straightforward formulation that can be synthesized
in one or two steps as opposed to requiring many steps, and (3) do not require
biotechnology processes for development or manufacture. In addition, the Company
generally seeks to acquire products that are already in Phase II or Phase III
clinical trials, or in an earlier stage of development if the Company believes
there is a relatively high likelihood of obtaining FDA approval. When a product
is licensed without the equivalent of Phase II or III data, the Company may
conduct one or more "pilot clinical trials" to better assess this likelihood.
Each such pilot trial is narrowly defined and has a separate budget that to date
has not exceeded $500,000. Upon the completion of such a pilot clinical trial,
management seeks the approval of the Board of Directors for authority to proceed
to full development of the product. The Company does not conduct basic research
and does not attempt to discover new drugs. The Company may also purchase rights
to existing products in order to reduce development risk. To reduce its
marketing risk, the Company generally attempts to obtain some form of
proprietary protection, such as orphan drug designation, patent protection,
exclusive licensing agreements, predominant market penetration or sole supplier
agreements.
PROPRIETARY RIGHTS
To encourage the continued development of drugs for smaller patient populations,
the federal government enacted the Orphan Drug Act of 1983. This Act provides
incentives to companies to develop and market drugs for rare diseases or
conditions that are known to affect fewer than 200,000 people in the United
States. A company must request orphan drug designation before an NDA is
approved, and after the FDA grants orphan drug designation, the
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generic identity of the therapeutic agent (drug) and its potential orphan use
(market) are published by the FDA. Orphan drug designation does not convey any
advantage in, or shorten the duration of, the regulatory approval process. The
FDA may grant orphan drug designation to more than one company of an identical
drug for the same designated indication, however under current law, orphan drug
status is granted to the first company receiving FDA marketing approval of a
drug with orphan drug designation. A company receiving orphan drug status for a
designated indication is entitled to a seven-year exclusive marketing period in
the United States for the drug with the approved indication, subject to certain
limitations. Orphan drug status, however does not prevent subsequent approval of
a different drug for the same designated indication, nor subsequent approval of
the same drug for a different designated indication, nor provide any marketing
exclusivity in foreign markets.
Since 1983, the FDA has assigned orphan drug designation to more than 650
potential products. Although the Company believes the size of the aggregated
markets for orphan and small market drugs may be large, the total annual market
for any particular orphan drug indication rarely exceeds $100 million and most
have potential markets of less than $25 million annually.
Orphan Drug protection is available in Japan under requirements such as those in
the United States. The European Union is expected to approve orphan drug
regulations in 2000.
The Company believes it is important that its proposed products receive patent
protection or orphan drug designation or have other factors that limit potential
competition. A drug that has orphan drug designation and which is the first
product to receive marketing approval for its product claim, indication or
application, receives orphan drug status and is entitled to a seven-year
exclusive marketing period in the United States for that product claim,
indication or application, subject to certain limitations. The Company has five
products with orphan drug status. Veterinary products are not eligible for
orphan drug status, but the Company's Antizol-Vet product has another form of
U.S marketing exclusivity for a period of five years from its November 1996
marketing approval date. Applications for Orphan Drug designation will be made
where appropriate and available for any additional indications or products that
may be licensed in the future.
The license agreement pursuant to which the Company has acquired rights to
develop and market Busulfex provide for an assignment of the licensor's
proprietary rights, including patent and technology rights. With respect to
additional products it may license in the future, if any, the Company expects
that such licenses will include, if such rights are available, an assignment of
the licensor's proprietary rights with respect to the licensed product. Foreign
patent applications have been filed for Busulfex and Xyrem. The Company
evaluates the desirability of registering approved patents or other forms of
protection for its products in individual foreign markets based on the expected
costs and relative benefits of attaining such protection.
THE REGULATORY PROCESS
Pharmaceutical products intended for therapeutic use in humans are governed by
extensive FDA regulations in the United States and by comparable regulations in
foreign countries. The process of seeking and obtaining FDA approval for a
previously unapproved new human pharmaceutical product generally requires a
number of years and involves the expenditure of substantial resources.
Following drug discovery, the process required before a drug product may be
marketed in the United States includes (i) pre-clinical laboratory and animal
safety tests, (ii) the submission to the FDA of an IND application, (iii)
clinical and other studies to assess safety and parameters of use, (iv) adequate
and well-controlled clinical trials to establish the safety and effectiveness of
the drug product, (v) the submission to the FDA of an NDA, (vi) FDA approval of
the NDA prior to any commercial sale or shipment of the product and (vii)
finally, marketing of the drug.
Typically, pre-clinical studies are conducted in the laboratory and in animal
model systems to gain preliminary information on the product's pharmacology and
toxicology and to identify any potential safety problems that would preclude
testing in humans. The results of these studies, together with the general
investigative plan, protocols for specific human studies and other information,
are submitted to the FDA as part of the IND application. The FDA regulations do
not, by their terms, require FDA approval of an IND. Rather, if the FDA does not
notify the sponsor to the contrary within 30 days of receipt of the IND, a
clinical investigation is allowed to commence. As a practical
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matter, however, FDA approval is often sought before a company commences
clinical investigations. That approval may come within 30 days of IND receipt,
but may involve substantial delays if the FDA requests additional information.
The initial phase of clinical testing (Phase I) is conducted to evaluate the
metabolism and pharmacological actions of the experimental product in humans, as
well as the side effects associated with increasing doses, and, if possible, to
gain early evidence of possible effectiveness. Phase I studies can also evaluate
various dosages, methods and schedules of product administration. These studies
generally involve a small number of healthy volunteer subjects, but may be
conducted in people with the disease that the product is intended to treat. The
total number of subjects is generally in the range of 20 to 80. A demonstration
of therapeutic benefit is not required in order to complete Phase I trials
successfully. If acceptable product safety is demonstrated, Phase II trials may
be initiated.
Phase II trials are designed to evaluate the effectiveness of the product in the
treatment of a given disease and involve patients with the disease under study.
These trials are well-controlled, closely monitored and involve a relatively
small number of subjects, usually no more than several hundred. The optimal
dosages, methods and schedules of administration are determined in these
clinical trials. If Phase II trials are successfully completed, Phase III trials
are often commenced, although Phase III trials are not always required,
particularly for drugs of high medical value intended for smaller patient
populations, if efficacy and safety have been validated in the Phase II trials.
Phase III trials are expanded, controlled trials that are performed after
preliminary evidence of the effectiveness of the experimental product has been
obtained. These trials are intended to gather the additional information about
safety and effectiveness needed to evaluate the overall risk/benefit
relationship of the experimental product. In addition, these trials provide the
confirmatory evidence of both effectiveness and safety necessary for product
approval. Phase III trials usually involve several hundred to several thousand
subjects.
A clinical trial may combine the elements of more than one phase (i.e., a Phase
I/II or II/III trial) and typically two or more Phase III studies are required
for FDA approval. A company's designation of a clinical trial as being of a
particular Phase is not necessarily indicative that such a trial will be
sufficient to satisfy the FDA requirements of that Phase because this
determination cannot be made until the protocol and data have been submitted to
and reviewed by the FDA. In addition, a clinical trial may contain elements of
more than one Phase notwithstanding the designation of the trial as being of a
particular Phase. The FDA closely monitors the progress of the Phases of
clinical testing and may, at its discretion, re-evaluate, alter, suspend or
terminate the testing based on the data accumulated and its assessment of the
risk/benefit ratio to patients. It is not possible to predict with certainty the
time required to complete Phase I, II and III studies with respect to a given
product. Likewise, it is difficult to predict with any certainty the
requirements of the FDA.
Upon the successful completion of clinical testing, a marketing application
(e.g., NDA) is submitted to the FDA for approval. This application requires
detailed data on the results of pre-clinical testing, clinical testing and the
composition of the product; specimen labeling to be used with the drug;
information on manufacturing methods; and samples of the product. Following the
passage of the Prescription Drug User Fee Act ("PDUFA"), the FDA typically takes
from six to eighteen months to review an NDA after it has been accepted for
filing. Following its review of a marketing application, the FDA invariably
raises questions or requests additional information. The NDA approval process
can, accordingly, be very lengthy. Further, there is no assurance that the FDA
will ultimately approve an NDA. The FDA can also determine that a drug is
"approvable" contingent on satisfactory review of additional information
requested by the FDA. We cannot assure you that such requests by the FDA for
additional information can be fulfilled in a timely manner, if at all. If the
FDA approves the NDA, the new product may be marketed for the applications or
treatments that have been approved by the FDA. The claims with which a product
can be marketed are also subject to review and approval by the Division of Drug
Marketing, Advertising and Communications ("DDMAC"), the FDA's marketing
surveillance department within the Center for Drugs. The FDA often clears a
product for marketing with a modification, or restriction to the proposed label
claims or requires that post-marketing surveillance, or Phase IV testing, to be
conducted.
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OPERATING FUNCTIONS
The Company has structured each of its operating functions to support its
strategy. Following is a general explanation of the typical steps in the
Company's processes of product acquisition, development and marketing.
PRODUCT ACQUISITION
The Company is actively searching for product licensing opportunities preferably
within its selected strategic therapeutic market segments. The continual
acquisition of products for development and/or commercialization is a key
element of the Company's growth strategy. The Company attracts product
acquisition proposals through a network of customer and industry contacts,
licensing brokers and a growing awareness of its activities by governmental,
academic and industry sources. Since its inception, the Company has carefully
evaluated many product opportunities. To date, sixteen products have been
acquired and, of these, seven products are currently under development or being
marketed.
The Company seeks to acquire pharmaceutical products within selected STMS that,
in the Company's opinion, generally:
* Are of high medical value as defined by the customer (physician or patient)
within a STMS;
* Are targeted at distinct patient populations;
* Are prescribed by physician specialists;
* Can be marketed with a small, specialized sales effort to health care
specialists, health care institutions, and patients;
* Are likely to be eligible for reimbursement by third-party payors;
* Have or are candidates for patent protection, orphan drug designation or
have other characteristics that enhance the Company's competitive position;
* Treat diseases that have clinical endpoints (i.e., signs or symptoms) that
are readily measured;
* Are conventional pharmaceutical products that are relatively
straightforward in formulation and development, and do not involve the
application of new technologies;
* Are in Phase II or Phase III clinical trials and have a relatively high
likelihood of obtaining the approval of the FDA within three years of their
acquisition;
* Offer attractive potential financial returns with relatively inexpensive
development costs;
* Compliment other products in an existing STMS or can be grouped with other
products to build a new STMS.
In selecting additional products for potential inclusion in its portfolio, the
Company generally focuses on acquiring rights to medicines that serve distinct
patient populations. Many major drug companies and generic manufacturers are
less likely to address these orphan drug and niche markets because they do not
believe that these markets are capable of producing acceptable revenues and
returns on their product development investments. This reluctance limits the
number of potential sources of competition. In addition, a product designed for
smaller patient populations is often eligible for orphan drug designation. By
obtaining orphan drug designation, the Company is granted exclusive marketing
rights or status in the United States for seven years, subject to certain
limitations, after an NDA for a product is approved, if the Company is the first
to receive approval for the designated drug and indication.
The Company seeks to acquire potential products that already have, or will not
require, a substantial quantity of clinical data to demonstrate their relative
efficacy and safety. The Company also searches for product candidates that
represent new dosage forms of previously approved or known compounds because the
Company believes these types of products are more likely to be quickly approved
by the FDA and accepted by the medical community. In addition, the Company
attempts to develop medicines where there are clear clinical endpoints that
demonstrate their effectiveness. Generally, the Company seeks to acquire
products that can be developed to the point of FDA approval within three years
of their acquisition with expected development costs in the range of $5.0 to
$15.0 million. Contrast this approach to the development of therapies for
complex diseases (e.g., AIDS, psychoses or complex cancers) that can require a
decade or more of development and involve the expenditure of tens of millions of
dollars or more. Typically, the Company also focuses its development efforts on
one indication and, when possible, one dosage form to minimize development
costs. Additional indications or dosage forms will only be evaluated after the
primary NDA is submitted or approved.
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An additional element of the Company's product development strategy is to
acquire products that have or can have a degree of proprietary protection.
Generally, this goal is accomplished by selecting products that are eligible for
orphan drug designation, are covered by patents or are the subject of an
exclusive license from a sole supplier or a manufacturer with specialized or
proprietary processes. The likely availability of adequate levels of
reimbursement from third-party payors is also an important factor in product
acquisition decisions.
The Company's management reviews all new product opportunities and makes
recommendations to the Board of Directors of the Company regarding the license
or acquisition of any proposed additional products. The product review process
generally involves discussions with customers (physicians and patients) within a
given STMS to identify unmet needs, and with the initial product developer and
experts in the disease treated by the drug; a review of research publications
and other databases to gauge competitive activities; market research aimed at
identifying potential acceptance by the end user; technical evaluations to
determine manufacturability and cost; expected FDA regulatory requirements to
obtain acceptable marketing or promotional claims; and a legal review of any
relevant proprietary rights. If this review indicates that the proposed product
meets the Company's selection criteria, efforts to negotiate a license are
initiated. Generally, the Company seeks to obtain licenses that require a
minimal signing fee, are subject to commercially acceptable royalty levels and,
where appropriate, provide for the continued involvement of the original
developer in the development process through a consulting or similar
arrangement.
The Company is continually evaluating additional proposed products within the
selected STMS. Although the Company generally is actively discussing product
licensing or acquisition possibilities with other parties, it currently does not
have any binding agreements or arrangements for the acquisition of any
additional products. Should the Company be unsuccessful in acquiring additional
proposed products for development and commercialization within a selected STMS,
the Company may reassess the viability of the selected STMS and redefine the
selected STMS to expand the number of potential products that might satisfy the
Company's acquisition criteria for a viable STMS to ensure adequate future
growth of the Company.
PRODUCT DEVELOPMENT
Pharmaceutical product development is one of the Company's principal activities.
The Company has incurred $29.8 million in research and development expense
through December 31, 1999. In addition, the Company estimates that it will need
to incur at least an additional $6.4 million in research and development expense
relating to the products it currently markets and to obtain FDA approval for
marketing Xyrem as expeditiously as possible.
A major element of the Company's product development strategy is to use
third-parties or contract research organizations or CROs to conduct safety and
efficacy testing and clinical studies, to assist the Company in guiding products
through the FDA review and approval process, and to manufacture and distribute
any FDA approved products. The Company believes that maintaining a minimal
infrastructure will enable it to develop products efficiently and cost
effectively. To facilitate this strategy, the Company utilizes a team approach
to develop its proposed products. A development team is organized and managed by
senior staff. The development team is cross-functional and includes in-house
experts, as well as appropriate outside consultants, to manage all development
activities and market planning with respect to a proposed product. A development
team designs a development plan, which will support the proposed indication and
marketing claims, and creates a financial budget for the proposed product and
contracts with outside development agents and consultants to arrange for the
necessary clinical and toxicology studies, manufacturing arrangements and FDA
filings. Upon approval of the NDA by the FDA, the Company's marketing and sales
staff manages sales of the proposed product.
The Company believes the use of third parties to develop and manufacture its
products has several advantages. This approach generally allows a greater pool
of resources to be concentrated on a product than if these functions were
performed by internal personnel who were required to support all of the
Company's products. Although this approach will allow the Company to avoid the
expense associated with developing a large internal infrastructure to support
its product development efforts, it will result in the Company being dependent
on the ability of outside parties to perform critical functions for the Company.
This contract approach to product development requires project management by
professionals with substantial industry experience. The Company believes it has
in-house experts in areas of critical importance to all of its proposed products
who can be consulted by the development teams. These areas include regulatory
affairs,
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<PAGE>
marketing and sales, quality assurance, manufacturing, clinical trials
management, finance, information systems and general management.
The product development process is designed to identify any problems associated
with a proposed product's clinical aspects. The Company attempts to reduce the
risk that a proposed product will not be accepted in the marketplace by
conducting the market research and planning process concurrently with a
product's development. No drug development portfolio can be completely insulated
from potential failures and it is likely that some proposed products selected
for development by the Company will not produce the clinical or revenue results
expected. To date, the Company has discontinued development activities with
respect to eleven proposed products because the estimated financial returns of
these proposed products were deemed unacceptable by management.
MANUFACTURING
The Company does not have and does not intend to establish any internal product
testing, drug or chemical synthesis of bulk drug substance, and manufacturing
capability for drug product. Manufacturers of the Company's products are subject
to applicable Good Manufacturing Processes ("GMP") as required by FDA
regulations, or other rules and regulations prescribed by foreign regulatory
authorities. The Company is negotiating or has entered into bulk drug supply and
drug product manufacturing agreements with third parties for all of its FDA
approved products and is dependent on such third parties for continued
compliance with GMP and applicable foreign standards. The Company believes that
qualified manufacturers will continue to be available in the future, at a
reasonable cost to the Company, although there can be no assurance that this
will be the case.
Due to FDA mandated dating requirements and the limited market size for each of
the Company's approved products, the Company may be subject to complex
manufacturing logistics, minimum order quantities that could result in excess
inventory as determined under the Company's accounting policy, unsalable
inventory as a result of product dating expiring prior to use, and competition
with others for manufacturing services when needed or expected. The Company has
a production planning program to assess and manage the manufacturing logistics
amongst the vendors supplying the required finished product components of bulk
drug substance, drug product and packaging.
The Company is substantially dependent on its contract drug product
manufacturers. These manufacturers have been approved by the FDA for the
production of the Company's approved products. Following is a listing of the
Company's contract drug product manufacturers:
Contract Drug Product Manufacturer Marketed and Proposed Products
- ------------------------------------------ -------------------------------------
An affiliate of Boehringer Ingelheim Antizol, Antizol-Vet, Elliotts B
Solution, and Busulfex
NutraMax, Inc. Sucraid
Proclinical, Inc. Cystadane
Catalytica Pharmaceuticals, Inc Xyrem (Treatment IND supplies)
(final contract not negotiated)
Global Pharm, Inc. (final contract Xyrem (Treatment IND supplies)
not negotiated)
In addition to the contract drug product manufacturers, the Company is
substantially dependent on Ash Stevens, Inc. ("Ash Stevens") and Lonza, Inc.
("Lonza"). Ash Stevens is the Company's sole supplier of bulk drug substance for
the manufacture of Antizol, Antizol-Vet, and Busulfex; while Lonza is the
Company's sole supplier of bulk drug substance for the manufacture of Xyrem for
use in clinical trials and is anticipated to be the sole supplier of any
approved product.
MARKETING - UNITED STATES
The Company has designed its product selection strategy to maximize the success
of its marketing efforts. By having products that current and potential
customers have identified as having "high medical value", the Company believes
it should be able to more easily attract the attention of targeted segments of
the medical community. The Company
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<PAGE>
also believes that its focus on well-defined patient populations will allow the
use of a small, focused sales force instead of a large, specialized sales force.
Because of the distinct nature of most of its potential markets, the Company
expects to be able to concentrate its marketing efforts on a limited number of
medical specialists, or on patients themselves.
As part of its marketing efforts, the Company identifies and defines appropriate
STMS, identifies customer needs within each STMS, identifies specific product
acquisition candidates within each STMS, works with the development team to
insure clinical data are collected that supports the desired indication and
marketing claims, and if FDA approval is obtained, designs and implements
marketing plans for each of its approved products. Market research is conducted
to analyze the potential of products prior to their acquisition. Once a product
is acquired and is being developed, further market research is completed and,
based on this analysis, the product's marketing plan is developed. Upon
submission to the FDA of a proposed product's NDA, the product management
responsibilities transition from the development team to the Company's marketing
and sales staff. The development group continues to provide support where needed
to enhance marketing and sales efforts. This group is responsible for all
aspects of a product's marketing and sales, including product forecasting,
positioning, price, promotion and physical distribution to successfully launch
and commercialize the product. Senior sales and marketing employees lead a cross
functional team of internal personnel and external consultants to implement a
product's marketing and commercialization plan. In addition, marketing and sales
staff also supports the Company's international sales efforts through support of
and interfacing with work with international partners.
MARKETING - FOREIGN
In general, the Company expects to license foreign marketing, sales and
distribution rights after an NDA is submitted in the United States. The Company
contracts with foreign companies (usually pharmaceutical companies) to market
and distribute its products. The Company considers Europe, Japan and Canada to
be its most attractive foreign markets. The Company has entered into marketing,
sales and distribution agreements for Antizol, Cystadane and Sucraid in Europe,
Cystadane and Sucraid in Australia and New Zealand, Busulfex, Cystadane, Elliots
B Solution and Sucraid in Israel, Antizol and Cystadane in Canada, and Elliotts
B Solution in Central America. In October 1999, the Company signed a definitive
agreement with Pierre Fabre Medicament, granting the French company exclusive
rights to market and distribute Busulfex in 21 European countries, as well as
Argentina and South Africa. Pierre Fabre, a private company with 1998 sales in
excess of $1 billion and approximately 8,300 employees, will market Busulfex to
transplant centers through its 75 oncology marketing and sales personnel. The
Company has also signed an agreement with IDIS World Medicine in December 1999
to distribute Busulfex on a "named patient basis" to requesting physicians
outside of the United States, Canada and Israel. The Company began shipments to
IDIS in January 2000. The Company expects to seek a marketing and distribution
partner for Busulfex in Japan.
The Company's practice is to negotiate contracts with foreign distributors that
generally provide for minimum order and sales performance, including minimum fee
payments. The Company's accounting policy is to recognize minimum fees, if any,
when earned. Minimum fees negotiated with foreign parties to date are not
material and are not refundable, nor subject to future performance criteria. The
foreign contracting party is responsible for obtaining marketing approval for
the Company's product to which the agreement relates and the Company is
responsible for providing selected U.S regulatory information to the foreign
party on request. The Company cannot unilaterally terminate these agreements
without established evidence of default, but these agreements do expire over a
defined period of time and the Company may seek other foreign parties to provide
comparable services upon expiration if not satisfied with the performance of its
partners. The principal benefit a foreign party receives from entering into
these agreements with the Company and paying the minimum fees, if any, is a
contracted price for acquisition of product from the Company because the Company
is the sole supplier of its approved products on a worldwide basis.
DISTRIBUTION
The Company does not intend to develop internal physical distribution
capabilities because the Company believes its relatively low-volume products can
be more economically and efficiently distributed through third party
distribution organizations. The physical distribution of the Company's products
through third parties allows the Company to avoid some of the costs associated
with developing internal information systems that comply with regulatory
requirements and satisfy customer service demands. Cystadane and Sucraid are
principally distributed directly to patients through third party mail order
pharmacies. Chronimed and an affiliate of Cardinal Health are the principal
third party distributors of Cystadane and Sucraid, respectively. Elliotts B
Solution, Antizol and Busulfex are
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<PAGE>
primarily used in a hospital setting and are distributed by an affiliate of
Cardinal Health. The distribution of Antizol and Busulfex through an affiliate
of Cardinal Health facilitates the sale of these products directly into
hospitals or, if customers prefer, through their primary wholesaler. Antizol-Vet
is a product used in veterinary clinics and is distributed by an affiliate of
Cardinal Health to individual veterinary clinics and a network of veterinary
wholesalers.
COMPETITION
Potential competitors in the United States are numerous and include
pharmaceutical, chemical and biotechnology companies. The Company will
experience competition in several specific areas, including those described
below.
* PRODUCT ACQUISITION - The Company intends to acquire the rights to products
with important therapeutic advantages that generally are not of interest to
larger pharmaceutical companies. Nevertheless, the Company will compete
with other entities in acquiring product rights from universities and other
research institutions, as well as from other potential licensors.
* PRODUCT DEVELOPMENT RESOURCES - The Company will compete for certain
resources, such as the services of clinical investigators, contract
manufacturers, advisors and other consultants. The Company will generally
have little or no control over the allocation of such resources.
* ORPHAN DRUG DESIGNATION - The Company is aware of two other companies that
have filed for and received orphan drug designation on products similar to
two of its products. Sparta Pharmaceutical (acquired by SuperGen in 1999)
and Teva (formerly Biocraft) have been granted orphan drug designations for
their intravenous busulfan and sodium oxybate, respectively. Intravenous
busulfan and sodium oxybate are the equivalent of the Company's Busulfex
and Xyrem products, respectively. The Company does not believe SuperGen is
developing an intravenous busulfan. During 1999, the Company entered into
an agreement with Teva, that, in effect, transfers Teva's development data
and development rights to the Company. While the Company is not aware of
others holding or seeking orphan drug designations for products that would
compete with the Company's products for NDA approval, there can be no
assurance that the Company's products will not have such competition for
the protection conferred by orphan drug status.
* MARKETING AND SALES - Each of the Company's current products will face
competition from other products or from other therapeutic alternatives. In
general, the Company's products will compete against products whose
marketers have substantially greater resources, including large specialized
sales forces, than the Company.
GRANTS
The FDA Office of Orphan Drug Products (Orphan Drug grants) and the Small
Business Administration (SBIR grants) offer grants to companies whose efforts
meet certain requirements. Orphan Drug grants were made available for Busulfex,
Antizol and Colomed and an SBIR grant was made available for Intrachol. From
July 1, 1995 through December 31, 1998, the Company collected approximately
$1,567,000 in grant proceeds with respect to approximately $1,567,000 in grant
related disbursements. The grant proceeds collected by the Company are
non-refundable. There can be no assurance that Orphan Drug or SBIR grants will
be made available to the Company in subsequent periods. The Company currently
has no active grants.
GOVERNMENT REGULATION
GENERAL
Political, economic and regulatory influences are subjecting the health care
industry in the United States to fundamental change. Several potential
approaches are under consideration, including mandated basic health care
benefits, controls on health care spending through limitations on the growth of
private health insurance premiums and Medicare and Medicaid spending, price
discounts from drug manufacturers, the creation of large purchasing groups and
other significant changes to the health care delivery system. In addition, some
states have adopted or are considering various health care reform proposals. The
Company anticipates that Congress and state legislatures will continue to review
and assess alternative health care delivery systems and payment methods and that
public debate of these issues will likely continue in the future. Because of
uncertainties regarding the ultimate features of reform initiatives and their
enactment and implementation, the Company cannot predict which, if any, of such
reform
12
<PAGE>
proposals will be adopted, when they may be adopted or what impact they may have
on the Company or its prospects.
REIMBURSEMENT
Employers, through payments to their employee benefit plans, bear a significant
share of the health care costs of their employees. These plans are typically
administered by insurance companies, health maintenance organizations, preferred
provider organizations and other third-party payors. Health care services and
products, including pharmaceutical products, are also paid for by government
agencies, such as Medicaid. Employers and the payors involved in providing or
administering health care benefits are increasingly turning to "managed care"
systems to control health care costs. Under these systems, the administrative
requirements and standards of care are established by the health care purchasers
and providers and the benefit level depends on the negotiated price. Managed
care systems usually limit treatment options to approved therapeutic regimens
and "formularies," or lists of approved drugs and medical products.
Being included on the formularies of managed care groups is important to the
commercial success of a prescription medicine. A pharmaceutical must be included
on a third-party payor's formulary or must be deemed "medically necessary" to be
eligible for reimbursement by that payor. In deciding whether a drug is to be
included on a formulary, payors will generally consider its therapeutic value
and cost in comparison to other available treatments. The Company believes that
the proprietary nature and medical usefulness of its products should assist it
in its efforts to have its products approved for reimbursement. No assurance can
be given, however, that the Company's products will be approved for
reimbursement by third-party payors at acceptable levels, or at all.
PRODUCT APPROVALS
The Company's products require FDA approval in the United States and comparable
approvals in foreign markets before they can be marketed. The development of
investigational products and the marketing of approved products requires
continuing compliance with FDA regulations.
SCHEDULED PRODUCTS
Products that are designated "controlled" substances also require compliance
with regulations administered by the U.S. Drug Enforcement Agency ("DEA"), and
similar regulations administered by state regulatory agencies. On February 18,
2000, the President signed federal legislation that directs the U.S. Attorney
General to use her emergency scheduling authority to make gamma hydroxybutyrate
(GHB) a Schedule I substance within 60 days. Schedule I is the designation by
which illegal drugs are controlled. The bill further directs the Attorney
General to treat GHB products being studied under Food and Drug Administration
(FDA) approved protocols as Schedule III substances. This legislation also
mandates that Schedule III designation will apply to any FDA approved New Drug
Application (NDA) for GHB products.
MANUFACTURING REGULATION
All facilities and manufacturing techniques used to manufacture products for
clinical use or sale in the United States must be operated in conformity with
GMP, the FDA requirements governing the production of pharmaceutical products.
FDA approval is required before a contract manufacturer can implement most
changes in manufacturing procedures for any of the Company's approved products.
The Company has established a quality assurance program to monitor third-party
manufacturers of its products to promote compliance by such manufacturers with
domestic and foreign regulations (based on country of use). In addition, FDA
approval is required for changing contract manufacturers of approved products.
Obtaining the FDA's approval for a change in manufacturing procedures or change
in manufacturers could cause production delays and loss of revenue.
FOREIGN REGULATION
Products marketed outside of the United States are subject to regulatory
approval requirements similar to those required in the United States, although
the requirements governing the conduct of clinical trials, product licensing,
pricing and reimbursement vary widely from country to country. No action can be
taken to market any product in a country until an appropriate application has
been approved by the regulatory authorities in that country. The current
approval process varies from country to country, and the time spent in gaining
approval varies from that required for FDA approval. In certain European
countries, the sales price of a product must also be approved. The pricing
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<PAGE>
review period often begins after market approval is granted. The Company intends
to utilize foreign partners to apply for foreign marketing approvals.
INSURANCE
Providing health care products entails an inherent risk of liability. In recent
years, participants in the health care industry have been subject to a large
number of lawsuits alleging malpractice, product liability or related legal
theories, many of which involve large claims and significant defense costs. The
Company may from time to time be subject to such suits as a result of the nature
of its business. The Company carries product liability insurance coverage in the
aggregate amount of $10 million. The Company also carries a $2 million general
business insurance policy. The Company does not carry any insurance to cover the
financial risks associated with a potential FDA mandated recall of an approved
product. There can be no assurance, however, that such insurance policies will
be sufficient to fully indemnify the Company against any asserted claims or that
such insurance will continue to be available.
HUMAN RESOURCES
The Company has forty-seven full-time and six part-time employees. The Company
believes that its relationship with its employees is good. None of the Company's
employees is represented by a labor union.
TRADE SECRETS
The Company also relies on trade secrets and proprietary know-how to protect
certain of its technologies and potential products. The Company requires
employees, consultants and advisors to enter into confidentiality agreements
that prohibit disclosure to any third party or use of such secrets and know-how
for commercial purposes. Company employees also agree to disclose and assign to
the Company all methods, improvements, modifications, developments, discoveries
and inventions conceived during their employment that relate to the Company's
business. We cannot assure, however, that these agreements will be observed to
prevent disclosure or that they will provide adequate protection for the
Company's confidential information and inventions.
DISCONTINUED DEVELOPMENT PRODUCTS
Through December 31, 1999, the Company discontinued development activities on a
total of eleven proposed products. During 1997, the Company discontinued
development activities on the following proposed products: Colomed, Caprogel,
Clonidine, alpha-galactosidase A, colloidal bismuth subcitrate, Intrachol,
Repliderm, 5FU (5-fluorouracil), and other indications of Cystadane. In December
1998, the Company sold its rights to colloidal bismuth subcitrate for $750,000,
and is evaluating the potential value of its rights to one or more of the other
proposed products that were discontinued in 1997. Depending on the availability
of financing in subsequent periods, the Company may continue development of one
or more of the proposed products that have been discontinued based on the
criteria described under the Product Acquisition section. In addition, prior to
1997, the Company discontinued development activities on two proposed products,
which proved to have little potential future value. There can be no assurance
that the Company's license rights and/or any clinical data related to a
discontinued product have any value to a third party and, if such rights or
clinical data have value, there can be no assurance that the Company can come to
terms with a third party for the sale of such rights or clinical data.
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<PAGE>
PRODUCTS
The following tables summarize certain information relating to the Company's
products:
<TABLE>
<CAPTION>
MARKETED PRODUCTS
- -------------------------------------------------------------------------------------------------------------
NDA U.S. Patent Orphan Drug
Approval Issued or Status
Approved Product and STMS Application Date Applied For **
- ----------------------------------- ----------------------- -------- ----------- -----------
<S> <C> <C> <C> <C>
I. ANTIDOTE STMS
- -----------------------------------
Antizol(R)(fomepizole) Injection Antidote for ethylene December No Granted
glycol (antifreeze) or 1997
suspected ethylene
glycol ingestion in
humans
II. ONCOLOGY SUPPORT STMS
Busulfex(R)(busulfan) Injection For use in combination February Yes Granted
with cyclophosphamide 1999
as a conditioning
regimen prior to
allogenic hematopoietic
cell transplantation
for chronic myelogenous
leukemia ("CML")
Elliotts B(R) Solution (buffered Diluent for September No Granted
Intrathecal electrolyte/dextrose intrathecally 1996
Solution) administered
methotrexate sodium and
cyarabine
III. OTHER
Cystadane(R)(betaine anhydrous for Homocystinuria, a October No Granted
oral solution) genetic disease 1996
Antizol-Vet(R)(fomepizole) Antidote for ethylene November No Five year
for Injection glycol (antifreeze) or 1996 period of
suspected ethylene exclusivity
glycol ingestion in
dogs
Sucraid(R)(sacrosidase) oral Sucrase deficiency, a April No Granted
solution genetic disease 1998
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
PRODUCTS UNDER DEVELOPMENT
- -----------------------------------------------------------------------------------------------------------------
Phase of U.S. Patent Orphan Drug
Development Issued or Designation
Proposed Product and STMS Proposed Application * Applied For **
- ----------------------------------- --------------------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
I. SLEEP DISORDERS STMS
Xyrem(R)(sodium oxybate) oral Under investigation for the
solution treatment of narcolepsy III Yes Yes
</TABLE>
* Development Phases are discussed under "Business - The Regulatory Process".
** Orphan Drug Designation and Status are discussed under "Business -
Proprietary Rights"
ANTIDOTE STMS - APPROVED PRODUCT
ANTIZOL (FOMEPIZOLE) INJECTION
Antizol, the first of the Company's products in the Antidote STMS, received
marketing clearance from the FDA on December 4, 1997. The Company commenced
shipping Antizol in December 1997. Antizol is primarily used in a hospital
setting and is distributed for the Company by an affiliate of Cardinal Health.
When ingested by humans, ethylene glycol (found in antifreeze) and methanol
(found in windshield wiper fluid) can lead to death or permanent and serious
physical damage. In a survey conducted in 1999 by the American Association of
Poison Control Centers, over 6,300 cases of ethylene glycol poisoning were
reported to United States poison control centers. In the same year, there were
approximately 600 treatments for such poisonings. The Company believes that
hospital pharmacies will continue to stock Antizol because it is important to
treat poisoned patients very quickly in order to improve the chances of
successful recovery. For 1999, Antizol contributed approximately 43% of the
Company's total 1999 revenue. The Company expects to see incremental stocking by
hospitals in 2000, due to the 1999 publishing of clinical data and guidelines
for treatment.
The Company has obtained orphan drug status for Antizol as an antidote to treat
ethylene glycol poisonings, which provides marketing exclusivity to the Company
through December 2004. Fomepizole, the active ingredient in Antizol, is a known
compound and is not patentable. The Company has contracted with a third party
for the production of Antizol under GMP conditions. The Company, through a
sublicense agreement with Mericon Investment Group, Inc. ("MIG"), has an
exclusive, worldwide license to develop and market Antizol, which expires in
July 2013, subject to a five year renewal through July 2018 exercisable by MIG
at the request of the Company.
Orphan Medical was granted release from its Phase IV commitment as a result of
the very small number of pediatric patients requiring treatment for ethylene
glycol and methanol poisonings. A supplemental NDA covering the methanol
indication is expected to be submitted to the FDA in the near future.
ONCOLOLOGY SUPPORT STMS - APPROVED PRODUCTS
BUSULFEX (BUSULFAN) INJECTION
Busulfex is the Company's lead product in its Oncology Support STMS. Following
an accelerated six-month priority review, the Company received regulatory
approval from the FDA in February 1999 to market Busulfex in the United States.
The FDA approved Busulfex for use in combination with cyclophosphamide as a
conditioning regimen prior to allogeneic hematopoietic progenitor cell
transplantation for chronic myelogenous leukemia ("CML"). The first commercial
sales of Busulfex occurred in February 1999, within two weeks of FDA approval.
Busulfex also received approval to market in Canada in September 1999, and in
Israel in February 2000. The indications approved in Canada and Israel, provide
for use of Busulfex as a conditioning regimen prior to bone marrow or
hematopoietic progenitor cell transplantation, when used in combination with
other chemotherapeutic agents and/or radiotherapy. Included in the Canadian
indication are acute lymphocytic leukemia, non-lymphocytic leukemia, acute
myeloid leukemia, non-Hodgkin's lymphoma, Hodgkin's disease, multiple myeloma,
myelodysplastic syndrome, breast cancer, ovarian cancer and several genetic
diseases.
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In October 1999, the Company signed a definitive agreement with Pierre Fabre
Medicament, granting the French company exclusive rights to market and
distribute Busulfex in 21 European countries, Argentina, and South Africa.
Pierre Fabre, a private company with 1998 sales in excess of $1 billion and
approximately 8,300 employees, will market Busulfex to transplant centers
through 75 oncology marketing and sales personnel. The Company signed an
agreement with IDIS World Medicine in December 1999 to distribute Busulfex on a
named patient basis to requesting physicians outside of the United States,
Canada and Israel. The Company began shipments to IDIS in January 2000.
Bone marrow and peripheral stem cell transplants are collectively known as
hematopoietic progenitor cell transplants, but are more commonly referred to as
stem cell or bone marrow transplants. This year approximately 20,000 stem cell
transplants are expected to be performed in the United States, with another
20,000 expected to be performed outside the United States. One of the many
complex steps in performing a stem cell transplant includes using high doses of
chemotherapeutic drugs, such as Busulfex, and/or radiation as a "conditioning
regimen" to destroy the abnormal cancer cells in the bone marrow and to create
"space" for the engraftment of transplanted stem cells. The stem cell transplant
then replaces the diseased or damaged marrow to grow into healthy marrow.
An oral form of busulfan has been used in the transplant setting for a number of
years. However, there are difficulties associated with its use. A patient
undergoing a transplant may be required to take up to 35 busulfan pills every
six hours, or up to 140 pills each day, over four days, often while in a state
of nausea. If the patient vomits any of the pills, they are often given
additional pills to ensure they receive the administered dose. Unfortunately,
because the absorption of the pills through the gastrointestinal system is
erratic, it is difficult to determine how much of the administered dose has
actually been absorbed. This variation in drug exposure can cause underdosing,
possibly leading to an ineffective conditioning regimen. Conversely, the
variation can lead to overdosing, causing an excessive amount of toxicity to the
patient. Because of these variations, many authors have cited the need for an
intravenous form of busulfan. The Company is the first to bring an intravenous
form of busulfan to the market.
Of the 20,0000 procedures expected to be performed in the United States, more
than 4,000 of these may receive some form of busulfan, as part of the
pre-transplantation conditioning regimen. The Company is marketing Busulfex to
hematologists and oncologists who perform stem cell transplants at cancer
treatment centers.
As clinicians review the clinical study data, they have responded positively to
the results seen in the Busulfex trials. The pharmacokinetics seen with
Busulfex, meaning the level of drug exposure, demonstrate the consistency that
would be expected with an intravenous drug. This consistency has led to the
outcomes seen with Busulfex, which show a low rate of liver toxicity as well as
an acceptable rate of early mortality within the first 100 days, the most
critical period for the patient. These factors may lead to improved safety and
an improved likelihood that a BMT will be successful.
Adoption of Busulfex into standard busulfan-based regimens has been steady, and
several clinicians in leading institutions have initiated new research protocols
using Busulfex to enhance the conditioning regimen, based on clinical data and
experience with Busulfex. Several leading United States research centers have
indicated to the Company that they have initiated or intend to initiate new
study protocols specifying the use of Busulfex.
Many other drugs are currently being developed for use in the BMT area. Although
most of these new drugs are used for a different purpose during the bone marrow
transplant and not in the conditioning regimen, some of them may compete with
Busulfex. In addition, the Company is aware that SuperGen Inc., which acquired
Sparta Pharmaceutical in 1999, now owns rights to another form of intravenous
busulfan which was in development by Sparta prior to its acquisition. SuperGen
holds orphan drug designation for its intravenous busulfan and could seek orphan
drug status, if SuperGen were to proceed with development of its intravenous and
if the FDA approves an NDA for such a product.
The Company has obtained orphan drug status for Busulfex for the approved
indication, which provides marketing exclusivity for that indication to the
Company through February 2006. The Company has contracted with a third party for
the production of Busulfex under GMP conditions. In addition, the Company has an
exclusive, worldwide license from M.D. Anderson Cancer Center, The University of
Texas, and The University of Houston (collectively, the "busulfan licensors") to
develop and market an intravenous form of busulfan, which is effective for the
term of
17
<PAGE>
busulfan licensors' patent rights. The busulfan licensors have been granted two
U.S. patents covering the licensed product's formulation and its use in bone
marrow transplants and other conditions, which expire in September 2016 and July
2015, respectively. The product is distributed for the Company by an affiliate
of Cardinal Health.
ELLIOTTS B SOLUTION (BUFFERED INTRATHECAL ELECTROLYTE/DEXTROSE INJECTION)
Elliotts B Solution, the first of the Company's products in the Oncology Support
STMS, received marketing clearance from the FDA in September 1996. The first
commercial sales of Elliotts B Solution occurred in December 1996. Elliotts B
Solution is primarily used in a hospital setting and is distributed for the
Company by an affiliate of Cardinal Health. Elliotts B Solution is a buffered
diluent for the intrathecal administration (injection into the fluid space
surrounding the spinal cord) of chemotherapeutic agents. Intrathecal injections
are most commonly made in treating acute lymphoblastic leukemia ("ALL"). ALL is
the most prevalent form of leukemia in children. Due to advances in
chemotherapy, the cure rate for ALL has improved dramatically in the past 30
years, going from almost zero to nearly 75% today. As a part of modern
chemotherapy, doctors often administer a series of up to 20 injections of
methotrexate sodium into the cerebrospinal fluid of patients. Elliotts B
Solution is comparable in pH, electrolyte composition, glucose content and
osmolarity to cerebrospinal fluid. It is estimated that cerebrospinal injections
of methotrexate sodium are administered to about 6,000 people in the United
States on an annual basis. Elliotts B Solution revenues through December 1999
have not been material nor does the Company expect that revenues to be material
in future periods.
The Company has obtained orphan drug status for the use of Elliotts B Solution
as a diluent for methotrexate sodium or cytarabine, which provides marketing
exclusivity through September 2003. Elliotts B Solution is a known compound that
has been used previously for the intrathecal administration of chemotherapeutic
agents and is, therefore, not patentable. The Company has contracted with a
third party for the production of Elliotts B Solution under GMP conditions. No
license was required for the Company to develop and market Elliotts B Solution.
SLEEP DISORDERS STMS - INVESTIGATIONAL PRODUCT
XYREM (SODIUM OXYBATE) ORAL SOLUTION
Narcolepsy is a chronic neurologic sleep disorder in which sleep is
"fragmented", that is, does not occur in an integrated and cohesive manner. This
fragmentation results in excessive daytime sleepiness, unavoidable daytime sleep
attacks, cataplexy or sudden loss of muscle control provoked by emotions, sleep
paralysis or brief periods of muscle paralysis and hallucinations, or vivid and
sometimes frightening dreaming when falling asleep or waking up. Other related
symptoms include broken night-time sleep, disturbances of auditory and visual
perception, and lapses of consciousness and memory problems. These symptoms can
lead to a variety of complications, such as limitations on education and
employment opportunities, driving or machine accidents, difficulties at work
resulting in disability, forced retirement or job dismissal, and depression.
Narcolepsy is thought to affect as many as 125,000 patients in the United States
and approximately 80,000 to 100,000 of these patients are thought be diagnosed.
Narcolepsy patients usually begin to develop symptoms between the ages of 15-25,
with a smaller number developing symptoms between the ages of 35-45. Symptoms
have been reported in patients as young as five years of age.
The usual treatment for narcolepsy includes symptomatic treatment of excessive
daytime sleepiness and sleep attacks with stimulants or wakefulness promoting
agents. The symptoms of cataplexy, sleep paralysis and hypnagogic hallucinations
are typically treated with tricyclic antidepressants ("TCAs") or selective
serotonin reuptake inhibitors ("SSRIs"). These treatment regimens, in addition
to limited efficacy, are often unsatisfactory for a number of other reasons.
Amphetamines and other stimulants often cause undesirable side effects such as
insomnia, hypertension, palpitations, irritability and, at higher doses, may
mimic the symptoms of schizophrenia. Patients often build tolerance to the TCAs
and SSRIs and doses are increased to obtain clinical effectiveness at high
doses. These medications can cause the side effects of dry mouth, impotence,
loss of libido, and rapid heart. Clinical results with Xyrem suggest that it is
both safe and effective in the treatment of narcolepsy. When administered at
night, it is believed to consolidate sleep and has been shown to improve
cataplexy, and to lower the incidence of daytime sleepiness. More than 300
narcolepsy patients have been exposed to clinical doses with no consistent ill
effects, some of these patients for up to 15 years of treatment. Xyrem does not
appear to have the side effects associated with TCAs and SSRIs. Narcoleptic
patients could be treated with Xyrem at night and, if needed, with stimulants
during waking hours.
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Provigil(R) (modafinil), a product marketed by Cephalon, Inc., was approved by
the FDA in late 1998 for the treatment of excessive daytime sleepiness
associated with narcolepsy. The Company believes that Provigil and the proposed
use for Xyrem focus on different symptoms of narcolepsy, which could mean that
some patients may benefit from both modafinil and Xyrem.
During 1998, the Company completed a clinical trial with over 130 patients at 18
sleep centers, which assessed Xyrem at different dose levels against placebo.
When compared against placebo, higher doses of Xyrem demonstrated a reduction in
the number and severity of cataplexy attacks per week, the primary measure of
efficacy in this clinical trial. The secondary measure of efficacy was the
reduction of excessive daytime sleepiness, as measured by the Epworth Sleepiness
Scale, a subjective, but validated measure of EDS. At higher doses, Xyrem
appeared to reduce EDS beyond the improvement provided by stimulants which
patients continued to take during the trial.
During the first quarter of 1999, the Company commenced a Treatment IND program,
which is a clinical trial, to collect additional clinical safety data necessary
for the submission of an NDA. The FDA permits an investigational drug, like
Xyrem, to be used under a Treatment IND if there is sufficient evidence of
safety and effectiveness and the drug is intended to treat a serious disease.
The FDA also authorized the Company to seek reimbursement from patients and
their insurance providers for the use of Xyrem in this trial, which has allowed
the education of certain third party payors regarding Xyrem.
Gamma hydroxybutyrate (GHB) is the active ingredient in Xyrem. Illicitly
produced GHB has been reported to be a drug of abuse. For this reason the
Company has requested that Xyrem be classified a "schedule III/IV drug" under
the federal Controlled Substances Act. Many states have an equivalent
classification system and compliance requirements for drugs classified as a
scheduled drug. On February 18, 2000, the President signed federal legislation
that directs the U.S. Attorney General to use her emergency scheduling authority
to make gamma hydroxybutyrate (GHB) a Schedule I substance within 60 days.
Schedule I is the designation by which illegal drugs are controlled. The bill
further directs the Attorney General to treat GHB products being studied under
Food and Drug Administration (FDA) approved protocols as Schedule III
substances. This legislation also mandates that Schedule III designation will
apply to any FDA approved New Drug Application (NDA) for GHB products.
Sodium oxybate (GHB), the active ingredient in Xyrem, is a known compound and is
not patentable. The Company has received an orphan drug designation for its
proposed use of Xyrem. The Company has also filed a patent application with
respect to its formulation of Xyrem oral solution and will seek to obtain other
patent protection when possible and appropriate. No license was required for the
Company to develop Xyrem nor will a license be required to market Xyrem, if
approved by the FDA. The Company has contracted with third party bulk drug and
drug product manufacturers for the production of Xyrem.
OTHER APPROVED PRODUCTS
CYSTADANE (BETAINE ANHYDROUS FOR ORAL SOLUTION)
Cystadane received marketing clearance from the FDA in October 1996. The first
commercial sales of Cystadane occurred in December 1996. Cystadane is
principally distributed on a non exclusive basis by Chronimed, Inc. directly to
patients in the United States through its mail order pharmacy. Although
Cystadane does not fit into one of the Company's three STMS, the Company
believes that the small size of the market and the high medical value of
Cystadane justify the limited resources required by the Company to continue
making this product available to patients. It is the first agent approved by the
FDA for the treatment of homocystinuria, an inherited metabolic disease. The
clinical consequences are wide-ranging and include dislocation of the ocular
lens, early (under age 30) thromboembolism, developmental and mental retardation
and reduced life span related to elevated plasma homocysteine levels. It has
been estimated that homocystinuria occurs about once in every 200,000 live
births worldwide. There are estimated to be 1,000 patients with homocystinuria
in the United States. The annual market potential for Cystadane is expected to
be under $500,000. Cystadane revenues met the Company's expectations in 1999 and
are expected to grow slightly in subsequent periods.
The Company has obtained orphan drug status for Cystadane for the treatment of
homocystinuria, which provides marketing exclusivity to the Company through
October 2003. Betaine anhydrous, the active ingredient in Cystadane,
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is a known compound and is not patentable. The Company has contracted with a
third party for the production of Cystadane under GMP conditions. No license was
required for the Company to develop and market Cystadane.
The Company is not currently sponsoring any clinical trials with/for Cystadane.
It is aware, however, of clinical trials being conducted by independent
investigators to assess the safety and efficacy of Cystadane as a stand alone or
adjunctive therapy for the following positions: Non-alcoholic stecitohepatitis,
Rett syndrome, rheumatoid arthritis and hyperhomocystinemia. The Company does
not expect that the results of any of these clinical trials to significantly
enhance or decrease the current limited market potential for Cystadane.
ANTIZOL-VET (FOMEPIZOLE) FOR INJECTION
In November 1996, the Center for Veterinary Medicine of the FDA approved
Antizol-Vet as a treatment for dogs that have ingested or are suspected of
having ingested ethylene glycol. The first commercial sales of Antizol-Vet
occurred in January 1997. It is estimated that at least 10,000 cases of ethylene
glycol poisoning occur in dogs each year. The earlier an ethylene glycol
poisoned dog is treated with Antizol-Vet, the more likely that there will be a
positive outcome. The annual market potential for Antizol-Vet is expected to be
under $300,000. Although Antizol-Vet is not included in one of the Company's
three STMS, the Company will continue making Antizol-Vet available to
veterinarians justify the limited resources required by the Company to market
and distribute the product. The Company has found that stocking of this product
has been limited due to its high cost, but they are ordering it when a poisoning
occurs. Antizol-Vet revenues met the Company's expectations in 1999 and are
expected to remain constant or decline in subsequent periods.
Federal law provides the Company with a marketing exclusivity period through
November 2001 for the use of Antizol-Vet in dogs for the approved indication.
Fomepizole, the active ingredient in Antizol, is a known compound and is not
patentable. The Company has contracted with a third party for the production of
Antizol-Vet under GMP conditions. The Company, through a sublicense agreement
with Mericon Investment Group, Inc. ("MIG"), has an exclusive, worldwide license
to develop and market Antizol-Vet, which expires in July 2013, subject to a five
year renewal through July 2018 exercisable by MIG at the request of the Company.
The Company has partnered with seven leading regional and national veterinary
wholesalers to distribute Antizol-Vet to veterinary clinics. It is believed that
the current partners effectively and efficiently encompass the entire country
with limited sales territory overlap, thus helping prevent downward retail
pricing pressures. The Company does not anticipate adding additional
distribution partners.
SUCRAID (SACROSIDASE) ORAL SOLUTION
Sucraid received marketing clearance from the FDA in April 1998. The first
commercial sales of Sucraid occurred in July 1998. Sucraid is principally
distributed by an affiliate of Cardinal Health directly to patients in the
United States through its mail order pharmacy. The FDA approved Sucraid to be
used for oral replacement therapy of genetically determined sucrase deficiency,
which is part of congenital sucrase isomaltase deficiency (CSID). Sucraid is
used as a replacement for an enzyme in the small intestine that is necessary for
the digestion of sucrose, which is common table sugar. Although Sucraid does not
fit into one of the Company's three STMS, the Company believes that the small
size of the market and the high medical value of Sucraid justify the limited
resources required by the Company for making this product available to patients.
The annual market potential for Sucraid is expected to be under $500,000.
Sucraid revenues since July 1998 have continued to meet the Company's
expectations and are expected to grow slightly in 2000.
The primary symptoms of CSID include severe watery diarrhea, chronic
malabsorption and, in infants and toddlers, failure to thrive. Other common
symptoms include nausea, vomiting, abdominal cramps and abdominal pain following
the consumption of foods containing sucrose. Prior to the approval of Sucraid,
the only specific treatment of CSID available to patients was the life-long
adherence to a sucrose-free diet. Compliance with a sucrose-free diet is very
difficult because sucrose is found in many foods in the typical American diet.
Nonspecific symptomatic treatments include antidiarrheal, antispasmodic and
antiflatulence drugs, all of which are limited in their efficacy. Sucraid is a
specific replacement of the missing enzyme responsible for CSID.
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Sacrosidase, the active ingredient in Sucraid, is a known compound and is not
patentable. The Company has obtained orphan drug status for Sucraid for the
approved indication, which provides marketing exclusivity to the Company through
April 2005. The Company has contracted with a third party for the production of
Sucraid under GMP conditions. In addition, the Company has an exclusive,
worldwide license from Hartford Hospital to develop and market Sucraid, which
expires in April 2005. The license provides for two five year extension options,
the first through April 2010 and the second through April 2015, unless either
party decides to terminate the license within 90 days prior to April 2005 or
April 2010.
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RISK FACTORS
An investment in our common stock involves a number of risks, including among
others, risks associated with companies that operate in the pharmaceutical
industry. These risks are substantial and inherent in our operations and
industry. You should carefully consider the following information about these
risks, together with the information in the rest of this prospectus, before
buying shares of common stock.
WE HAVE A HISTORY OF LOSSES, WHICH WE EXPECT TO CONTINUE.
We have been unprofitable since our inception in January 1993. We expect
operating losses in 2000 because anticipated gross profits from product revenues
will not offset our operating expenses and additional spending to continue drug
development activities. The amount of these losses may vary significantly from
year-to-year and quarter-to-quarter. Our actual losses will depend on, among
other factors, the timing of product development, regulatory approval, and
market demand for our Food and Drug Administration ("FDA") approved products. We
cannot assure you that we will ever generate sufficient product revenues to
achieve profitability.
LIMITATIONS TO SOURCES OF ADDITIONAL CAPITAL - RESTRICTIONS, COVENANTS AND
RIGHTS RELATED TO SENIOR CONVERTIBLE PREFERRED STOCK AND SERIES B CONVERTIBLE
PREFERRED STOCK.
On July 23, 1998, we completed the private sale to UBS Capital of $7.5 million
of Senior Convertible Preferred Stock. On August 2, 1999, we completed another
private sale to UBS Capital of $2.95 million of Series B Convertible Preferred
Stock. In conjunction with the issuance of the preferred shares, we agreed to
several restrictions and covenants, and granted certain voting and other rights
to the holders of the preferred shares. One of the most important of these
restrictions is that we cannot incur additional indebtedness, except for
indebtedness secured solely by our trade receivables, until we have profitable
operations, subject to certain limitations. Another important restriction is
that, without the approval of a majority of the preferred stockholders, we
cannot issue additional equity securities unless the selling price per share
exceeds the then conversion price of the outstanding convertible preferred stock
or the sale of equity is accomplished in a public offering. The present
conversion price is $8.14 per share for the Senior Convertible Preferred Stock
and $6.50 for the Series B Convertible Preferred Stock. These restrictions could
make it more difficult and more costly for us to obtain additional capital. We
cannot assure you that additional sources of capital will be available to us or,
if available, on terms acceptable to us.
POSSIBLE VOLATILITY OF STOCK PRICE.
There is generally significant volatility in the market prices of securities of
early stage companies, and particularly of early stage pharmaceutical companies.
Contributing to this volatility are various factors and events that can affect
our stock price in a positive or negative manner. These factors and events
include, but are not limited to:
* announcements by us or our competitors of new product
developments or clinical testing results;
* governmental approvals, refusals to approval, regulations or
actions;
* developments or disputes relating to patents or proprietary
rights;
* public concern over the safety of therapies;
* financial performance;
* fluctuations in financial performance from period to period;
and
* small float or number of shares of our stock available for
sale and trade.
These and other factors and events may have a significant impact on our business
and on the market price of the common stock.
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WE CANNOT BE SURE THAT FUTURE CAPITAL WILL BE AVAILABLE TO MEET OUR EXPECTED
CAPITAL REQUIREMENTS.
We expect spending for research and development, and sales and marketing to
increase significantly in fiscal 2000. Although we believe that we have
sufficient capital to meet out current business objectives, if we expand our
business plans, we may need additional capital. Adequate funds for our
operations, continued development, and expansion of our business plans, whether
from financial markets or from other sources, may not be available when needed
on acceptable terms, or at all. If we issue additional securities your holding
may be diluted.
POSSIBLE VOLATILITY OF STOCK PRICE AND REDUCED LIQUIDITY OF THE MARKET FOR THE
STOCK - POSSIBLE LOSS OF NASDAQ NATIONAL MARKET LISTING AND FAILURE TO QUALIFY
FOR NASDAQ SMALL CAP MARKET LISTING.
There is a risk that the market value and the liquidity of the public float for
our common stock could be adversely affected in the event we no longer meet the
Nasdaq's requirements for continued listing on the National Market. For
continued listing on the Nasdaq National Market, a company must satisfy a number
of requirements, which in our 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 December 31, 1999, our net tangible
assets equaled $3.6 million and our market capitalization was approximately
$34.3 million (based on the last sale price of $5.1875 and 6,606,207 shares
outstanding as of December 31, 1999). Net tangible assets are defined as total
assets less the sum of total liabilities and intangible assets. Market
capitalization is defined as total outstanding shares multiplied by the last
sales price quoted by Nasdaq.
Since December 31, 1999, two events have occurred to improve this situation. In
February, 2000, we completed the sale of an aggregate of 1,365,000 shares of
newly issued common stock for net proceeds of $10.7 million. Because of this
financing, we exceeded the Nasdaq net tangible asset requirement as of March 1,
2000 with performa net tangible assets of $14.3 million. Moreover, as of March
1, 2000 we had 8,192,249 shares of common stock outstanding and the last sale
price of our stock on March 1, 2000 was $14.25 resulting in a market
capitalization of $116.7 million. Therefore, we currently meet the Nasdaq
National Market listing. However, we cannot assure you that this threshold will
continue to be met or that we will continue to have adequate capital to meet the
net tangible asset requirement.
THERE IS A LIMITED MARKET FOR OUR PRODUCTS.
Most orphan drugs have a potential United States market of less than $25 million
annually and many address annual markets of less than $1 million. We cannot
assure you that sales of our products will be adequate to make us profitable
even if the products are accepted by medical specialists and used by patients.
WE RELY ON THE LIMITED PROTECTION OF THE ORPHAN DRUG ACT.
UNITED STATES
Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs
intended to treat a "rare disease or condition." The Orphan Drug Act generally
defines "rare disease or condition" as one that affects populations of fewer
than 200,000 people in the United States. The Orphan Drug Act provides us with
certain limited protections for our products.
The first step in obtaining the limited protection under the Orphan Drug Act is
acquiring the FDA's approval of "orphan drug designation," which must be
requested before submitting a New Drug Application ("NDA"). After the FDA grants
orphan drug designation, it publishes the generic identity of the therapeutic
agent and the potential orphan use specified in the request. Orphan drug
designation does not constitute FDA approval. In addition, orphan drug
designation does not convey any advantage in, or shorten the duration of, the
regulatory approval process.
The second step in obtaining the limited protection under the Orphan Drug Act is
acquiring the FDA's recognition of "orphan drug status." The Orphan Drug Act
confers orphan drug status upon the first company to receive FDA approval to
market a drug with "orphan drug designation" for a specific
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designated indication. Orphan drug status does not protect against another
formulation or drug of materially different composition from being approved,
with or without orphan drug status, for the same indication. FDA approval also
results in United States marketing exclusivity for a period of seven years,
subject to certain limitations. Although obtaining FDA approval to market a
product with orphan drug status can be advantageous, we cannot assure you that
the scope of protection or the level of marketing exclusivity will remain in
effect in the future. In addition, United States orphan drug status does not
provide any marketing exclusivity in foreign markets. Although certain foreign
countries provide development and marketing benefits to orphan drugs, we cannot
assure you that such benefits can be obtained or, if obtained, will be of
material value to us. The FDA has granted us orphan drug status for Antizol,
Elliotts B Solution, Cystadane, Sucraid, and Busulfex.
We have obtained orphan drug designation for Xyrem and plan to submit an NDA for
approval. Sodium oxybate is the generic identity of the therapeutic agent for
Xyrem. Despite orphan drug designation for Xyrem, another pharmaceutical company
could attempt to develop sodium oxybate for the same designated indication as
Xyrem or may seek approval of an NDA for their drug prior to the approval of an
NDA for Xyrem. If the FDA first approves another sponsor's NDA for sodium
oxybate and for the same indication as Xyrem, that sponsor will be entitled to
exclusive marketing rights. In that case, the FDA would not approve our
application to market Xyrem for seven years, if at all. We are aware that the
FDA has granted Teva (formerly Biocraft) orphan drug designation for the use of
sodium oxybate to treat the symptoms of narcolepsy, however, we have obtained
the exclusive right to use Teva's data for one controlled study in our NDA
submission. We cannot assure you that the FDA will approve Xyrem first for the
designated indication. We also cannot assure you that the FDA will not grant
orphan drug designation and marketing approval to other competing products prior
to approving our NDA for Xyrem.
Even if the FDA approves an NDA for a drug with an orphan drug designation, the
FDA may still approve the same drug for a different indication, or a molecular
variation of the same drug for the same indication. We are aware that the FDA
granted to Sparta Pharmaceutical, which has been acquired by SuperGen Inc.,
orphan drug designation for an intravenous busulfan for a closely related
indication. If the FDA approves an NDA for Sparta's drug, Sparta could seek
orphan drug status. In addition, the FDA does not restrict doctors from
prescribing an approved drug for uses not approved by the FDA for that drug.
Thus, a doctor could prescribe another company's drug for indications for which
our product has received FDA approval and orphan drug status. Significant "off
label" use, that is, prescribing approved drugs for unapproved uses, could
adversely affect the marketing potential of any of our products that have
received orphan drug status and NDA approval.
The possible amendment of the Orphan Drug Act by Congress has been the subject
of congressional discussion from time to time over the last ten years. Although
Congress has made no significant changes to the Orphan Drug Act 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. We cannot assure you that
the Orphan Drug Act will remain in effect or that it will remain in effect in
its current form. The precise scope of protection that orphan drug designation
and marketing approval may afford in the future is unknown. We cannot assure you
that the current level of exclusivity will remain in effect.
EUROPE
An orphan drug act was recently passed in Europe that provides for up to ten
years of market exclusivity for the first company to obtain regulatory approval
for an orphan indication or a designated drug. This law, however, has yet to be
put into effect. For a pharmaceutical product to qualify, the prevalence (or
incidence), whichever is greater, must not exceed five patients per 10,000
population. We cannot provide assurance that this law will be enacted or that
any of our pharmaceutical products will qualify for orphan drug protection in
Europe or that another company will not obtain an approval which would block us
from marketing our product in Europe.
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THE FDA AND FOREIGN REGULATORY AUTHORITIES MUST APPROVE OUR PRODUCTS FOR SALE.
Government regulation in the United States and abroad is a significant factor in
the testing, production and marketing of our current and future products. Each
product must undergo an extensive regulatory review process conducted by the
United States Food and Drug Administration and by comparable agencies in other
countries. We cannot market any medicine we may develop or license as a
prescription product in any jurisdiction, including foreign countries, in which
the product does not receive regulatory approval. The approval process can take
many years and requires the expenditure of substantial resources.
We depend on external laboratories and medical institutions to conduct our
pre-clinical and clinical analytical testing in compliance with clinical and
laboratory practices established by the FDA. The data obtained from pre-clinical
and clinical testing is subject to varying interpretations that could delay,
limit or prevent regulatory approval. In addition, changes in FDA policy for
drug approval during the period of development and in the requirements for
regulatory review of each submitted NDA could result in additional delays or
outright rejection.
We cannot assure you that the FDA or any foreign regulatory authority will
approve in a timely manner, if at all, any product we develop. Generally, the
FDA and foreign regulatory authorities approve only a very small percentage of
newly discovered pharmaceutical compounds that enter pre-clinical development.
Moreover, even if the FDA approves a product, it may place commercially
unacceptable limitations on the uses, or "indications," for which a product may
be marketed. This would result in additional cost and delay for further studies
to provide additional data on safety or effectiveness.
FDA APPROVAL DOES NOT GUARANTEE FINANCIAL SUCCESS.
Six of our products have been approved for marketing by regulatory authorities
in the United States or elsewhere. Even if we obtain FDA approval to market
Xyrem, we cannot assure you that Xyrem or our other products will be
commercially successful or achieve the expected financial results. We may
encounter unanticipated problems relating to the development, manufacturing,
distribution and marketing of our products. Some of these problems may be beyond
our financial and technical capacity to solve. The failure to adequately address
any such problems could have a material adverse effect on our business and our
prospects. In addition, the efforts of government entities and third party
payors to contain or reduce the costs of health care may adversely affect our
sales and limit the commercial success of our products.
We cannot completely insulate our drug development portfolio from the
possibility of clinical or commercial failures. Some products that we have
selected for development may not produce the results expected during clinical
trials or receive FDA approval. Drugs approved by the FDA may not generate
product sales of an acceptable level. We have discontinued the development of
eleven products from our portfolio since inception: L-Cycloserine in 1994;
Glucaric Acid in 1996; and nine other products in 1997. We discontinued the nine
products in 1997 in order to focus our development efforts and resources on
those products that fit within three selected strategic therapeutic market
segments: Antidote; Oncology Support; and Sleep Disorders. In December 1998, we
sold our rights to colloidal bismuth subcitrate for $750,000. We are evaluating
the potential value of our rights in other discontinued products. We cannot
assure you that any of these discontinued products have any value. Depending on
available financing, we may continue to develop one or more of the discontinued
products. We cannot assure you that we will continue development on all other
proposed products or that we will continue marketing all FDA approved products.
SIGNIFICANT GOVERNMENT REGULATION CONTINUES ONCE A PRODUCT IS APPROVED FOR SALE.
After a reviewing division of the FDA approves a drug, the FDA's Division of
Drug Marketing, Advertising and Communication must approve such drug's marketing
claims, which are the basis for the drug's labeling, advertising and promotion.
We cannot be sure that the Division of Drug Marketing, Advertising and
Communication will approve our proposed marketing claims. The failure of the
Division of Drug Marketing, Advertising and Communication to approve our
proposed marketing claims could have a material adverse effect on our business
and prospects.
The FDA requires that a company conduct "post-marketing adverse event
surveillance programs" to monitor any side effects that occur after the
company's drug is approved for marketing. If the surveillance
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program indicates unsafe side effects, the FDA may recall the product, and
suspend or terminate a company's authorization to market the product. The FDA
also regulates the manufacturing process for an approved drug. The FDA may
impose restrictions or sanctions upon the subsequent discovery of previously
unknown problems with a product or manufacturer. One possible sanction is
requiring the withdrawal of such product from the market. The FDA must approve
any change in manufacturer as well as most changes in the manufacturing process
prior to implementation. Obtaining the FDA's approval for a change in
manufacturing procedures or change in manufacturers is a lengthy process and
could cause production delays and loss of sales, which would have a material
adverse effect on our business and our prospects.
Certain foreign countries regulate the sales price of a product after marketing
approval is granted. We cannot be sure that we can sell our products at
satisfactory prices in foreign markets even if foreign regulatory authorities
grant marketing approval.
WE RELY ON OTHERS FOR PRODUCT DEVELOPMENT OPPORTUNITIES.
We engage only in limited research to identify new pharmaceutical compounds. To
build our product portfolio, we have adopted a license and acquisition strategy.
This strategy for growth requires us to identify and acquire pharmaceutical
products targeted at niche markets within selected strategic therapeutic market
segments. These products usually require further development and approval by
regulatory bodies before they can be marketed. We cannot assure you that any
such products can be successfully developed, approved or marketed. We must rely
upon the willingness of others to sell or license pharmaceutical product
opportunities to us. Other companies, including those with substantially greater
resources, compete with us to acquire such products. We cannot assure you that
we will be able to acquire rights to additional products on acceptable terms, if
at all. Our failure to acquire or license any new pharmaceutical products or
products that fit within one of our strategic therapeutic market segment, or our
failure to promote and market any products successfully or products within an
existing strategic therapeutic market segment, could have a material adverse
effect on our business and our prospects.
We have contractual development rights to certain compounds through various
license agreements. Generally, the licensor can unilaterally terminate these
agreements for several reasons, including, but not limited to the following
reasons:
* for cause if we breach the contract;
* if we become insolvent or bankrupt;
* if we do not apply specified minimum resources and efforts to
develop the compound under license; or
* if we do not achieve certain minimum royalty payments, or in
some cases, minimum sales levels.
We cannot assure you that we can meet all specified requirements and avoid
termination of any license agreements. We cannot assure you that if any
agreement is terminated, we will be able to enter into similar agreements on
terms as favorable as those contained in our existing license agreements.
WE DEPEND ON OTHERS TO MANUFACTURE AND SUPPLY THE PRODUCTS WE MARKET.
We do not have and do not intend to establish any internal product testing,
synthesis of bulk drug substance, or manufacturing capability for drug product.
Accordingly, we depend on others to supply and manufacture the components
incorporated into all of our finished drug products. The inability to contract
for these purposes on acceptable terms could adversely affect our ability to
develop and market our products. Failure by parties with whom we contract to
adequately perform their responsibilities may delay the submission of products
for regulatory approval, impair our ability to deliver our products on a timely
basis or otherwise adversely affect our business and our prospects. The loss of
a supply or manufacturing contractor could materially adversely affect our
business and our prospects.
The loss of either a bulk drug supplier or drug product manufacturer would
require us to obtain regulatory clearance in the form of a "pre-approval
submission" and incur validation and other costs associated with
26
<PAGE>
the transfer of the bulk drug or drug product manufacturing process. We believe
that it could take as long as one year for the FDA to approve such a submission.
Because our products are targeted to relatively small markets and our
manufacturing production runs are small by industry standards, we have not
incurred the added costs to certify and maintain secondary sources of supply for
bulk drug substance or backup drug product manufacturers for some products.
Should we lose either a bulk drug supplier or a drug product manufacturer, we
could run out of salable product to meet market demands or investigational
product for use in clinical trials, while we wait for the FDA approval of a new
bulk drug supplier or drug product manufacturer. We cannot assure you that the
change of a bulk drug supplier or drug product manufacturer and the transfer of
the processes to another third party will be approved by the FDA, and if
approved, in a timely manner. The loss of or the change of a bulk drug supplier
or a drug product manufacturer could have a material adverse effect on our
business and prospects.
BULK DRUG SUPPLY
Bulk drug substance is the active chemical compound used in the manufacture of
our drug products. We depend substantially on Ash Stevens, Inc. for the supply
of bulk drug substance used in Busulfex, Antizol, and Antizol-Vet. If we were to
lose Ash Stevens as a supplier, we would be required to identify a new supplier
for the bulk drug substance used in products that provided approximately 90% of
1999 and all of 1998 revenues and are expected to generate over 90% of 2000
total revenues. We depend substantially on Lonza, Inc. for the supply of bulk
drug substance used in Xyrem. If we were to lose Lonza as a supplier, we would
be required to identify a new supplier before an NDA is submitted for Xyrem. We
also cannot assure you that our bulk drug supply arrangements with Ash Stevens
and Lonza, or any other future such supplier, might not change in the future. We
cannot assure you that any change would not adversely affect production of
Busulfex, Antizol, Antizol-Vet, Xyrem, or any other drug the Company might
attempt to develop or market.
DRUG PRODUCT MANUFACTURE
From bulk drug substance, drug product manufacturers formulate a finished drug
product and package the product for sale or for use in clinical trials. We
depend substantially on an affiliate of Boehringer Ingelheim for drug product
manufacturing of Busulfex, Antizol, and Antizol-Vet. If we were to lose
Boehringer as a manufacturer, we would be required to identify a new
manufacturer for drug products that provided approximately 90% of 1999 and all
of 1998 revenues and are expected to generate over 90% of 2000 total revenues.
We have identified Catalytica Pharmaceuticals, Inc. and Global Pharm, Inc. as
drug product manufacturers for Xyrem and expect to contract with either or both
of these companies for its manufacture. Currently, however, we do not have a
contract with either firm. If we do not contract with either of these firms, we
would be required to identify a new drug product manufacturer before an NDA is
submitted for Xyrem. We cannot assure you that our drug product manufacturing
arrangements with Boehringer and Global Pharm might not change in the future. We
are currently negotiating with an additional manufacturer for additional
production of Xyrem. We do not have a contract in place with this supplier at
this time and cannot assure you that contract negotiations will be completed and
a contract executed. We cannot assure you that any change would not adversely
affect production of Busulfex, Antizol, Antizol-Vet, or Xyrem, or any other drug
that we might attempt to develop or market.
WE CANNOT CONTROL OUR CONTRACTORS' COMPLIANCE WITH APPLICABLE REGULATIONS.
The FDA defines and regulates good manufacturing practices to which bulk drug
suppliers and drug product manufacturers are subject. The Drug Enforcement
Agency (DEA) defines and regulates the handling and reporting requirements for
certain drugs which have abuse potential, known as "scheduled drugs". Foreign
regulatory authorities prescribe similar rules and regulations. Our supply and
manufacturing contractors must comply with these regulatory prescriptions.
Failure by our contractors to comply with FDA or DEA requirements or applicable
foreign requirements could result in significant time delays in our inability to
commercialize or continue to market a product. Either result could have a
material adverse effect on our business and prospects. Failure to comply with
good marketing practices or other applicable legal requirements can lead to
federal seizure of violative products, injunctive actions brought by the federal
government, or potential criminal and civil liability for Orphan, our officers,
or our
27
<PAGE>
employees. We cannot assure you that we will be able to maintain relationships
either domestically or abroad with contractors whose facilities and procedures
comply or will continue to comply with FDA or DEA requirements or applicable
foreign requirements.
WE DEPEND UPON OTHERS FOR DISTRIBUTION.
We have an exclusive agreement with Cardinal Health, Inc. to provide a variety
of services to support the effective distribution of our products. Cardinal will
provide integrated distribution and operations services to process and support
transactions between us and our wholesalers, specialty distributors, and direct
customers. Cardinal also will provide reimbursement management, patient
assistance and information hotline services, and specialty distribution and
marketing services to physician practices. Cardinal currently distributes
Busulfex, Cystadane, Elliotts B Solution, Antizol, Antizol-Vet, and Sucraid.
Cardinal also will distribute our proposed products should those products
receive marketing clearance from the FDA. We will substantially depend upon
Cardinal's ability to successfully distribute Busulfex, Elliotts B Solution,
Antizol, Antizol-Vet, and Sucraid and potentially any other of our products that
may receive marketing clearance from the FDA in the future.
Chronimed Inc. is the principal distributor, on a non-exclusive basis, in the
United States for Cystadane. Chronimed distributes this product directly to
patients through its mail order pharmacy. We substantially depend upon
Chronimed's ability to successfully distribute Cystadane directly to patients in
the United States.
We cannot assure you that other distribution companies would be available or
continue to be available on commercially acceptable terms. The loss of a
distributor or failure to renew agreements with an existing distributor would
have a material adverse effect on our business and prospects.
WE RELY ON FOREIGN MARKETING ALLIANCES AND HAVE NO ASSURANCE OF FOREIGN
LICENSEES.
Our strategy to address foreign markets is to license foreign marketing and
distribution rights after a new drug application (referred to in the industry as
an "NDA") is submitted or approved in the United States. We consider Europe,
Japan, and Canada our most attractive foreign markets. Our current foreign
developments are:
* EUROPE. We have licensed the marketing and distribution rights
for Busulfex, Antizol, Cystadane and Sucraid in Europe. If our
licensees are unsuccessful in their distribution efforts, we
may find it difficult to contract with other distributors for
these products within Europe. Distribution of Busulfex is
limited to "named patient" or "emergency use" basis until full
regulatory approval is obtained. This "emergency use"
distribution of Busulfex is not expected to result in much, if
any, contribution to the Company's revenues.
* AUSTRALIA AND NEW ZEALAND. We have licensed marketing and
distribution rights for Cystadane and Sucraid in Australia and
New Zealand, but sales of these products have not been
material. We do not expect sales to increase in the near
future to the point that they become material.
* ISRAEL. We have licensed marketing and distribution rights for
Busulfex, Cystadane, Elliotts B Solution and Sucraid in
Israel. Full regulatory approval was obtained in Israel in
February 2000. We do not expect such distribution to result in
material revenues.
* CANADA. We have licensed marketing and distribution rights for
Antizol and Cystadane in Canada. We do not expect such
distribution to result in material revenues.
* CENTRAL AMERICA. We have licensed marketing and distribution
rights for Elliotts B Solution in Central America, but sales
have not been material. We do not expect domestic or foreign
sales of Elliotts B Solution to become material.
28
<PAGE>
We depend on our foreign licensees for the regulatory registration of our
products in foreign countries. We cannot be sure that our licensees can obtain
such registration. In addition, we cannot be sure that we will be able to
negotiate commercially acceptable license agreements for our other products or
in additional foreign countries. Furthermore, we cannot assure you that these
companies will be successful in marketing and selling our products in their
respective territories.
OUR PRODUCTS MIGHT BE RECALLED.
A product can be recalled at our discretion or at the discretion of the FDA, the
U.S. Federal Trade Commission, or other government agencies having regulatory
authority for marketed products. A recall may occur due to disputed labeling
claims, manufacturing issues, quality defects, or other reasons. We cannot
assure you that a product recall will not occur. We do not carry any insurance
to cover the risk of a potential product recall. Any product recall could have a
material adverse effect on our business and prospects. To date, no recall of
products marketed by the Company has occurred.
WE FACE LIMITS ON PRICE FLEXIBILITY AND THIRD-PARTY REIMBURSEMENT.
The flexibility of prices that we can charge for our products depends on
government regulation, both in the United States and abroad, and on other third
parties. One important factor is the extent to which reimbursement for our
products will be available to patients 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. We are uncertain as to the pricing flexibility we
will have with respect to, and if we will be reimbursed for, newly approved
health care products.
In the United States, we expect continuing federal and state proposals to
implement government control of the pricing and profitability of prescription
pharmaceuticals. Cost controls, if mandated by a government agency, could
decrease, or limit, the price we receive for our products or products we may
develop in the future. We may not be able to recover our development costs,
which could be substantial. We may not be able to realize an appropriate profit
margin. This could have a material adverse effect on our business. Furthermore,
federal and state regulations govern or influence reimbursement of health care
providers for medical treatment of certain patients. We cannot assure you 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 our business and
prospects.
Certain private health insurers and third-party payors may attempt to control
costs further by selecting exclusive providers of pharmaceuticals. If such
arrangements are made with our competitors, these insurers and third-party
payors would not reimburse patients who purchase our competing products. This
would diminish the market for our products and could have a material adverse
effect on our business and prospects.
PATENTS AND OTHER PROPRIETARY RIGHTS ARE SIGNIFICANT FACTORS IN THE
PHARMACEUTICAL INDUSTRY.
The pharmaceutical industry and the investment community places considerable
importance and value on obtaining patent and trade secret protection for new
technologies, products and processes. The patent position of pharmaceutical
firms is often highly uncertain and generally involves complex legal, technical
and factual questions. Our success depends on several issues, including, but not
limited to our ability:
* to obtain, and enforce proprietary protection for our products
under United States and foreign patent laws and other
intellectual property laws;
* to preserve the confidentiality of our trade secrets; and
* to operate without infringing the proprietary rights of third
parties.
We evaluate the desirability of seeking patent or other forms of protection for
our products in foreign markets based on the expected costs and relative
benefits of attaining such protection. We cannot assure you that any patents
will be issued from any applications or that any issued patents will afford us
adequate protection or competitive advantage. Also, we cannot assure you that
any issued patents will not be challenged, invalidated, infringed or
circumvented. Parties not affiliated with us have obtained or may obtain United
States or foreign patents or possess or may possess proprietary rights relating
to our products. We cannot assure you that patents now in existence or later
issued to others will not adversely affect the development or commercialization
of our products.
29
<PAGE>
We believe that the active ingredients or compounds in our FDA approved and
proposed products, Cystadane, Elliotts B Solution, Antizol, Antizol-Vet, Xyrem
and Sucraid, are in the public domain and presently are not subject to patent
protection in the United States. However, we have filed a patent application
with respect to our formulation of Xyrem oral solution. United States patents
issued to the licensor covers our formulation and use of Busulfex. We could,
however, incur substantial costs asserting any infringement claims that we may
have against others.
We seek to protect our proprietary information and technology, in part, through
confidentiality agreements and inventors' rights agreements with our employees.
We cannot assure you that these agreements will not be breached, that we will
have adequate remedies for any breach, or that our trade secrets will not
otherwise be disclosed to or discovered by our competitors. We also cannot
assure you that our planned activities will not infringe patents owned by
others. We could incur substantial costs in defending infringement suits brought
against us. We also could incur substantial costs in connection with any suits
relating to matters for which we have agreed to indemnify our licensors or
distributors. An adverse outcome in any such litigation could have a material
adverse effect on our business and prospects. In addition, we often must obtain
licenses under patents or other proprietary rights of third parties. We cannot
assure you that we can obtain any such licenses on acceptable terms, if at all.
If we cannot obtain required licenses on acceptable terms, we could encounter
substantial difficulties in developing, manufacturing or marketing one or more
of our products.
WE FACE INTENSE COMPETITION IN OUR INDUSTRY.
Competition in the pharmaceutical industry is intense. Potential competitors in
the United States are numerous and include pharmaceutical, chemical and
biotechnology companies. Many of these companies have substantially greater
capital resources, marketing experience, research and development staffs and
facilities than we do. We seek to limit potential sources of competition by
developing products that are eligible for orphan drug designation and NDA
approval or other forms of protection. We cannot assure you, however, that our
competitors will not succeed in developing similar technologies and products
more rapidly than we can. Similarly, we cannot assure you that these competing
technologies and products will not be more effective than any of those that we
have developed or are currently developing.
WE EXPECT RAPID TECHNOLOGICAL AND OTHER CHANGE TO BE CONSTANT IN OUR INDUSTRY.
The pharmaceutical industry has experienced rapid and significant technological
change as well as structural changes, such as those brought about by changes in
heath care delivery or in product distribution. We expect that pharmaceutical
technology will continue to develop and change rapidly, and our future success
will depend, in large part, on our ability to develop and maintain a competitive
position. Technological development by others may result in our products
becoming obsolete before they are marketed or before we recover a significant
portion of the development and commercialization expenses incurred with respect
to such products. In addition, alternative therapies, new medical treatments, or
changes in the manner in which health care is delivered or products provided
could alter existing treatment regimes or health care practices, and thereby
reduce the need for one or more of our products, which would adversely affect
our business and our prospects.
WE FACE SUBSTANTIAL PRODUCT LIABILITY AND INSURANCE RISKS.
Testing and selling health care products entails the inherent risk of product
liability claims. The cost of product liability insurance coverage has increased
and is likely to continue to increase in the future. Substantial increases in
insurance premium costs in many cases have rendered coverage economically
impractical. We currently carry product liability coverage in the aggregate
amount of $10 million for all claims made in any policy year. Although to date
we have not been the subject of any product liability or other claims, we cannot
assure you that we will be able to maintain product liability insurance on
acceptable terms or that our insurance will provide adequate coverage against
potential claims. A successful uninsured product liability or other claim
against us could have a material adverse effect on our business and prospects.
30
<PAGE>
IMPACT OF YEAR 2000 READINESS ISSUE.
We have assessed and continue to assess the impact of the so-called "Year 2000
Readiness Issue" on our 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.
The Year 2000 Readiness Issue also relates to the ability to properly exchange
time/date data between such products. Systems that are not year 2000 compliant
might recognize the year 2000 as the year 1900, or not recognize a year at all.
This inability to recognize or properly treat the year 2000 may cause our
systems, or the systems used by our suppliers, distributors, customers or
regulatory agencies such as the FDA, to process critical financial and
operational information incorrectly, or not at all.
Our information technology systems consist of computer hardware systems and
software applications supplied by third parties. Our strategy has been to
replace our information technology systems with current technology, which is
both "year 2000 compliant" and more efficient. We have also purchased and
implemented financial and operational software upgrades that are year 2000
compliant. For the twelve months ended December 31, 1999, our information
technology system purchases have not been material. Our information technology
systems are year 2000 compliant.
Our assessment of internal systems includes a review of non-information
technology systems. This assessment includes a review of our internal equipment
and facilities. Based upon this review, we believe that our processes and
equipment are year 2000 compliant.
We have identified third parties, with which we have material relationships,
including suppliers, distributors and other key vendors of materials and
services. These parties or organizations have confirmed that they have
implemented Year 2000 Readiness Programs. We have not developed a contingency
plan to provide for continuity of business operations in the event material
third parties experience a disruption of service due to the Year 2000 Readiness
Issue. Potential problems include, but are not limited to, loss of electricity,
loss of communications (data and voice), and loss of transportation services.
However, even if all material third parties confirm that they are or expect to
be year 2000 compliant, we cannot state with certainty that such parties will be
compliant or that their systems will not fail in the future. Failure of third
party systems on which we rely could significantly disrupt our ability to
transact business with our customers and suppliers. It is impossible to assess
fully the potential consequences in the event service interruptions from
suppliers occur or in the event that there are disruptions in such
infrastructure areas as utilities, communications, transportation, banking and
government.
As of March 1, 2000, the Company is not aware of a failure of its, or any of its
vendor's, technology systems related to the year 2000 issue. The Company will
continue to monitor the year 2000 issue.
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<PAGE>
ITEM 2. PROPERTIES
The Company currently occupies approximately 13,400 square feet of leased office
space at a monthly rent of approximately $16,000, including operating expenses.
This lease expires on October 31, 2002.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages as of March 1, 2000.
Name Age Title
- ----------------------- --- -------------------------------------------------
John Howell Bullion 48 Chief Executive Officer and Chairman of the Board
William Houghton, M.D. 57 Chief Operating Officer
Dayton T. Reardan, Ph.D. 44 Vice President of Regulatory Affairs
Patti A. Engel 39 Vice President of Marketing & Sales
Timothy G. McGrath 35 Vice President and Chief Financial Officer
Executive officers of the Company serve at the discretion of the Board of
Directors with no fixed term. There are no family relationships between or among
any of the executive officers or directors of the Company.
Mr. Bullion has been Chief Executive Officer of the Company since June 24, 1994
and Chairman of the Board of Directors since December 30, 1998. Mr. Bullion is a
co-founder of Chronimed Inc., the company from which Orphan Medical, Inc. was
spun in 1994. He has been a director of Chronimed since 1985. Prior to joining
Orphan Medical, Mr. Bullion served as President of Bluestem Partners, an
investment and consulting company; Dahl & Associates, a soil and ground water
remediation company; and Concurrent Knowledge Systems, Inc., a software
development company. Mr. Bullion also served as partner and Vice President with
First Bank System Venture Capital Company for seven years.
Dr. Houghton has been the Company's Chief Operating Officer since August 1998.
Dr. Houghton's most recent position was Chief Scientific Officer and Vice
President of Clinical and Regulatory Affairs at Iotek, Inc. from April 1995 to
August 1998. At Iotek, Dr. Houghton was responsible for all research activities,
regulatory and clinical research, and served as the medical liaison with Iotek's
Medical advisory Board. From February 1984 to March 1995, Dr. Houghton also held
a variety of management positions with Abbott Australasia and Abbott
Laboratories in the United States.
Dr. Reardan has been the Company's Vice President of Regulatory Affairs since
May 1995 and had been the Director of Regulatory Affairs since joining the
Company in 1994. From 1993 to 1994, he was Director of Development at CV
Therapeutics. From 1984 to 1993, he held a variety of management positions at
Xoma Corporation.
Ms. Engel has been the Company's Vice President of Marketing & Sales since May
1995 and had been Director of Marketing for the Company since joining the
Company in 1994. From 1984 to 1994, Ms. Engel held a variety of sales and
marketing management positions with 3M Pharmaceuticals, a division of the 3M
Company. Prior to joining 3M, Ms. Engel was a practicing nurse in the field of
pediatric oncology.
Mr. McGrath has been the Company's Vice President and Chief Financial Officer
since October 1999. Mr. McGrath has most recently worked as consultant providing
financial services to growing companies in the Minneapolis and Saint Paul area.
From 1994 to 1998, he was Vice President of Finance at E. W. Blanch Holdings,
Inc., a publicly traded provider of integrated risk management and distribution
services. Prior to joining E.W. Blanch Holdings, Mr. McGrath was with Ernst &
Young LLP in Minneapolis.
32
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the National Market tier of The Nasdaq
Stock Market under the Symbol: ORPH. The following table sets forth the
quarterly high and low sales prices for the Company's Common Stock for the years
ended December 31, 1999 and December 31, 1998.
- ----------------------------------------------------------------------
High Low
----------- ------------
YEAR ENDED DECEMBER 31, 1999
January 1 through March 31 $10.000 $6.750
April 1, through June 30 $7.625 $4.750
July 1 through September 30 $8.250 $5.875
October 1 through December 31 $7.438 $4.875
YEAR ENDED DECEMBER 31, 1998
January 1 through March 31 $12.625 $4.750
April 1 through June 30 $13.875 $8.625
July 1 through September 30 $11.813 $5.938
October 1 through December 31 $9.250 $5.875
- ----------------------------------------------------------------------
As of March 10, 2000, the Company's Common Stock was held by 268 shareholders of
record and the Company estimates that there were approximately 3,600 beneficial
owners of its Common Stock on such date.
The Company has never declared or paid any dividends and does not anticipate
paying dividends on its Common Stock in the foreseeable future. The Company
currently intends to retain future earnings, if any, for use in the Company's
business. The payment of any future dividends on its Common Stock will be
determined by the Board of Directors in light of conditions then existing,
including the Company's earnings, financial condition and requirements,
restrictions in financing agreements, business conditions and other factors.
33
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company as of December 31, 1999 and
1998 and for the three years ended December 31, 1999, 1998 and 1997, are derived
from, and are qualified by reference to, the financial statements of the Company
audited by Ernst & Young LLP, independent auditors, included elsewhere in this
Form 10-K. The following selected financial data as of and for the six months
ended December 31, 1995 are derived from audited financial statements not
included herein. In 1995, the Company changed its fiscal year ending June 30 to
a calendar year ending December 31. This change resulted in a shortened fiscal
year of six months, July 1, 1995 to December 31, 1995. The information set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations", the Financial Statements and
Notes thereto and other financial information included elsewhere in this Form
10-K.
<TABLE>
<CAPTION>
FINANCIAL POSITION
- --------------------------------------------------------------------------------------------------------------------
December 31,
--------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and
available-for-sale securities $ 4,032,914 $ 7,521,483 $ 7,169,230 $ 16,707,906 $ 8,749,237
Working capital 3,161,324 5,274,550 4,479,714 14,538,893 7,317,554
Total assets 6,241,178 9,046,730 8,238,950 17,150,599 8,987,362
Accumulated deficit (40,243,874) (34,433,640) (26,196,538) (14,808,669) (7,191,485)
Total shareholders' equity 3,561,208 5,575,577 3,645,902 14,795,331 7,493,990
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
FINANCIAL RESULTS
- ---------------------------------------------------------------------------------------------------------------------
For the Year For the Year For the Year For the Year For Six Months
Ended Ended Ended Ended Ended
December 31, December 31, December 31, December 31, December 31,
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ --------------
Revenues $ 6,457,406 $ 5,048,308 $ 654,838 $ 36,681 $ --
Cost of sales 803,562 1,118,644 317,727 10,446 --
------------ ------------ ------------ ------------ ------------
Gross profit 5,653,844 3,929,664 337,111 26,235 --
Operating expenses
Research and development 4,975,706 6,611,011 6,482,004 6,248,381 2,414,988
Sales and marketing 3,430,539 2,739,299 1,158,988 399,444
General and administrative 2,756,827 2,994,342 2,416,344 1,854,273 872,773
Contract termination fee -- -- 2,172,000 -- --
------------ ------------ ------------ ------------ ------------
Loss from operations (5,509,228) (8,414,987) (11,937,225) (8,475,863) 3,287,761
Other income, net 287,989 177,885 549,356 858,679 289,611
------------ ------------ ------------ ------------ ------------
Net loss (5,221,239) (8,237,102) (11,387,869) (7,617,184) (2,998,150)
Less: Preferred stock
dividend 682,872 249,658 -- -- --
------------ ------------ ------------ ------------ ------------
Net loss applicable to
common shareholders $ (5,904,111) $ (8,486,760) $(11,387,869) $ (7,617,184) $ (2,998,150)
============ ============ ============ ============ ============
Basic and diluted loss
per common share $ (0.90) $ (1.36) $ (1.87) $ (1.43) $ (.80)
Weighted average
shares outstanding 6,587,790 6,236,897 6,074,342 5,331,356 3,739,588
</TABLE>
- --------------------------------------------------------------------------------
34
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company incorporated in June 1994 to carry on the business previously
conducted by the Orphan Medical Division of Chronimed. Since its inception in
January 1993, the activities of the Orphan Medical Division and the Company have
consisted primarily of obtaining the rights for developing and marketing
proposed pharmaceutical products, managing the development of these products and
preparing for the commercial introduction of six products. The Company operates
in a single business segment: pharmaceutical product development. The Company
has experienced recurring losses from operations and has generated an
accumulated deficit through December 31, 1999 of $40.2 million. In addition, the
Company expects to incur additional losses from operations in 2000.
RECENT DEVELOPMENTS
In February 2000, the Company completed the sale of 1.365 million newly issued
shares of common stock for net proceeds of $10.7 million. The Company has
committed to register the shares under the Securities Act of 1933, as amended.
This new capital strengthens the Company's financial position.
On August 2, 1999, the Company completed a $5.0 million financing transaction in
a private placement. The funding consists of $2.95 million of the Company's
Series B Convertible Preferred Stock and a commitment of $2.05 million of debt
in the form of a line of credit. The Series B Convertible Preferred Stock may be
converted prior to August 2, 2009 into common shares at a price of $6.50 per
share. The debt, when drawn, bears an interest rate of 7.5% and matures on
August 2, 2002.
In connection with the financing, the Company also issued two seven-year
warrants. One of the warrants entitles the holder to receive, upon payment of
the $2.05 million exercise price, either $2.05 million of Series C Convertible
Preferred Stock (which is similar to the Series B Convertible Preferred Stock
and also has a conversion price of $6.50 per share) or 315,385 shares of Series
D Non-Voting Preferred Stock (which is equivalent to common stock except that it
has no voting rights). The other warrant, issued in relation to the debt,
entitles the holder to purchase 282,353 shares of Series D Non-Voting Preferred
Stock at an exercise price of $4.25 per share. The Company can require the
exercise of the warrants under certain conditions.
The financing triggered antidilution provisions relating to the $8.1 million of
the Senior Preferred Stock outstanding as of August 1, 1999 (after giving effect
to the semi-annual in-kind dividend distributions, the most recent of which was
August 1, 1999), which resulted in a decrease in the conversion price of those
shares from $8.50 to $8.14 per share.
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 1999 VS. TWELVE MONTHS ENDED DECEMBER 31, 1998
Revenues increased from $5.0 for the twelve months ended December 31, 1998 to
$6.5 million for the twelve months ended December 31, 1999, an increase of $1.5
million or 28%. The Company received approval for Busulfex in February 1999 and
began shipping product within two weeks. Antizol revenue in 1999 declined
compared to 1998 reflecting the initial stocking of this product by hospitals
during 1998. The Company expects Antizol revenues to decline in 2000 because
most hospitals that were expected to stock Antizol have done so, and future
orders will most likely be based on use. The sales of Cystadane, Sucraid
Antizol-Vet and Elliotts B met the Company's expectations in 1999 and are not
expected to increase significantly in 2000. Revenues 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 Company's ability to
optimize distribution of its approved products.
Cost of sales decreased from $1.1 million or 22% of revenues for the twelve
months ended December 31, 1998 to $0.8 million or 12% of revenues for the twelve
months ended December 31, 1999, a decrease of $0.3 million or 28%. The decrease
is primarily attributable to a $0.1 million reduction in the allowance for
product returns in 1999 and a $0.1 million write off of inventory in the prior
year related to Antizol and Antizol-Vet inventories. Cost of sales as a
percentage of revenues will fluctuate from quarter to quarter and from year to
year depending on, among
35
<PAGE>
other factors, demand for the Company's products, new product introductions and
the mix of approved products shipped.
Research and development expense decreased from $6.6 million for the twelve
months ended December 31, 1998 to $5.0 million for the twelve months ended
December 31, 1999, a decrease of $1.6 million or 25%. In February 1999, the Food
and Drug Administration ("FDA") approved the Company's NDA for Busulfex and, as
a result, Busulfex development spending decreased from 1998 levels. Development
activities for Xyrem were slowed until the results of a September meeting with
the FDA were known. However, the Company expects research and development
expense, principally clinical and toxicology spending for Xyrem, to increase
significantly over 1999 levels due to the commencement in 2000 of additional
Xyrem clinical trials supporting additional future Xyrem claims and the expected
completion of the submission of an NDA for Xyrem scheduled for the Fall of 2000.
Sales and marketing expense increased from $2.7 million for the twelve months
ended December 31, 1998 to $3.4 million for the twelve months ended December 31,
1999, an increase of $0.7 million or 25%. This increase is largely attributable
to significantly higher spending related to the addition of an Antizol and
Busulfex sales force, sales and marketing program costs for Antizol and
Busulfex, and an incentive program for employees. The Company expects sales and
marketing expenses to increase because of the pre-approval market research
related to Xyrem and on-going marketing activities for Busulfex.
General and administrative expense decreased from $3.0 million for the twelve
months ended December 31, 1998 to $2.8 million for the twelve months ended
December 31, 1999, a decrease of $0.2 million or 7%. This decrease is
principally related to management consulting expenses for regulatory and product
development assistance incurred in 1998 resulting from the 1997 departure of the
Company's former President and Chief Operating Officer, and a 1998 charge to
compensation expense related to stock options. General and administrative
expenses are not expected to increase significantly in subsequent periods.
Other income is the sum of interest income from investment activities less
interest expense from financing activities. Other income increased from $0.2
million for the twelve months ended December 31, 1998 to $0.3 million for the
twelve months ended December 31, 1999. This increase is due to $0.2 million of
interest expense recorded in 1998 that was attributable to the Company's
obligation to Chronimed resulting from the 1997 contract termination fee. As a
result of higher levels of invested funds from the proceeds of the private
placement in February 2000, interest income will increase during 2000 prior to
the use of those funds for funding corporate expenses, including the development
of Xyrem.
Preferred stock dividends relate to the Senior Convertible Preferred Stock that
was issued on July 23, 1998 and Series B Convertible Preferred Stock issued on
August 2, 1999. Both have dividend rates of 7.5%. Preferred stock dividends were
$0.7 million for the twelve months ended December 31, 1999 compared to $0.2
million for the twelve months ended December 31, 1998. Preferred stock
dividends, which commenced on February 1, 1999, are payable in arrears on August
1 and February 1 of each year. The Company satisfied its dividend payment
obligation by issuing additional preferred stock, as permitted by the terms of
the Senior Convertible Stock. The Company intends to continue to satisfy its
dividend payment obligations by the issuance of additional preferred stock
through August 1, 2000 (after which date the Company is obligated to the
preferred stock dividend in cash or additional common shares, which will cause
preferred stock dividends to increase in subsequent quarters.
Net loss applicable to common shareholders of $(5.9) million for the twelve
months ended December 31, 1999 compared to a net loss of $(8.5) million for the
twelve months ended December 31, 1998. Basic and diluted loss per common share
for these respective periods were $(0.90) and $(1.36), based on weighted average
number of common shares outstanding of 6,587,790 and 6,236,897, respectively.
TWELVE MONTHS ENDED DECEMBER 31, 1998 VS. TWELVE MONTHS ENDED DECEMBER 31, 1997
Revenues increased from $0.7 million for the twelve months ended December 31,
1997 to $5.0 million for the twelve months ended December 31, 1998, an increase
of $4.3 million or 671%. The 1998 increase is principally attributable to
Antizol, which the Company commenced shipping for the first time in December
1997. Antizol revenue growth to date reflects the initial stocking of this
product by hospitals during 1998. In 1998, Antizol-Vet revenues declined from
1997. Cystadane and Sucraid revenues increased from 1997 levels principally
because of
36
<PAGE>
international shipments of Cystadane and the 1998 commercial introduction of
Sucraid, which the Company commenced shipping in July 1998.
Cost of sales increased from $0.3 million or 49% of revenues for the twelve
months ended December 31, 1997 to $1.1 million or 22% of revenues for the twelve
months ended December 31, 1998, an increase of $0.8 million 252%. The increase
is attributable to significantly higher unit sales volume of new products,
Antizol and Sucraid, and provisions to write off excess Antizol and Antizol-Vet
inventories. Based on the Company's expectation of lower demand for Antizol and
Antizol-Vet after 1998, inventories in excess of expected 1999 demand were
written off to zero, which increased cost of sales by approximately $93,000.
Research and development expense increased from $6.5 million for the twelve
months ended December 31, 1997 to $6.6 million for the twelve months ended
December 31, 1998, an increase of $0.1 million or 2%. For the twelve months
ended December 31, 1997, approximately $1.7 million of research and development
expense related to the nine development products the Company discontinued during
1997. Excluding the research and development expense of $1.7 million
attributable to the nine discontinued development products, research and
development expense related to 1998 increased by approximately $1.8 million over
the corresponding 1997 period. This increase is largely attributable to
significantly higher regulatory and clinical spending for Busulfex and Xyrem in
1998 as compared to 1997.
Sales and marketing expense increased from $1.2 million for the twelve months
ended December 31, 1997 to $2.7 million for the twelve months ended December 31,
1998, an increase of $1.5 million or 111%. This increase is largely attributable
to significantly higher spending related to the addition of an Antizol and
Busulfex sales force, sales and marketing program costs for Antizol and
Busulfex, and an incentive program for employees.
General and administrative expense increased from $2.5 million for the twelve
months ended December 31, 1997 to $3.0 million for the twelve months ended
December 31, 1998, an increase of $0.5 million or 22%. This increase is
principally related to a management consulting arrangement for regulatory and
product development assistance necessitated by the 1997 departure of the
Company's former President and Chief Operating Officer, and a charge to
compensation expense related to stock options.
Contract termination fee of $2.2 million for the twelve months ended December
31, 1997 was a one-time expense related to the June 1997 termination of an
agreement under which Chronimed had exclusive rights to distribute certain
Orphan Medical products, including Antizol and Busulfex. The amount expensed at
the time of the contract termination in the Company's second quarter of 1997 was
$2.2 million, which represented the present value of future payments that
aggregated $2.5 million, discounted at 12%. Interest expense attributable to the
contract termination fee obligation is included in other income. As of December
31, 1998, the Company had fully satisfied its obligation to Chronimed with
respect to the contract termination fee and no additional expense is expected in
subsequent quarters.
Other income is the sum of interest income from investment activities less
interest expense from financing activities. Other income decreased from $0.5
million for the twelve months ended December 31, 1997 to $0.2 million for the
twelve months ended December 31, 1998. This decrease is due to less interest
income resulting from lower levels of invested funds during the year, and to
approximately $0.2 million of interest expense attributable to the Company's
obligation to Chronimed resulting from the 1997 contract termination fee
Preferred stock dividends relate to the Senior Convertible Preferred Stock that
was issued on July 23, 1998 and has a dividend rate of 7.5%. Preferred stock
dividends accumulated were $0.2 million for the twelve months ended December 31,
1998. Preferred stock dividends are payable in arrears on August 1 and February
1 of each year, commencing on February 1, 1999. The Company satisfied its
February 1, 1999 dividend payment obligation by issuing additional preferred
stock, as permitted by the terms of the Senior Convertible Stock. The Company
intends to continue to satisfy its dividend payment obligations by the issuance
of additional preferred stock through August 1, 2000, which will cause preferred
stock dividends to increase in subsequent quarters.
Net loss applicable to common shareholders of $(8.5 million) for the twelve
months ended December 31, 1998 compares with a net loss of $(11.4 million) for
the twelve months ended December 31, 1997. Basic and diluted loss
37
<PAGE>
per common share for these respective periods were $(1.36) and $(1.87), based on
weighted average number of common shares outstanding of 6,236,897 and 6,074,342,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
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, net proceeds from public offerings in 1995 and 1996, net proceeds from
a 1998 and 1999 private placement of convertible preferred stock, interest
income and product sales. The 1999 private placement of convertible preferred
stock resulted in net proceeds of $2.9 million. In February 2000, the Company
completed a private placement of 1.365 million shares of newly issued common
stock, resulting in net proceeds of $10.7 million. The various public and
private placement transactions resulted in aggregate net proceeds, after
commissions and expenses, of $44.3 million.
Net working capital (current assets less current liabilities) decreased from
$5.3 million at December 31, 1998 to $3.2 million at December 31, 1999. Cash,
cash equivalents, and available-for-sale securities decreased from $7.5 million
at December 31, 1998 to $4.0 million at December 31, 1999. The Company invests
excess cash in short-term, interest-bearing, investment grade securities.
The Company has a commercial revolving line of credit with a bank, which expires
on May 15, 2000. The maximum amount available to the Company under this
arrangement is $500,000, subject to certain limitations based on the Company's
trade accounts receivable. The Company intends to renew this line of credit
facility. However the Company cannot assure that the bank will do so, or that it
would do so on terms acceptable to the Company. In connection with the financing
transaction in August 1999, the Company received a $2.05 million commitment in
the form of a line of credit from UBS Capital. Amounts outstanding under this
line of credit bear an interest rate of 7.5% and mature on August 2, 2002. To
date, the Company has not borrowed under either of these arrangements.
The Company's commitments for outside development spending decreased from $3.4
million at December 31, 1998 to $1.6 million at December 31, 1999. The decrease
is principally attributable to the timing of the initiation of clinical trials
for Xyrem development activities. The Company expects future commitments for
Xyrem to increase significantly over current levels.
The Company expects spending during 2000 for research and development, and sales
and marketing to increase significantly over 1999 levels. Management believes
the Company's current working capital and anticipated operating cash flows from
product sales will be sufficient to fund its operations at least through
December 31, 2000.
For continued listing on the Nasdaq National Market, a company must satisfy a
number of requirements, which in the Company's case include either: (1) net
tangible assets in excess of $4.0 million or (2) a market capitalization of at
least $50.0 million. Net tangible assets are defined as total assets less the
sum of total liabilities and intangible assets. The Company did not meet either
of these thresholds at December 31, 1999. The Company's net tangible assets at
December 31, 1999 equaled approximately $3.6 million and the Company's market
capitalization was approximately $34.3 million (based on the last sale price of
$5.1875 and 6,606,207 shares outstanding as of December 31, 1999). Since
December 31, 1999, two events have occurred to change this situation. In
February 2000, the Company completed the sale of 1,365,000 shares of newly
issued common stock for net proceeds $10.7 million. Because of this financing,
the Company met the net tangible asset requirement as of March 1, 2000, when the
Company's proforma net tangible assets were $14.3 million. Moreover, as of March
1, 2000, the Company had 8,192,249 shares of common stock outstanding and the
last trading price of the Company's stock on March 1, 2000 was $14.25 resulting
in a market capitalization of $116.7 million. The Company does not expect to be
profitable in fiscal 2000, but does expect to meet the net tangible asset
requirement for listing on the Nasdaq National Market. However there can be no
assurance that the Company will continue to have adequate capital to meet the
net tangible asset requirement.
In connection with the 1998 private placement of convertible preferred stock,
the Company agreed to certain restrictions and covenants, which could limit its
ability to obtain additional financing. The most important of these restrictions
are: (1) the Company cannot incur additional indebtedness, except for
indebtedness secured solely by the Company's trade receivables, until it has
profitable operations, subject to certain limitations and (2) the Company
cannot, without the approval of a majority of the preferred stockholders, issue
additional equity securities unless the
38
<PAGE>
selling price per share exceeds the then conversion price, presently $8.14 per
share, of the outstanding convertible preferred stock or the sale of equity is
accomplished in a public offering. Even without these restrictions, the Company
can make no assurances that additional financing opportunities will be available
or, if available, on acceptable terms.
IMPACT OF YEAR 2000
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company's
expenses associated with Year 2000 readiness were not material in 1999. The
Company is not aware of any material problems resulting from Year 2000 issues,
either with its products, its internal systems, or the products and services of
third parties. The Company will continue to monitor its mission critical
computer applications and those of its suppliers and vendors throughout the year
2000 to ensure that any latent Year 2000 matters that may arise are addressed
promptly.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's investments consist of debt securities with contractual maturities
of less than one year. Therefore, the Company does not believe its operations
are exposed to significant market risk relating to interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements of the Company as of and for the year ended December
31, 1999 begin on page F-1 of this Annual Report.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
None.
39
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) DIRECTORS OF THE REGISTRANT.
The information required by this item is incorporated by reference from the
information under the caption "Election of Directors" contained in the Company's
Proxy Statement to be filed with the Securities and Exchange Commission in
connection with the solicitation of proxies for the Company's Annual Meeting of
Shareholders to be held on June 6, 2000 (the "Proxy Statement").
(b) EXECUTIVE OFFICERS OF THE REGISTRANT.
Information concerning Executive Officers of the Company is included in this
Annual Report in Item 4A under the caption "Executive Officers of the
Registrant".
(c) COMPLIANCE WITH 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934.
The information required by this item is incorporated by reference from the
information under the caption "Section 16(a) Reporting" contained in the Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
information under the caption "Executive Compensation" contained in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is incorporated by reference from the
information under the caption "Stock Ownership" contained in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
information contained under the caption "Certain Transactions" contained in the
Proxy Statement.
40
<PAGE>
PART IV
ITEM 14. FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1). FINANCIAL STATEMENTS
PAGE NUMBER
IN THIS
DESCRIPTION ANNUAL REPORT
- ------------------------------------------------------------- --------------
Audited Financial Statements:
Report of Independent Auditors F-1
Balance Sheets F-2
Statements of Operations F-3
Statements of Cash Flows F-4
Statement of Changes in Shareholders' Equity F-5
Notes to Financial Statements F-6 to F-13
(a)(2). The following financial statement schedule should be read in conjunction
with the Audited Financial Statements referred to under Item 14 (a)(1) above.
Financial statement schedules not included in this Report have been omitted
because they are not applicable or the required information is shown in the
Audited Financial Statement or Notes thereto.
PAGE NUMBER
IN THIS
DESCRIPTION ANNUAL REPORT
- ------------------------------------------------------------- --------------
Schedule II - Valuation and Qualifying Accounts: Years Ended F-14
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
(a)(3). LISTING OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit Method of
Number Description Filing
- ----------- ------------------------------------------------------------------------------------------ ------------
<S> <C> <C>
3.1 Articles of Incorporation of Orphan Medical, Inc. ("OMI") (1)
3.1.1 Certificate of Designation for Senior Convertible Preferred Stock (11)
3.1.2 Certificate of Designation for Series B, C and D Preferred Stock (15)
3.2 Bylaws of OMI, as amended (1)
4.1 OMI 1994 Stock Option Plan (1)
4.2 OMI Employee Incentive Stock Option Agreement (1)
4.3 OMI Non-Incentive Stock Option Agreement (1)
4.4 OMI Non-Incentive Stock Option Agreement for Non-Employee Directors (1)
10.1 Marketing and Distribution Agreement between OMI and Chronimed effective July 2, 1994 (1)
10.2 Transfer Agreement between OMI and Chronimed effective July 1, 1994 (1)
10.3 Distribution and Spin-off Agreement between OMI and Chronimed effective July 2, 1994 (1)
10.4 Administrative Services Agreement between OMI and Chronimed effective July 2, 1994 (1)
10.5 Security Agreement between OMI and Chronimed effective July 2, 1994 (1)
10.6 Aminocaproic Acid License Agreement between Chronimed and Virginia's Center for
Innovative Technology dated September 17, 1993 (1)
10.7 Patent and Technology License Agreement for Busulfan between Chronimed and The University
of Texas M.D., Anderson Cancer Center, the Board of Regents of the University of Texas
System and the University of Houston effective February 14, 1994 (1)
10.8 Letter Agreement regarding L-Cycloserine between Chronimed and Dr. Meier Lev dated
December 29, 1993 (1)
10.9 Sublicense Agreement regarding 4-Methylpyrazole between Chronimed and Mericon Investment
Group, Inc. dated December 17, 1993 (1)
10.10 License Agreement regarding Short Chain Fatty Acids between Chronimed and Richard Breuer
dated March 2, 1994 (1)
10.11 Employment Agreement between OMI and John Howell Bullion dated August 31, 1994 (1)
10.11.1 Employment Agreement between OMI and John Howell Bullion dated October 29, 1999 Filed
herewith
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
Exhibit Method of
Number Description Filing
- ----------- ------------------------------------------------------------------------------------------ ------------
<S> <C> <C>
10.12 Employment Agreement between OMI and Bertram A. Spilker, Ph.D., M.D. dated August 31, 1994 (1)
10.13 Assumption Agreement and Consent to Assignments regarding Short Chain Fatty Acids between
OMI and Richard Breuer dated September 30, 1994 (2)
10.14 Assumption Agreement and Consent to Assignment regarding Aminocaproic Acid between OMI
and Virginia's Center for Innovative Technology dated September 30, 1994 (2)
10.15 Assumption Agreement and Consent to Assignment regarding 4-Methylpyrazole between OMI and
Mericon Investment Group, Inc. dated October 5, 1994 (2)
10.16 License Agreement regarding 4-Methylpyrazole between Kenneth McMartin and Mericon
Investment Group, Inc. dated July 6, 1993 (2)
10.17 License Agreement regarding Glucaric Acid between OMI and Ohio State University Research
Foundation dated December 28, 1994 (2)
10.18 Manufacturing Development and Supply Agreement regarding Aminocaproic Acid between OMI
and Lifecore Biomedical, Inc. dated December 21, 1994 (2)
10.19 Marketing Agreement regarding Cystagon between OMI and Chronimed dated October 19, 1994 (2)
10.20 Assumption Agreement and Consent to Assignment regarding Busulfan between OMI and the
University of Texas, M.D., Anderson Cancer Center, the Board of Regents of the University
of Texas System and the University of Houston dated October 18, 1994 (2)
10.21 License Agreement regarding Catrix between OMI and Lescarden, Inc. dated October 28, 1994 (2)
10.22 License Agreement regarding Sucrase between OMI and Hartford Hospital dated December 30,
1994 (2)
10.23 Option to Acquire License regarding Tretinoin between OMI and James Hannan dated February
6, 1995 (2)
10.24 Consulting Agreement between OMI and William B. Adams dated November 15, 1994 (3)
10.27 Agreement regarding Cystagon between Chronimed and Mylan Pharmaceutical dated October 17,
1994 (2)
10.29 Agreement between OMI and David A. Feste effective July 1, 1995 (4)
10.30 Development and License Agreement regarding Choline Chloride between OMI and Alan
Buchman, Donald J. Jenden, Marvin E. Ament and Mark D. Dubin dated May 11, 1995 (4)
10.31 Addendum to License Agreement regarding Short Chain Fatty Acids between OMI and Richard
Breuer dated May 12, 1995 (4)
10.32 Addendum to Administrative Services Agreement between OMI and Chronimed dated August 2,
1995 (4)
10.33 Amendment to Aminocaproic Acid License Agreement between OMI and Virginia's Center for
Innovative Technology dated September 17, 1993 (5)
10.34 Amendment No. 1 to Marketing and Distribution Agreement between OMI and Chronimed dated
July 2, 1994 (5)
10.35 Amendment to Marketing Agreement regarding Cystagon between OMI and Chronimed dated
October 19, 1994 (5)
10.36 IRS tax qualification letter dated January 10, 1996 regarding the favorable determination
of the tax status of the OMI 401(k) Savings Plan (5)
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Exhibit Method of
Number Description Filing
- ----------- ------------------------------------------------------------------------------------------ ------------
<S> <C> <C>
10.38 Form of License Agreement regarding Colloidal Bismuth Subcitrate between OMI and Josman
Laboratories, Inc. dated March 4, 1996 (5)
10.39 Agreement between OMI and Chronimed dated June 3, 1996 to amend Marketing and
Distribution Agreement dated July 2, 1996 (6)
10.40 Cystadane Agreement between the OMI and Chronimed dated October 11, 1996 (7)
10.41 License Agreement regarding alpha galactosidase A between OMI and Research Corporation
Technologies, Inc. Dated March 15, 1996 (8)
10.42 License Agreement regarding 5-fluorouracil between OMI and the University of Miami and
its Department of Opthalmology dated December 6, 1996 (8)
10.43 Collaborative Development Agreement regarding Clonidine between OMI and Medtronic, Inc.
dated November 27, 1996 (8)
10.44 Distribution Agreement between OMI and W. A. Butler Company dated November 26, 1996 (8)
10.45 Distribution Services Agreement between OMI and Cardinal Health dated June 1, 1997 (9)
10.46 Termination Agreement between OMI and Chronimed dated as of June 27, 1997. (10)
10.47 Loan Agreement and Security Agreement between OMI and Riverside Bank dated May 15, 1998. (11)
10.48 Stock Purchase Agreement between OMI and UBS Capital II LLC dated July 23, 1998. (11)
10.49 Supplement to Termination Agreement between OMI and Chronimed dated December 7, 1998. (12)
10.50 Supplement II to Termination Agreement between OMI and Chronimed dated February 9, 1999. (13)
10.51 Purchase Agreement between OMI and UTECH, LLC dated December 30, 1998 regarding the sale
and assignment to UTECH LLC of license rights to Colloidal Bismuth Subcitrate. (14)
10.52 Common Stock Purchase Warrant between OMI and R.J. Steichen dated January 1, 1999. (14)
10.53 Purchase Agreement and Letter of Intent between OMI and Caduceus Capital Trust , Caduceus Filed
Capital II L.P., PaineWebber Eucalyptus Fund LLC, and PaineWebber Eucalyptus Fund Ltd. herewith
10.54 Purchase Agreement and Letter of Intent between DG LUX LACUNA APO BIOTECH FUND Filed
herewith
10.55 Stock Purchase Agreement between OMI and UBS Capital II LLC dated August 2, 1999 (15)
10.56 Promissory Note between OMI and UBS Capital II LLC dated August 2, 1999 (15)
10.57 Warrant to purchase shares of Series C Convertible Preferred Stock or Series D Non-Voting
Preferred Stock (15)
10.58 Warrant to purchase shares Series D Non-Voting Preferred Stock (15)
10.59 Form of Change in Control Agreement to be entered into between the OMI and Certain Filed
Executives herewith
Filed
23.1 Consent of Ernst & Young LLP herewith
Filed
24 Power of Attorney herewith
Filed
27 Financial Data Schedule - EDGAR SCHEDULE herewith
</TABLE>
(1) Incorporated by reference to the corresponding exhibit numbers in
OMI's Registration Statement on Form 10 filed on August 31, 1994,
Commission File No. 0-24760.
(2) Incorporated by reference to the corresponding exhibit numbers in
OMI's Registration Statement on Form S-1 filed on March 3, 1995,
Commission File No. 0-24760.
(3) Incorporated by reference to the corresponding exhibit number in
OMI's Quarterly Report on Form 10-Q for the quarter ended December 30,
1994, Commission File No. 0-24760.
(4) Incorporated by reference to the corresponding exhibit numbers in
OMI's Annual Report on Form 10-K filed for the year ended June 30,
1995, Commission File No. 0-24760.
43
<PAGE>
(5) Incorporated by reference to the corresponding exhibit numbers in
OMI's Registration Statement on Form S-1 filed on March 11, 1996,
Commission File No. 0-24760.
(6) Incorporated by reference to the corresponding exhibit number in
OMI's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996, Commission File No. 0-24760.
(7) Incorporated by reference to the corresponding exhibit number in
OMI's Quarterly Report on Form 10-Q for the quarter ended September 30,
1996, Commission File No. 0-24760.
(8) Incorporated by reference to the corresponding exhibit numbers in
OMI's Annual Report on Form 10-K filed for the year ended December 31,
1996, Commission File No. 0-24760.
(9) Incorporated by reference to the corresponding exhibit number in
OMI's Quarterly Report on Form 10-Q for the quarter ended March 31,
1997, Commission File No. 0-24760.
(10) Incorporated by reference to the corresponding exhibit numbers in
OMI's Annual Report on Form 10-K filed for the year ended December 31,
1997, Commission File No. 0-24760.
(11) Incorporated by reference to the corresponding exhibit numbers in
OMI's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998, Commission File No. 0-24760.
(12) Incorporated by reference to the similarly described exhibit
included with OMI's Current Report on Form 8-K dated December 7, 1998,
Commission File No. 0-24760.
(13) Incorporated by reference to the similarly described exhibit
included with OMI's Current Report on Form 8-K dated February 9, 1999,
Commission File No. 0-24760.
(14) Incorporated by reference to the similarly described exhibit
included with OMI's Annual Report on Form 10-K for the year ended
December 31, 1998, Commission File No. 0-24760.
(15) Incorporated by reference to the similarly described exhibit
included with OMI's Current Report on Form 10-Q for the quarter ended
June 30, 1999, Commission File No. 0-24760.
(b). REPORTS ON FORM 8-K
None.
(c). EXHIBITS
See Item 14(a)(3) above.
(d). FINANCIAL STATEMENT SCHEDULES
See Item 14(a)(2) above.
44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the registrant has duly caused this report on Form 10-K to be signed on
its behalf by the undersigned thereunto duly authorized, in the City of
Minnetonka, Minnesota, on the 13th day of March, 2000.
ORPHAN MEDICAL, INC.
By:
/s/ John Howell Bullion
-----------------------
John Howell Bullion
Chief Executive Officer
/s/ Timothy G. McGrath
-----------------------
Timothy G. McGrath
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1934 this report has been
signed by the following persons on behalf of the Registrant and in the
capacities indicated as of March 13, 2000.
SIGNATURE TITLE
- --------------------------------------- -----------------------------------
/s/ John Howell Bullion Chief Executive Officer (Principal
- --------------------------------------- Executive Officer) and a Director
John Howell Bullion
* Director
- ---------------------------------------
Michael Greene
* Director
- ---------------------------------------
Julius A. Vida
* Director
- ---------------------------------------
W. Leigh Thompson, Ph.D., M.D.
* Director
- ---------------------------------------
William M. Wardell, Ph.D., M.D.
* Director
- ---------------------------------------
Lawrence C. Weaver, Ph.D., D.Sc. (Hon.)
By: /s/ John Howell Bullion
-----------------------
John Howell Bullion, Attorney-In-Fact
* John Howell Bullion, pursuant to the Powers of Attorney executed by
each of the officers and directors above whose name is marked by a "*",
by signing his name hereto, does hereby sign and execute this Annual
Report on behalf of each of the officers and directors in the
capacities in which the name of each appears above.
45
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Orphan Medical, Inc.
We have audited the accompanying balance sheets of Orphan Medical, Inc. as of
December 31, 1999 and 1998, and the related statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. Our audits also included the financial statement
schedule listed in Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Orphan Medical, Inc. at
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 4, 2000
except for Note 14, as to which
the date is February 25, 2000
F-1
<PAGE>
ORPHAN MEDICAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 205,678 $ 2,980,342
Available-for-sale securities 3,827,236 4,541,141
Accounts receivable, less allowance for doubtful
accounts of $113,000 and $48,620 for 1999 and 1998,
respectively 1,089,712 989,339
Other receivables 5,425 6,925
Inventories 545,543 112,725
Prepaid expenses 167,700 115,231
------------ ------------
Total current assets 5,841,294 8,745,703
Property and equipment:
Property and equipment 715,337 556,358
Accumulated depreciation (362,404) (255,331)
------------ ------------
352,933 301,027
Other assets 46,951 --
------------ ------------
Total assets $ 6,241,178 $ 9,046,730
============ ============
Liabilities and shareholders' equity
Current liabilities:
Accounts payable 564,102 586,816
Accrued outdated product return allowance 281,750 304,582
Accrued compensation 299,121 178,079
Accrued expenses 1,534,997 2,401,676
------------ ------------
Total current liabilities 2,679,970 3,471,153
Commitments -- --
Shareholders' equity:
Senior Convertible Preferred Stock, $.01 par value;
14,400 shares authorized; 8,088 and 7,500 shares
issued and outstanding 81 75
Series B Convertible Preferred Stock, $.01 par value;
5,000 shares authorized; 2,950 and 0 shares issued
and outstanding 30 --
Series C Convertible Preferred Stock, $.01 par value;
4,000 shares authorized; 0 shares issued and
outstanding -- --
Series D Convertible Preferred Stock, $.01 par value;
1,500,000 shares authorized; 0 shares issued and
outstanding -- --
Common stock, $.01 par value; 25,000,000 shares
authorized; 6,606,207 and 6,560,096 issued and
outstanding 66,062 65,601
Additional paid-in capital 43,743,664 39,946,113
Accumulated deficit (40,243,874) (34,433,640)
Accumulated other comprehensive loss (4,755) (2,572)
------------ ------------
Total shareholders' equity 3,561,208 5,575,577
------------ ------------
Total liabilities and shareholders' equity $ 6,241,178 $ 9,046,730
============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-2
<PAGE>
ORPHAN MEDICAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 6,457,406 $ 5,048,308 $ 654,838
Cost of sales 803,562 1,118,644 317,727
------------ ------------ ------------
Gross profit 5,653,844 3,929,664 337,111
Operating expenses:
Research and development 4,975,706 6,611,011 6,482,004
Sales and marketing 3,430,539 2,739,299 1,158,988
General and administrative 2,756,827 2,994,342 2,461,344
Contract termination fee (Note 12) -- -- 2,172,000
------------ ------------ ------------
Loss from operations (5,509,228) (8,414,987) (11,937,225)
Other income:
Interest, net 287,989 177,885 549,356
------------ ------------ ------------
Net loss (5,221,239) (8,237,102) (11,387,869)
Less: Preferred stock dividends 682,872 249,658 --
------------ ------------ ------------
Net loss applicable to common shareholders $ (5,904,111) $ (8,486,760) $(11,387,869)
============ ============ ============
Basic and diluted loss per common share
applicable to common shareholders $ (0.90) $ (1.36) $ (1.87)
============ ============ ============
Weighted average number of
shares outstanding 6,587,790 6,236,897 6,074,342
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
ORPHAN MEDICAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (5,221,239) $ (8,237,102) $(11,387,869)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 115,777 98,287 76,491
Compensatory options 51,196 323,608 26,703
Contract termination fee -- -- 2,048,103
Changes in operating assets and
liabilities:
Accounts payable (22,714) 227,971 110,989
Accrued expenses (768,469) 758,312 78,688
Inventories (432,818) 195,823 (308,548)
Accounts receivable and other (124,996) (687,959) (237,281)
------------ ------------ ------------
Net cash used in operating activities (6,403,263) (7,321,060) (9,592,724)
INVESTING ACTIVITIES
Purchase of property and equipment (158,980) (61,678) (157,689)
Purchase of short-term investments (8,735,566) (12,749,402) (12,253,885)
Maturities of short term investments 9,447,288 13,226,002 20,013,533
------------ ------------ ------------
Net cash provided by investing activities 552,742 414,922 7,601,959
FINANCING ACTIVITIES
Stock option and warrant exercise proceeds 876,546 660,595 213,697
Net proceeds from Preferred Stock
offerings 2,876,869 7,075,008 --
Preferred stock dividend (995) -- --
Common stock redemption (676,563) -- --
------------ ------------ ------------
Net cash provided by financing activities 3,075,857 7,735,603 213,697
------------ ------------ ------------
(Decrease) increase in cash and cash
equivalents (2,774,664) 829,465 (1,777,068)
Cash and cash equivalents at the beginning
of period 2,980,342 2,150,877 3,927,945
------------ ------------ ------------
Cash and cash equivalents at the
end of period $ 205,678 $ 2,980,342 $ 2,150,877
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Warrants issued for line of credit $ 82,000 -- --
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
ORPHAN MEDICAL, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
PREFERRED STOC COMMON STOCK ADDITIONAL OTHER
--------------- ------------------------ PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT LOSS TOTAL
-------------------------------------------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 -- $ -- 6,056,088 $ 60,561 $ 29,543,439 $(14,808,669) $ -- $ 14,795,331
Options exercised -- -- 41,287 413 213,284 -- 213,697
Compensatory options -- -- -- -- 26,703 -- 26,703
Warrants exercised -- -- 2,187 22 (22) -- --
Net loss -- -- -- -- -- (11,387,869) (11,387,869)
Unrealized loss on
available-for-sale
securities -- -- -- -- -- -- (1,960) (1,960)
------------
Subtotal - comprehensive
loss (11,389,829)
------ ------ --------- ------------ ------------ ------------ ------ ------------
Balance at December 31, 1997 -- -- 6,099,562 60,996 29,783,404 (26,196,538) (1,960) 3,645,902
Net proceeds from private
offering of 7,500 shares
of Senior Convertible
Preferred Stock 7,500 75 -- -- 7,074,933 -- 7,075,008
Stock issued to Chronimed
for contract termination
fee -- -- 313,694 3,137 2,105,041 -- 2,108,178
Options exercised -- -- 160,100 1,601 808,994 -- 810,595
Shares tendered in
connection with stock
option exercises -- -- (16,551) (166) (149,834) -- (150,000)
Compensatory options -- -- -- -- 323,608 -- 323,608
Warrants exercised -- -- 3,291 33 (33) -- --
Net loss -- -- -- -- -- (8,237,102) (8,237,102)
Unrealized loss on
available-for-sale
securities -- -- -- -- -- -- (612) (612)
------------
Subtotal - comprehensive
loss (8,237,714)
------ ------ --------- ------------ ------------ ------------ ------ ------------
Balance at December 31, 1998 7,500 75 6,560,096 65,601 39,946,113 (34,433,640) (2,572) 5,575,577
Net proceeds from private
offering of 2,950 shares
of Series B Convertible
Preferred Stock 2,950 30 -- -- 2,876,838 -- 2,876,868
Options exercised -- -- 168,834 1,688 848,859 -- 850,547
Repurchase of Chronimed
stock (127,723) (1,277) (675,286) -- (676,563)
Compensatory options -- -- -- -- 51,196 -- 51,196
Warrants exercised -- -- 5,000 50 25,950 -- 26,000
Warrants issued for line of
credit -- -- -- -- 82,000 -- 82,000
Net loss -- -- -- -- -- (5,221,239) (5,221,239)
Unrealized loss on
available-for-sale
securities -- -- -- -- -- -- (2,183) (2,183)
------------
Subtotal - comprehensive
loss (5,223,422)
Preferred stock dividends 588 6 -- -- 587,994 (588,995) (995)
------ ------ --------- ------------ ------------ ------------ ------ ------------
Balance at December 31, 1999 11,038 $ 111 6,606,207 $ 66,062 $ 43,743,664 $(40,243,874) $(4,755) $ 3,561,208
====== ====== ========= ============ ============ ============ ======= ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
ORPHAN MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. BUSINESS ACTIVITY
Orphan Medical, Inc. (the "Company") 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 substantially equivalent substitute. The Company operated
within a single segment, pharmaceutical product development, and had six
approved products commercially available in the United States and several
foreign countries. The Company has discontinued reporting as a development stage
enterprise in fiscal 1999.
As of December 31, 1999, the Company had not completed product development,
obtained required regulatory approvals or verified the market acceptance and
demand for Xyrem(R) (sodium oxybate) oral solution, one of its three principal
products. Antizol(R) (fomepizole) Injection, Busulfex(R) (busulfan) Injection
and Xyrem are the Company's principal products. In February 1999, the U.S. Food
and Drug Administration (the "FDA") approved the Company's New Drug Application
("NDA") for Busulfex and the Company began commercial shipments of Busulfex to
distributors and wholesalers during the same month. In addition, a Treatment
Investigational New Drug ("IND") application for Xyrem was approved by the FDA
in December 1998 and the Company began shipping Xyrem in February 1999, for use
in its Treatment IND clinical trials. The Treatment IND allows the Company to
seek payments for Xyrem used by patients enrolled in the Treatment IND clinical
trials, as well as gain additional clinical safety data that are expected to
support the Company's planned NDA filing for Xyrem.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
REVENUE RECOGNITION
Sales are recognized at the time a product is shipped to the Company's
customers. Provisions are established for estimated returns of outdated product
and for discounts for prompt payment.
CASH EQUIVALENTS AND AVAILABLE-FOR-SALE SECURITIES
The Company considers all highly liquid investments with remaining maturities of
90 days or less when purchased to be cash equivalents. The Company considers all
highly liquid investments with remaining maturities of more than 90 days when
purchased to be available-for-sale securities. Cash equivalents are carried at
cost plus accrued interest, which approximates market value. The Company records
unrealized gain or loss, if any, on available-for-sale securities as a separate
component of shareholders' equity.
CONCENTRATION OF CREDIT RISK
The Company invests its excess cash in U.S. government agency securities,
investment grade commercial paper, and other money market instruments and has
established guidelines relative to diversification and maturities in an effort
to maintain safety and liquidity. These guidelines are periodically reviewed to
take advantage of trends in yields and interest rates. The Company has not
experienced any significant losses on its cash equivalents or available-for-sale
securities.
F-6
<PAGE>
ORPHAN MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTS RECEIVABLE ALLOWANCE
The Company determines an allowance amount based upon an analysis of the
collectibility of specific accounts and the aging of the accounts receivable.
There is a concentration of sales to larger medical wholesalers and
distributors. The Company performs periodic credit evaluations of its customers'
financial condition. Receivables are generally due within 30 days of the invoice
date. Credit losses relating to customers have not been material since the
Company's inception.
INVENTORIES
Inventories consist principally of raw materials, packaging and finished goods
for products that have been approved by the FDA for commercial sale and are
valued at the lower of cost or market determined under the standard cost method,
which approximates the first-in, first-out (FIFO) method. The Company's policy
is to establish an excess and obsolete reserve for its products in excess of the
expected demand for such products during the twelve months following the balance
sheet date.
DECEMBER 31,
--------------------------
1999 1998
------------ ------------
Raw materials and packaging $ 148,129 $ 1,063
Finished goods 397,414 111,662
------------ ------------
$ 545,543 $ 112,725
============ ============
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Maintenance and repairs are expensed
as incurred. Depreciation is computed using the straight-line method over the
assets' estimated useful lives of five to seven years.
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are charged to operations as incurred.
Research and development costs consist principally of preclinical and clinical
testing costs, certain salary and related expenses, bulk drug and drug product
costs incurred in support of clinical testing and for validation lots required
by the FDA, toxicology studies and various technical consulting costs.
GRANT AWARDS
The FDA Office of Orphan Drug Products and the Small Business Administration
provide, upon application and approval, non-refundable grant awards in support
of certain research and development activities. Cash proceeds collected pursuant
to the terms of such grant awards are accounted for on a reimbursement basis.
INCOME TAXES
The Company accounts for income taxes using the liability method. Deferred
income taxes are provided for temporary differences between the financial
reporting and tax bases of assets and liabilities.
STOCK BASED COMPENSATION
The Company accounts for its stock option plans under the intrinsic-value-based
method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." The Company has adopted the disclosure only
provision of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock Based Compensation."
LOSS PER SHARE
Basic and diluted loss per common share applicable to common shareholders are
based upon the weighted average number of Common Stock shares outstanding during
the respective period. Basic loss per share excludes any dilutive effects of
options, convertible senior preferred stock and warrants. Basic and diluted loss
per share are the
F-7
<PAGE>
ORPHAN MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOSS PER SHARE (CONTINUED)
same for the reported periods because the effect of stock options, warrants, and
convertible securities is anti-dilutive.
RECLASSIFICATIONS
Certain prior year balances have been reclassified in order to conform with the
current year presentation. These reclassifications have no impact on net loss or
shareholders' equity as previously reported.
3. AVAILABLE-FOR-SALE SECURITIES
The amortized cost and estimated market value of available-for-sale securities,
all of which have contractual maturities of one year or less, are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
As of December 31, 1999
Commercial paper $ 3,831,991 $ -- $ 4,755 $ 3,827,236
------------ ------------ ------------ ------------
$ 3,831,991 $ -- $ 4,755 $ 3,827,236
============ ============ ============ ============
As of December 31, 1998
Commercial paper $ 500,289 $ -- $ 2,161 $ 498,128
U.S. Government securities 4,043,424 -- 411 4,043,013
------------ ------------ ------------ ------------
$ 4,543,713 $ -- $ 2,572 $ 4,541,141
============ ============ ============ ============
</TABLE>
4. OPERATING LEASES
The Company has a non-cancelable operating lease for office space that expires
on October 31, 2002. Future minimum lease payments, including current real
estate taxes and operating expenses under this operating lease are $216,000,
$219,000, and $187,600 for the years ended December 31, 2000, 2001, and 2002
respectively. Total rent expense was approximately $142,600, $125,000, and
$107,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
5. BORROWINGS
The Company has a commercial revolving line of credit with a bank, which expires
on May 15, 2000. The maximum amount available to the Company under this
arrangement is $500,000, subject to certain limitations. The Company's
indebtedness to the bank may not exceed the lesser of (1) 75 percent of the
Company's trade accounts receivable that have been outstanding for 90 days or
less or (2) $500,000. In addition, the Company must maintain a minimum balance
of at least $250,000 in accounts which the bank controls. Advances are charged a
variable rate of interest equal to the prime rate plus one half of a percent.
Through December 31, 1999, the Company has not borrowed under this arrangement.
The Company has an additional line of credit discussed further in Note 10.
F-8
<PAGE>
ORPHAN MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
As of December 31, 1999, the Company had net operating loss (NOL) carryforwards
of approximately $32,261,000, credit for increasing research activities (the
"R&D credit") carryforwards of approximately $359,000 and orphan drug credit
carryforwards of approximately $5,882,000, available to reduce its future tax
liabilities. These carryforwards will begin expiring after 2009. For the years
ended December 31, 1999 and 1998, a valuation allowance of $17,611,000 and
$14,658,000, respectively, has been recognized to offset the deferred tax assets
related to these carryforwards.
No current income taxes have been provided for the years ended December 31,
1999, 1998 and 1997 as the Company had a loss for both financial reporting and
tax purposes.
Significant components of the Company's net deferred tax assets are as follows:
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
Deferred tax assets:
Net operating loss carryforwards $ 10,969,000 $ 9,381,000
R&D and orphan drug credit carryforwards 6,241,000 4,625,000
Contract termination fee -- 230,000
Inventory reserves 128,000 169,000
All other reserves 305,000 284,000
Deferred tax liabilities:
Depreciation (32,000) (31,000)
Valuation allowance for deferred tax assets (17,611,000) (14,658,000)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
As a result of the 1995 public stock offering, the Company exceeded the limits
allowable under Section 382 of the Internal Revenue Code related to changes in
ownership percentage which governs future utilization of NOL, R&D credit, and
orphan drug credit carryforwards (collectively, "tax benefit carryforwards").
The effect of this occurrence is to limit the annual utilization of a portion of
the Company's tax benefit carryforwards attributable to the period prior to the
change in ownership. Should another change in ownership occur, future
utilization of the Company's tax benefit carryforwards may be subject to
additional limitations under Section 382.
7. EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) Savings Plan, which is funded by elective salary
deferrals by employees. The Plan covers substantially all employees meeting
minimum eligibility requirements. The Plan does not require mandatory
contributions by the Company, but discretionary contributions may be made at the
election of the Company. The Company has not made any provision for
discretionary contributions to the Plan.
On January 4, 2000, shareholders approved the Orphan Medical, Inc. Employee
Stock Purchase Plan to be funded by employee contributions. All employees are
eligible subject to certain requirements.
8. STOCK OPTIONS
The Company has one stock option plan for employees and non-employees, the 1994
Stock Option Plan (the "Plan"). The Plan provides the Company may grant employee
incentive stock options and non-qualified stock options at a price of not less
than 100% of fair market value. Options are exercisable as prescribed by the
Plan and expire up to fifteen years from the grant date for non-qualified stock
options and up to ten years from the grant date for employee incentive stock
options. At December 31, 1999, the Plan has 1,925,000 shares of Common Stock
reserved for issuance.
F-9
<PAGE>
ORPHAN MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTIONS (CONTINUED)
Options outstanding were granted as follows:
PLAN
----------- WEIGHTED
OPTIONS AVERAGE
OUTSTANDING EXERCISE PRICE
----------- --------------
Balance at December 31, 1996 1,208,000 $5.18
Options granted 308,000 5.81
Options canceled (78,566) 5.41
Options exercised (41,287) 5.18
-----------
Balance at December 31, 1997 1,396,147 5.32
Options granted 199,500 7.77
Options canceled (6,900) 10.13
Options exercised (160,100) 5.06
-----------
Balance at December 31, 1998 1,428,647 5.66
Options granted 234,305 6.39
Options canceled (22,500) 5.51
Options exercised (168,834) 5.04
-----------
Balance at December 31, 1999 1,471,618 $5.85
===========
The following table summarizes information about the stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ ---------------------------------
WEIGHTED AVERAGE
RANGE OF EXERCISE NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ----------------- --------------- -------------------------------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
$4.19 - $5.00 704,313 4.52 years $4.99 704,313 $4.99
$5.38 - $6.63 435,805 5.82 years 5.93 250,605 5.89
$6.83 - $10.13 331,500 8.31 years 7.57 152,600 7.67
------------- ------------
$4.19 - $10.13 1,471,618 $5.85 1,107,518 $5.56
============= ============
</TABLE>
Fully vested and exercisable options were 1,107,518, 1,101,960, and 903,947 as
of December 31, 1999, 1998, and 1997, respectively. The weighted average
exercise prices for the fully vested and exercisable options as of December 31,
1999, 1998, and 1997 were $5.57, $5.31, and $5.16, respectively.
PRO FORMA INFORMATION:
The Company applies the intrinsic-value method in accounting for stock issued to
employees and directors. Accordingly, compensation expense is recognized only
when options are granted with a discounted exercise price. Any such compensation
expense is recognized ratably over the associated service period, which is
generally the option vesting period.
F-10
<PAGE>
ORPHAN MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTIONS (CONTINUED)
PRO FORMA INFORMATION:
Pro forma net loss and loss per share information, as required by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" (SFAS 123), has been determined as if the Company had accounted
for employee stock options under the fair value method. The fair value of these
options was estimated at grant date using a Black-Scholes option pricing model
with the following assumptions for 1999, 1998, and 1997, respectively.
1999 1998 1997
---------------------------------------
Expected dividend yield 0.00% 0.00% 0.00%
Expected stock price volatility 57% 61% 61%
Risk-free interest rate 5.88% 5.5% 5.5%
Expected life of options 5 years 5 years 5 years
The weighted average fair value of the options granted in 1999, 1998, and 1997
was $3.55, $4.79, $2.99, respectively, as computed as described above.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over a four year average vesting period. The Company's
pro forma net loss for 1999, 1998 and 1997 was $(6,014,176) $(9,015,936), and
$(11,690,085) and pro forma net loss per share was $(0.91), $(1.45), and
$(1.92), respectively. These pro forma amounts include amortized fair values
attributable to options granted after June 30, 1995 only, and therefore are not
representative of future pro forma amounts.
9. STOCK WARRANTS
The Company issued warrants to the underwriter related to the Company's 1995
initial public stock offering to purchase 222,500 shares of Common Stock at a
price of $5.20 per share. These warrants are exercisable at any time between May
11, 1997 and May 12, 2000. In 1999, The Company issued additional warrants to
the underwriter related to the Company's 1995 initial public offering to
purchase 10,000 shares of Common Stock at $8.50 per share. At December 31, 1999
and 1998, the Company had warrants outstanding to purchase 211,725 and 206,725
shares, respectively, of Common Stock, all of which are currently exercisable.
In connection with the August 1999 financing, the Company issued two seven-year
warrants. One of the warrants entitles the holder to receive, upon payment of
the $2.05 million exercise price, either 2,050 shares of Series C Convertible
Preferred Stock (which is similar to the Series B Convertible Preferred Stock
and which is convertible to shares of the Company's Series D Non-Voting
Preferred Stock at a conversion price of $6.50 per share) or 315,385 shares of
Series D Non-Voting Preferred Stock (which is equivalent to common stock except
that it has no voting rights) or a combination of Series C Convertible Preferred
Stock and Series D Non-Voting Preferred Stock, so long as the combined purchase
price for the shares does not exceed $2.05 million. The second warrant, issued
in relation to the line of credit, entitled the holder to purchase 282,353
shares of Series D Non-Voting Preferred Stock at an exercise price of $4.25 per
share. The Company can require the exercise of the warrants under certain
conditions. The value of the warrants was $82,000 and is amortized over the term
of the line of credit to interest expense. All of these warrants are outstanding
at December 31, 1999. These warrants are not exercisable until July 23, 2002.
F-11
<PAGE>
ORPHAN MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. SHAREHOLDERS' EQUITY
On October 12, 1994, Chronimed Inc. ("Chronimed") distributed 1,180,838 shares
of the Company's Common Stock to its shareholders of record as of September 6,
1994. The distribution of the Company's Common Stock by Chronimed Inc.
represented a complete distribution in connection with a spin-off of the
Company, effective July 1, 1994. The Company completed a public offering of
Common Stock on May 19, 1995, and June 29, 1995, pursuant to which it sold
2,558,750 shares of Common Stock at $4.00 per share, before commissions and
expenses. The Company also completed a public offering of Common Stock on April
23, 1996 pursuant to which it sold 2,300,000 shares of Common Stock at $7.125
per share, before commissions and expenses.
On July 23, 1998 the Company issued $7.5 million of Senior Convertible Preferred
Stock (the "Preferred Shares") in a private placement. The Company realized net
cash proceeds of $7.1 million from the sale of the Preferred Shares after the
payment of related offering expenses. The Preferred Shares are convertible, at
the option of the holders, into shares of the Company's Common Stock at a price
equal to $8.50 per share. The Preferred Shares have anti-dilution and change of
control protection, and bear a dividend of 7.5% per annum, payable semi
annually, which during the first two years may by paid either in cash or by
issuing additional Preferred Shares. In the third year and thereafter, the
dividend may be paid either in cash or by issuing Common Stock valued at the
then current market price. At the Company's option upon their maturity in July
2008, the Preferred Shares must be (a) converted into Common Stock, subject to a
$3.0 million conversion fee payable in cash or by issuing additional Common
Shares, or (b) redeemed for cash at $1,000 per share plus accrued dividends. The
holders of the Preferred Shares are entitled to and have exercised their right
to designate an individual to serve on the Company's Board of Directors.
On August 2, 1999, the Company completed a $5.0 million financing transaction in
a private placement. The funding consisted of a purchase of 2,950 shares of the
Company's Series B Convertible Preferred Stock for an aggregate purchase price
of $2.95 million and a commitment of $2.05 million of debt in the form of a line
of credit. The Series B Convertible Preferred Stock ("Series B Preferred
Shares") may be converted prior to August 2, 2009 into shares of the Company's
Common Stock at a price of $6.50 per share. Amounts outstanding under this line
of credit bear an interest rate of 7.5% and mature on August 2, 2002. The
Company has not borrowed under this arrangement as of December 31, 1999. The
Series B Preferred Shares have anti-dilution and change of control protection,
and bear a dividend of 7.5% per annum, payable semi annually, which during the
first two years may by paid either in cash or by issuing additional Series B
Preferred Shares. In the third year and thereafter, the dividend may be paid
either in cash or by issuing Common Stock valued at the then current market
price. At the Company's option upon their maturity in August 2009, the Series B
Preferred Shares must be (a) converted into Common Stock, subject to a $1.2
million conversion fee payable in cash or by issuing additional Common Shares,
or (b) redeemed for cash at $1,000 per share plus accrued dividends.
The August 1999 financing triggered antidilution provisions relating to the $8.1
million of the Senior Preferred Stock held as of August 1 (after giving effect
to the semi-annual in-kind dividend distributions, the most recent of which was
August 1, 1999), which resulted in a decrease in the conversion price of those
shares from $8.50 to $8.14 per share.
11. RESEARCH AND DEVELOPMENT COMMITMENTS
The Company has various commitments under agreements with outside consultants,
contract drug development and manufacturers, technical service companies,
license and research agreements, and agreements with drug distributors. The
Company does not have any joint venture agreements nor does it have any
arrangements to perform research and development for other parties. The Company
recognizes the costs associated with these commitments as incurred based on the
accrual method of accounting. Expenditures associated with these commitments
totaled approximately $3,600,000, $5,200,000, $5,232,000 for the years ended
December 31, 1999, 1998, and 1997, respectively. The Company's commitment to
incur additional expenditures in subsequent periods for development activities
totaled approximately $1,602,095, $3,350,000, and $2,700,000 at December 31,
1999, 1998, and 1997, respectively. Commitments for research and development
expenditures will likely fluctuate from year to year depending on, among other
factors, the timing of new product development, if any, and clinical trial
activity.
F-12
<PAGE>
ORPHAN MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company collected cash proceeds of approximately $511,000 and $788,000 for
the years ended December 31, 1998 and 1997, respectively, relating to certain
research and development expenditures that qualified for reimbursement under the
terms of several grant awards provided by the FDA Office of Orphan Drug
Products. At December 31, 1999, the Company had collected all cash proceeds
relating to research and development expenditures qualifying for reimbursement
and no additional reimbursements are available under these grant awards.
12. CONTRACT TERMINATION FEE
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 in 1994. 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 certain of Orphan Medical's products, including Busulfex and Antizol.
In consideration for terminating these agreements, the Company agreed to pay
Chronimed compensation equal to $2,500,000, consisting of cash and shares of the
Company's Common Stock. Chronimed was paid $250,000 in cash on June 27, 1997,
with the remaining balance of $2,250,000 payable in quarterly installments based
on a temporary royalty arrangement equal to 3 percent of the Company's sales and
the issuance of Common Stock equal to 1 percent of the Company's issued and
outstanding Common Stock at each quarter end. As provided by the Agreement, the
Company paid Chronimed approximately $131,000 and $9,400 in royalties for the
years ended December 31, 1998 and 1997, respectively. In addition, the Company
issued to Chronimed 313,694 of Common Stock through December 31, 1998, of which
185,971 have been sold by Chronimed in market transactions for net cash proceeds
of $1,433,061 as of that date.
On February 9, 1999, the Company completed the acquisition from Chronimed Inc.
of the remaining 127,723 unregistered shares of the Company's Common Stock. The
Company paid Chronimed $338,281 on February 9, 1999 and $338,282 on March 31,
1999 to satisfy all of its obligations under the June 1997 Termination
Agreement.
13. SEGMENT INFORMATION
The Company operates in two geographic segments, domestic and international. The
Company has no assets outside of the United States. The following is a summary
of net sales by geographic segment for the years ended December 31, 1999, 1998
and 1997, respectively.
1999 1998 1997
------------ ------------ ------------
Domestic $ 5,790,118 $ 4,810,003 $ 654,838
International 667,288 238,305 --
------------ ------------ ------------
Total $ 6,457,406 $ 5,048,308 $ 654,838
============ ============ ============
14. SUBSEQUENT EVENT
On February 23, 2000, the Company completed the sale of 1,265,000 shares of its
Common Stock at a price of $8.00 per share. The Company received net proceeds of
$9,720,000 from the transaction and has agreed to register the shares under the
Securities Act of 1933, as amended.
On February 25, 2000, the Company completed the sale of 100,000 shares of its
Common Stock at a price of $10.00 per share. The Company received proceeds of
$1,000,000 from the transaction and has agreed to register the shares under the
Securities Act of 1933, as amended.
F-13
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ORPHAN MEDICAL, INC.
<TABLE>
<CAPTION>
Additions
-------------------------------------
Balance at Charged to Other
Beginning of Charged to Costs Accounts - Deductions - Balance at End
Description Period and Expenses Describe Describe(1) of Period
- ----------------------------------- ------------ ---------------- ---------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $ 48,620 $ 64,380 $ -- $ -- $113,000
Allowance for excess
inventory 497,200 -- -- 120,607 376,593
YEAR ENDED DECEMBER 31, 1998
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts 22,617 26,003 -- -- 48,620
Allowance for excess
inventory 192,453 304,747 -- -- 497,200
YEAR ENDED DECEMBER 31, 1997
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts -- 22,617 -- -- 22,617
Allowance for excess
inventory 301,830 91,050 -- 200,427 192,453
</TABLE>
(1) Recovery of amounts previously reserved.
F-14
EXHIBIT 10.1.1
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made effective as of the 29th day of October, 1999,
entered into by and between Orphan Medical, Inc., a Minnesota Corporation (the
"Company") and John Howell Bullion of Hennepin County, Minnesota, (hereinafter
called "Employee").
WHEREAS, the Company desires to employ the Employee as its Chairman and
Chief Executive Officer (CEO) of the Company, in accordance with the following
terms, conditions and provisions; and
WHEREAS, the Employee desires to perform such services for the Company,
all in accordance with the following terms, conditions and provisions;
NOW THEREFORE, in consideration of the mutual covenants herein
contained, it is agreed as follows:
1. EMPLOYMENT AND DUTIES.
The Company hereby continues Employee's employment, and Employee hereby
accepts and agrees to serve the Company as the Chairman and the Company's CEO,
consistent with the job description for this position, and with duties subject
to review and modification from time to time at the direction of the Company's
Board of Directors (the "Board"). The Employee shall remain a member of the
Company's Board of Directors, subject to election by the shareholders of the
Company. The Employee shall apply his best efforts and devote substantially all
of his professional and business time and attention to the Company's affairs and
shall not, directly or indirectly, actively engage in or concern himself with
any other activities or commitments which interfere with the performance of his
duties hereunder or which, even if non-infering, may be contrary to the best
interests of the Company.
2. TERM.
The term of this Agreement and Employee's employment under this
Agreement shall commence on October 20, 1999, and shall continue thereafter for
a period of three years. Upon the expiration of the original term of this
Agreement, this Agreement shall automatically renew for successive two-year
terms, subject to termination as provided in Section 7.
<PAGE>
Employment Agreement
Page 2
3. COMPENSATION.
The Company shall compensate the Employee for his services at the
following salary, bonus, and benefits:
A. Base Salary
The Employee shall be paid a base annual salary of
One Hundred Eighty Thousand dollars ($180,000) for the
calendar year 2000 and $200,000 for the calendar year 2001
payable on the Company's normal payroll cycle. The Employee's
salary in November and December of 1999 will be adjusted for
these two months to the 2000 level. The base salary for 2000
and 2001 is the minimum salary for those respective years, and
$200,000 is the minimum salary during the balance of this
agreement in year 2001 and beyond. The base salary may be
increased from time to time at the discretion of the Board of
Directors. Employee shall receive an annual performance
review, and, contingent upon satisfactory review results,
shall be eligible for an increase of such base salary at the
direction of the Board of Directors.
B. Bonus.
The Employee shall continue to participate in a
Company Management Incentive Plan, as approved and amended by
the Board of Directors from time to time, and which is
designed to deliver an annual bonus consistent with current
levels established for this position by the Board of
Directors. Employee shall periodically meet with the Board of
Directors, to establish quantitative and qualitative
initiatives and objectives for the purpose of assessing the
amount of bonus to be paid to Employee at the end of the
associated bonus period.
C. Withholding Taxes.
The Employee agrees that the Company shall withhold
from any and all payments required to be made to the Employee
pursuant to this Agreement all federal, state, local, and/or
other taxes which the Company determines are required to be
withheld in accordance with applicable statues and/or
regulations from time to time in effect.
C. Stock Options.
The Employee shall be eligible to participate in the
annual grant of the Company's Stock Option Plan, consistent
with its terms and conditions, and with amounts of options,
including exercise price and vesting provisions determined by
the Board of Directors from time to time. Provisions under
this item 3C, stock options, are also subject to the
provisions found in Section 7, under Termination of agreement.
<PAGE>
Employment Agreement
Page 3
D. Employee Benefits Plans.
The Employee shall be entitled to participate in any
and all Company Employee benefit plans, in accordance with the
eligibility requirements and other terms and provisions of
such plan or plans. Additionally, so long as the Employee is
insurable via normal standards, the Company shall pay the
insurance premium for disability insurance coverage which
shall provide the Employee with a benefit upon total
disability equal to sixty-five percent (65%) of the Employee's
base salary payable to age 65. In the event that Employee
elects to pay the premiums for such coverage himself, the
Employee's annual base salary shall be increased by an amount
equal to the amount of such premiums, plus an additional
amount calculated to cover the Employee's additional income
taxes resulting from such incease.
E. Insurance.
The Employee agrees that the Company, at the
discretion of its Board of Directors, may apply for and
procure on its own behalf, life insurance on the life of the
Employee, for the purpose of protecting the Company against
loss caused by the death of the Employee (commonly referred to
as "Key" insurance). Employee agrees to cooperate and submit
to medical examination, and to execute or deliver any
documentation reasonably required by the Company's insurer in
order to effectuate such insurance.
4. VACATION AND TIME OFF.
The Employee shall be entitled to four weeks of paid vacation in each
year of employment under the terms of this Agreement, without reduction of
salary. Unused vacation time may be carried over to future years of employment,
consistent with Company policy affecting use of Employee vacation time. In
addition, Employee shall be entitled to such additional time off from work,
without loss of compensation, for attendance at professional meetings,
conventions, approved "other business activities", as per Section 12, and
educational courses in accordance with the Company's general policies in this
regard, and as from time to time determined by its Board of Directors.
5. EXPENSES.
The Company will reimburse Employee for reasonable expenses incurred by
the Employee in connection with the business of the Company, according to
policies promulgated from time to time by the Board of Directors, and upon
presentation by Employee of appropriate substantiation for such expenses.
<PAGE>
Employment Agreement
Page 4
6. DISABILITY.
Not withstanding any other provision of this Agreement, if Employee is
totally disabled, as defined below, for an aggregate of 180 calendar days in any
one calendar year of employment, the company shall not be obligated to pay
Employee the compensation provided in this Agreement for any period of total
disability during such year in excess of 120 days. In such event, Employee's
salary under Section 3 shall be prorated for such year of employment in the same
manner as if this Agreement had been terminated at the end of such 120th day.
The Company agrees that, while on disability leave of absence, and for
the duration of such disability, Employee may continue to receive Employer's
group insurance plan coverage by compliance with the provisions of the
Consolidated Omnibus Budget Reconciliation Act ("COBRA"), until the end of such
disability leave, or upon attainment of the age of 65, whichever is earlier.
Employee is responsible for any COBRA insurance plan or policy premium.
For purposes of this Agreement, Employee shall be considered to be
totally disabled when he is considered to be as such by any insurance company
used by the Company to provide disability benefits for the Employee, and
Employee shall continue to be considered totally disabled until such insurance
company ceases to recognize him as totally disabled for purposes of disability
benefits. If no such disability policies are in effect for the benefit of the
Employee or for any reason an insurance company fails to make a determination of
the question of whether Employee is totally disabled, Employee shall be
considered to be totally disabled if, because of mental or physical illness or
other cause, he is unable to perform the majority of his usual duties on behalf
of the Company. The existence of a total disability of the Employee, the date it
commenced, and the date it ceases, shall be determined by the Board of Directors
and the Employee, under these circumstances. If the parties cannot agree on the
foregoing questions of disability, then any such determination shall be made
after examination of Employee by medical doctor selected by the Board of
Directors, and a medical doctor selected by the Employee. If the medical doctors
so selected cannot agree on the foregoing questions of disability, a third
medical doctor shall be selected by the two and the opinion of a majority of all
three shall be binding.
7. TERMINATION.
This Agreement shall terminate upon the occurrence of any of the
following:
A. Mutual agreement, in writing, of the parties to terminate;
<PAGE>
Employment Agreement
Page 5
B. Employee's death. Under circumstance of Employee's death,
Company agrees to make termination payments to Employee's designated
beneficiaries, in the amount of one year of base salary, and annual
bonus payment for bonus payable in the fiscal year in which Employee's
death occurred. Additionally, any unexercised, vested stock options
which were available to Employee immediately prior to date of death
shall be exercisable by beneficiaries in accordance with the Company's
stock option plan. In addition, Employee's designated beneficiaries
may, at their option, continue to pay and to receive insurance coverage
under the COBRA provisions, and beyond, for a period of up to two years
following death, or upon attainment of age 65 of beneficiary, whichever
is earlier;
C. Upon the expiration of the initial or any renewal term of
this Agreement, following 120 days of written notice by one party to
the other indicating the party's intention not to renew (however,
Termination Payments pursuant to Section G of this agreement, shall not
be less than 12 months);
D. At the Company's option, if Employee shall be totally
disabled, as defined above for a continuous period in excess of nine
months. The Company's option to terminate in such event shall be
exercised upon at least 30 days written notice to Employee;
E. Termination by the Company for cause.
For purposes of this provision of this Agreement,
"Cause" shall mean termination by the Company of
Employee's employment based upon:
(i) The willful and continued failure by
Employee substantially to perform his duties
and obligations (other than any such failure
resulting from his incapacity due to
physical or mental illness), or
(ii) The willful misconduct of Employee which is
materially injurious to the Company or any
of its subsidiaries, monetarily or
otherwise.
For purposes of this paragraph, an act, or failure to
act, shall be considered "willful" if done, or
omitted to be done, by Employee in bad faith and
without reasonable belief that the action or omission
was in the best interests of the Company.
(iii) "Cause" shall mean termination by the
Company of Employee's employment based upon
(a) the willful and continued failure by
Employee substantially to perform his duties
and obligations (other than any such failure
resulting
<PAGE>
Employment Agreement
Page 6
from his incapacity due to physical or
mental illness) or (b) the willful
misconduct of Employee which is materially
injurious to the Company or any of its
subsidiaries, monetarily or otherwise. For
purposes of this paragraph, an act, or
failure to act, shall be considered
"willful" if done, or omitted to be done, by
Employee in bad faith and without reasonable
belief that the action or omission was in
the best interests of the Company.
F. Change of employment or termination without cause by the
Company.
A Change in employment shall be deemed to have
occurred if, without Employee's consent,
1. Employee's position, duties, or title are
materially and adversely changed without cause; or
2. At the option of either party, without cause, by
one year's advance notice to the other party; or
3. The location of performance of most of Employee's
duties is moved from the general geographic location
in which Employee performed such duties prior to the
move.
The effective date of a change in employment shall be the date
Employee elects, by written notice to the Company, to treat such action
as termination due to change in employment, provided it occurs within
90 days of the date Employee is notified of the change in employment.
Failure to treat a particular change in employment as a termination of
employment shall not preclude Employee from treating a subsequent
change of employment as a termination of employment.
G. Termination without good cause and termination payments.
In the event Employee's employment with the Company
is terminated without cause, or a change in employment occurs
and Employee elects to treat the change in employment as a
termination of employment and so notifies the Company of such
election within 90 days following the change of employment
(with a date of notice to be deemed the effective date of
termination) or the geographic location changes as defined
above, or upon non-renewal of this agreement by the Company,
then:
(a) Employee shall receive payment equal to 12 months
of Employee's then current annualized salary; plus
the
<PAGE>
Employment Agreement
Page 7
average of any bonus or incentive compensation paid
or payable for the most recent two fiscal years, or
other period generally used by the Company to
determine such bonus or incentive compensation, and
at Employee's election, may pay out such salary and
bonus or incentives over a period of one year
consistent with the Company's routine Employee
payment schedules, or in a lump sum; and all unvested
stock options held by Employee shall immediately
vest. The Employee shall also be paid any accrued
vacation pay to the date of such termination and any
accrued sick leave or unpaid expense reimbursements
that may be then due.
(b) Employee shall be entitled to continue
participation in the healthcare coverage, life
insurance and general Employee benefit plans of the
Company. The Company shall for two years following
the effective date of the termination under this
Section 7G, or until Employee becomes eligible for
such insurance coverages with another employer,
continue to provide such coverage for Employee and
his dependents to the same extent and cost the
Company is then providing for other Employees with
comparable coverage during this two year period.
Following this period of time, Employee will be
eligible for COBRA extension of benefits permissible
by law.
(c) In the event of a termination of employment under
this Section 7G, the Company agrees that in the event
of a dispute by the Employee over any terms or
provisions contained in this agreement, or
interpretation thereof, the Company will pay all
reasonable legal expenses incurred by Employee as a
result of Employee's efforts to resolve the dispute.
H. Termination without good cause prior to change of control
In the event that the Employee's employment shall be
terminated without Good Cause in anticipation of a Change of
Control, it being agreed that any such termination which shall
take place within 120 days of the effective date of such
Change of Control shall be conclusively deemed for purposes of
this paragraph to be termination in anticipation of such
Change of Control then and in such event, the Employee shall
be entitled to receive for the period of two (2) years
following such termination his base salary at the rate in
effect on the date of such termination of employment, payable
in equal installments in the same amounts and in the same
periodic intervals as his base salary was paid immediately
prior to such termination. Additionally, during such two-year
<PAGE>
Employment Agreement
Page 8
period, the Employee shall be entitled to continue to receive
each of the Employee benefits specified in Section 3D. hereof.
The Employee shall also be paid any accrued vacation pay to
the date of such termination, and any accrued sick leave or
unpaid expense reimbursements that may then be due. In the
event that the Employee shall obtain other full-time
employment during such two year period, the amount of the
Employee's base salary and benefits actually received by him
during such two year period shall be credited against the
Company's obligation to provide the termination payments and
continued benefits provided for in this paragraph (it being
agreed that any payments or benefits received by the Employee
for part-time employment or consulting work during such two
year period shall not be credited against the Company's
obligation hereunder. The Employee shall be under no
obligation to obtain such other full-time employment, but if
he shall, he shall promptly give written notice to the Company
of the salary and benefits provided to the Employee in
connection with such other full-time employment, in order that
the amount of such credit may be determined.
I. Voluntary termination and termination for good cause
payments
The Employee's employment may be voluntarily terminated by him
at any time by giving not less than thirty (90) days written
notice thereof to the Company. Additionally, the Employee's
employment may be terminated at any time for Good Cause (as
defined herein) effective upon giving written notice to such
termination for Good Cause by the Company to the Employee. If
at any time during the term of this Agreement (i) the Employee
shall have voluntarily terminated his employment with the
Company (other than following a Change of Control), or (ii)
the Company shall have terminated the employment of the
Employee for Good Cause, the Employee shall be entitled to
receive only his base salary as privided in Section 3 hereof
and accrued vacation pay to the date of such termination, any
sick leave or unpaid expense reimbursements that may be due,
and no other benefits, except those that cannot be divested
pursuant to the Employee Retirement Income Security Act of
1974, as amended or other applicable law.
J. Termination following change of control
Termination following a change in control shall be defined as
shown in attached Exhibit A attached hereto.
K. Segregation of Funds for Severance Payments.
To help assure to the Employee the funding of the Company's
obligation to provide the payments and benefits following the
termination of the Employee's employment as provided for under
Section 7, the Company
<PAGE>
Employment Agreement
Page 9
shall forthwith upon the termination of the Employee as
provided in any of such Section, place sufficient funds to
cover the required payments and the cost of the fringe
benefits provided for therein in a so-called "Rabbi Trust" or
other similar arrangement with a trustee reasonably acceptable
to the Employee, which trust shall insulate the amount placed
therein from the claims of the Company's creditors to the
maximum extent legally possible without the amount therein
being taxable in full to the Employee in the year of the
funding of such trust. The trust may be terminated and the
funds therein released to the Company at such time as the
Company shall cease to have any further obligation to the
Employee under the applicable Section 7 of this Agreement.
8. COVENANT NOT TO COMPETE.
Employee hereby covenants and agrees that during the initial and any
renewal term of this Agreement, and for a period of one year following the
termination of this Agreement, Employee shall not be engaged within the United
States, either directly or indirectly, in any matter or capacity, whether as an
advisor, principal, agent, partner, officer, director, Employee, member of an
association, or otherwise, in any business or activity, or own beneficially or
of record, five percent or more of the outstanding stock of any class of equity
securities in any Company in competition with the business then being conducted
by the Company. If Employee should breach the foregoing covenant, the Company
will cease making payments described in the previous section regarding
Termination of Agreement, and any associated payments contained therein; and
remaining unexercised stock options shall immediately be cancelled and benefit
plan provisions described in the Termination Section 7 shall be immediately
discontinued.
Additionally, at the option of the Board of Directors, the Company may
choose to extend the covenant not to compete set forth herein for a period of up
to an additional twelve months, beyond the initial twelve month period already
stipulated herein. In consideration for such election, the Company agrees to
make payment to the Employee the annualized salary and bonus equal to that in
effect during the fiscal year at the time of termination.
During this additional period of extension and payment, Employee agrees
not to solicit, directly or indirectly, any current Employee of the Company for
employment or engagement in any capacity outside of the Company, its
subsidiaries or affiliates.
9. CONFIDENTIALITY.
Employee will in the course of his employment by the Company have
access to confidential or proprietary data or information of the Company.
Employee will not at any time divulge or communicate to any person (other than
to a person bound by confidentiality obligations to the Company similar to those
contained in this Agreement) or use to the detriment of the Company or for the
benefit of any other person of such data or information. The provisions of this
Section 10 shall survive Employee's
<PAGE>
Employment Agreement
Page 10
employment hereunder whether by the normal expiration of that employment or
otherwise. The term "confidential or proprietary data or information" as used in
this Agreement shall mean information not generally available to the public
including, without limitation, personnel information, financial information,
customer lists, supplier lists, trade secrets, secret processes, know-how,
computer data and programs, pricing, marketing and advertising data. The
Employee acknowledges and agrees that any confidential or proprietary data or
information that Employee has heretofore acquired was received in confidence and
as a fiduciary with respect to the business of the Company.
All written materials, records and documents made by Employee or coming into
Employee's possession during the term of employment concerning any products,
processes, information or services used, developed, investigated or considered
by the Company, or otherwise concerning the business or affairs of the Company,
shall be the sole property of the Company and upon termination of Employee's
employment, or upon request by the Board of Directors during Employee's
employment, Employee shall promptly deliver the same to the Company. In
addition, upon termination of Employee's employment, or upon request of the
Board of Directors during Employee's employment, Employee shall deliver to the
Company all other property of the Company in Employee's possession or under
Employee's control including, but not limited to, financial statements,
marketing and sales data and other documents and all Employer credit cards.
10. ASSIGNMENT OF PATENT RIGHTS, COPYWRITES, ETC.
The Employee shall promptly disclose in writing to the Company all
inventions, discoveries, improvements and materials subject to copyright
protection devised by him while in the employ of the Company, and the Employee
hereby transfers and assigns to the Company, all right, title and interest in
and to the same, including any and all domestic and foreign patent rights or
copyrights therein and any renewals thereof. On request of the Company, the
Employee shall execute from time to time during or after the termination of his
employment, such further instruments, including without limitation applications
for letters patent or copyrights and assignments thereof, as may be deemed
necessary or desirable by the Company to effectuate the provision of this
Agreement. It is agreed, however, and Employee is hereby notified, that the
agreements contained in this Section 11 do not apply to such items and
inventions for which no equipment, materials, supplies, facility or Confidential
Information of the Company was used and which was developed entirely on
Employee's own time, and
(a) which does not relate directly to
(i) the business of the Company or to
(ii) the Company's actual or demonstrably anticipated
research and development, or
(b) which does not result from any work performed by Employee for
the Company.
<PAGE>
Employment Agreement
Page 11
11. OTHER BUSINESS ACTIVITIES.
Employee shall not serve as an officer of another company, whether for
compensation or otherwise, requiring more than nominal duties by the Employee,
during the term of this Agreement without the express prior written consent of
the Company's Board of Directors. Employee may not serve as a Director of any
other organization without express prior written approval by the Company's Board
of Directors, however, Employee's serving on the Boards of Chronimed and Life
Time Fitness is acknowledged and exempt from this restriction.
12. COOPERATION IN CLAIMS.
Both during employment and post employment, Employee agrees that in the
event of a legal action against the Company, or legal action initiated by the
Company against another party, in which Employee is deemed by the Company to be
a material witness or affiant, Employee agrees to make reasonable and best
efforts to cooperate with the Company in such matters. If Employee is no longer
employed, Company will reimburse Employee for time and expenses incurred as a
result of cooperation for this purpose.
13. INDEMNIFICATION.
The Company agrees to make its best efforts to indemnify and hold
harmless the Employee from liability incurred as a result of performance of
duties as an Officer and member of the Board of Directors. This includes but is
not limited to applicable statute, as well as efforts to secure coverage under
pertinent insurance policies.
14. NOTICES.
All notices, requests, demands and other communications provided for by
this Agreement shall be in writing and shall be deemed to have been given when
mailed at any general or branch United States Post Office enclosed in a
certified postpaid envelope, return receipt requested, and addressed to the
address of the respective party stated below or to such changed address as the
party may have fixed by notice:
If to the Employee:
John Howell Bullion
6016 Shane Drive
Edina, Minnesota 55439 - 1758
If to the Company:
Chairman, Compensation Committee of the Board of Directors
Orphan Medical, Inc.
Ridgedale Office Center
<PAGE>
Employment Agreement
Page 12
13911 Ridgedale Drive
Minnetonka, Minnesota 55305
Any notice of change of address shall only be effective, however, when
received.
15. SUCCESSORS AND ASSIGNS.
This Agreement shall inure to the benefit of, and be binding upon, the
Company, its successors and assigns, including, without limitation, any Company
which may acquire all or substantially all of the Company's assets and business
or into which the Company may be consolidated or merged, and the Employee, his
heirs, executors, administrators and legal representatives. The Employee may
assign his right to payment, and his obligations, under this Agreement.
16. APPLICABLE LAW.
This Agreement shall be governed by the laws of the State of Minnesota.
17. OTHER AGREEMENTS
This Agreement supersedes all prior understandings and agreements
between the parties. It may not be amended orally, but only by a writing signed
by the parties hereto.
18. NON-WAIVER.
No delay or failure by either party in exercising any right under this
Agreement, and no partial or single exercise of that right, shall constitute a
waiver of that or any other right.
19. HEADINGS.
Headings in this Agreement are for convenience only and shall not be
used to interpret or construe its provisions.
20. COUNTERPARTS.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which together shall constitute one
and the same instrument.
SIGNATURES
By /s/ Michael Greene
------------------------------
<PAGE>
Employment Agreement
Page 13
Michael Greene
Chair, Compensation Committee
Orphan Medical, Inc. Board of Directors
EMPLOYEE
/s/ John Howell Bullion
- ---------------------------------
<PAGE>
Employment Agreement
Page 14
EXHIBIT A
CHANGE OF CONTROL AGREEMENT
This agreement is made as of the 29th day of October, 1999, between
Orphan Medical, Inc., a Minnesota corporation (the "Company"), and John Howell
Bullion ("Employee"), residing in Edina, MN.
WITNESSETH THAT:
WHEREAS, the Company believes that it is in the best interests of
the Company to maintain management capable of protecting and enhancing the best
interests of the Company and its shareholders; and
WHEREAS, in connection therewith, the Company believes that it is
important for Employee to be available to assist and advise the Company and its
board of directors in the event the Company or its shareholders receives a
proposal for transfer of control of the Company, without being influenced by any
uncertainties which may exist with regard to Employee's future employment.
NOW, THEREFORE, to assure the Company that it will have continued
access to the dedicated services of Employee notwithstanding the possibility,
threat or occurrence of a bid to take over control of the Company, and to induce
Employee to remain in the employ of the Company, the Company and Employee agree
as follows:
1. Definitions.
As used herein, the following terms shall have the meanings set
forth below:
(i) A "Change in Control" shall mean the occurrence of any of the
following events:
(a) a change in control of the Company of a nature
required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the Securities Exchange Act of
1934, as amended ("Exchange Act"), whether or not the Company is
then subject to such reporting requirement; or
(b) any "person" (as such term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner"
(as defined in Rule 13d-3 promulgated under the Exchange Act),
directly or indirectly, of securities of the Company representing
(a) at least 15% but no more than 50% of the combined voting power
of the Company's then
<PAGE>
Employment Agreement
Page 15
outstanding securities unless the transaction is approved by the
Board of Directors of the Company in advance of the event, or by a
majority of the Continuing Directors within 30 days after the event,
or (b) more than 50% of the combined voting power of the Company's
then outstanding securities (regardless of any approval of the Board
of Directors); or
(c) individuals who at the date hereof constitute the
Board of Directors of the Company cease to constitute a majority
thereof, provided that such change is the direct or indirect result
of a proxy fight and contested election for positions on the Board;
or
(d) the sale, lease, exchange or other transfer,
directly or indirectly, of all or substantially all of the assets of
the Company, in one transaction or in a series of related
transactions; or
(e) a merger or consolidation to which the Company is a
party if the shareholders of the Company immediately prior to the
effective date of such merger or consolidation have "beneficial
ownership" (as defined in Rule 13d-3 promulgated under the Exchange
Act) immediately following the effective date of such merger or
consolidation of securities of the surviving company representing
(a) 50 percent or more, but not more than 85 percent, of the
combined voting power of the surviving corporation's then
outstanding securities, unless such merger or consolidation has been
approved in advance by the Board of Directors of the Company in
advance of the event, or by a majority of the Continuing Directors
within 30 days after the event or (b) less than 50 percent of the
combined voting power of the surviving corporation's then
outstanding securities (regardless of any approval by the continuity
directors); or
(f) the Board of Directors of the Company determines, in
its sole and absolute discretion, that there has been a change in
control of the Company.
(ii) "Continuing Directors" shall include only those directors of
the Company on the date hereof and those directors, as of a date 30 days prior
to an event that would otherwise be considered a "Change in Control," who were
nominated by Continuing Directors and duly elected by shareholders at an annual
meeting thereof or nominated and elected by directors who were "Continuing
Directors."
(iii) "Cause" shall mean termination by the Company of Employee's
employment based upon (a) the willful and continued failure by Employee
substantially to perform his duties and obligations (other than any such failure
resulting from his incapacity due to physical or mental illness) or (b) the
willful misconduct of Employee which is materially injurious to the Company or
any of its subsidiaries, monetarily or otherwise. For purposes of this
paragraph, an act, or failure to act, shall be considered
<PAGE>
Employment Agreement
Page 16
"willful" if done, or omitted to be done, by Employee in bad faith and without
reasonable belief that the action or omission was in the best interests of the
Company.
(iv) "Disability" shall mean any physical or mental condition which
would qualify Employee for a disability benefit under the long-term disability
plan of the Company.
2. Term of Agreement.
This agreement shall commence on the date hereof and shall continue
in effect until (i) Employee and the Company mutually agree in writing to
terminate this agreement, (ii) termination of Employee's employment with the
Company in a manner other than as set forth in section 3(i) hereof, or (iii)
Employee reaches the age of sixty-five (65).
3. Termination of Employment.
(i) Employee shall be entitled to receive the cash payment and other
benefits provided in section 4 hereof if, during the term of this agreement, the
Company, within twelve (12) months of a Change in Control, shall have terminated
Employee without Cause, required the Employee to relocate or offered employee
continued employment at a lower pay level and lesser level of responsibility.
(ii) Nothing contained herein shall be deemed to constitute a
guarantee of employment or limit the Company's right to terminate Employee prior
to a Change in Control or for Cause following a Change in Control. Employee's
rights upon termination of employment prior to a Change in Control or after the
expiration of the term of this agreement or after the expiration of the
prescribed periods following a Change in Control set forth in section 3(i) shall
be governed by the standard employment termination policy applicable to Employee
in effect at the time of termination.
4. Benefits Upon Termination Under Section 3(i)
Upon the termination of Employee pursuant to section 3(i) hereof,
Employee shall be entitled to receive the benefits specified in this section 4.
The amounts due to Employee under this section 4 shall be paid to Employee not
later than Employee's last day of employment. All payments to Employee pursuant
to this Section 4 shall be subject to any applicable payroll or other taxes
required by law to be withheld.
(i) The Company shall pay to Employee (a) the full base salary
earned by him and unpaid through the effective date of Employee's termination,
at the rate in effect at the time notice of termination was given, plus (b) an
amount representing credit for any vacation earned by him in the current
calendar year, but not taken.
(ii) In lieu of any further base salary payments to Employee for
periods subsequent to the date that the termination of Employee's employment
becomes
<PAGE>
Employment Agreement
Page 17
effective, the Company shall pay as severance pay to Employee a lump sum amount
in cash equal to the following: the highest annual salary and incentive payment
within the last two years divided by 12 multiplied by 24 months.
(iii) All options to purchase the Company's Common Stock and all
other incentive awards granted to Employee under the Company's 1994 Long-Term
Incentive and Stock Option Plan or any other stock option or incentive
compensation plan adopted by the Company (each, a "Plan" and, together, the
"Plans") shall become immediately exercisable or vested, as the case may be;
provided, however, such options or awards shall be exercisable or payable, as
the case may be, only in a manner consistent with the terms of the Plans and
related stock option or other agreements, as applicable and as in effect upon
the date of termination.
(iv) In addition to all other amounts payable to Employee under this
section 4, Employee shall be entitled to receive all benefits payable or
distributable to Employee under any Company pension plan and any other plan or
agreement relating to retirement benefits in accordance with the policies in
respect thereof in effect as of the date of the Change in Control.
(v) The Company shall pay to Employee all legal fees and expenses
incurred by Employee in seeking to obtain or enforce any right or benefit
provided to Employee by this agreement.
(vi) Should the Employee refuse continued employment at a similar
pay and responsibility level, the Employee will not be eligible for the benefits
as described in 4. (ii) above.
Notwithstanding anything contained in this agreement to the
contrary, the maximum amount to be paid by Company to Employee pursuant to the
terms of this Agreement and this section 4 shall be limited to an amount which
does not constitute an "excess parachute payment" within the meaning of section
280G of the Internal Revenue Code of 1954, as amended, or any successor
provision or regulations promulgated thereunder.
Employee shall not be required to mitigate the amount of any payment
provided for in this section 4 by seeking other employment or otherwise. The
amount of any payment or benefit provided in this section 4 shall not be reduced
by any compensation earned by Employee as a result of any employment by another
employer.
5. Successors; and Binding Agreement.
(i) The Company will use its best efforts to require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise),
to all or substantially
<PAGE>
Employment Agreement
Page 18
all of the business and/or assets of the Company, by written agreement in form
and substance satisfactory to Employee, expressly to assume and agree to perform
the Company's obligations under this agreement arising out of any such
succession in the same manner and to the same extent that the Company would be
required to perform this agreement. As used in this agreement, "Company" shall
mean the Company as hereinbefore defined and any successor to its business
and/or assets as aforesaid which executes and delivers the agreement provided
for in this section 5(i) or which otherwise becomes bound by all the terms and
provisions of this agreement by operation of law.
(ii) This agreement is personal to Employee and Employee may not assign
or transfer any part of his rights or duties hereunder, or any compensation due
to him hereunder, to any other person. Notwithstanding the foregoing, this
agreement shall inure to the benefit of and be enforceable by Employee's
personal or legal representatives, executors, administrators, heirs,
distributees, devisees and legatees.
6. Modification; Waiver. No provision of this agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in a
writing signed by Employee and such officer as may be specifically designated by
the Board of Directors of the Company. No waiver by either party hereto at any
time of any breach by the other party hereto of any condition or provision shall
be deemed a waiver of similar or dissimilar provisions or conditions at the same
or at any prior or subsequent time.
7. Notice. All notices, requests, demands and all other communications required
or permitted by either party to the other party by this agreement (including,
without limitation, any notice of termination of employment) shall be in writing
and shall be deemed to have been duly given when delivered personally or mailed
by regular, certified or registered mail, return receipt requested, at the
address of the other party, as follows:
If to the Company, to:
Orphan Medical, Inc.
Ridgedale Office Center
Suite 475
13911 Ridgedale Drive
Minnetonka, Minnesota 55305
Attention: Chief Executive Officer
If to Employee, to:
John Howell Buillion
6016 Shane Drive
Edina, Minnesota 55305
<PAGE>
Employment Agreement
Page 19
8. Severability. If any term or provision of this agreement or the application
hereof to any person or circumstances shall to any extent be invalid or
unenforceable, the remainder of this agreement or the application of such term
or provision to persons or circumstances other than those as to which it is held
invalid or unenforceable shall not be affected thereby, and each term and
provision of this agreement shall be valid and enforceable to the fullest extent
permitted by law.
9. Headings. The headings in this agreement are inserted for convenience or
reference only and shall not be a part of or control or affect the meaning of
this agreement.
10. Counterparts. This agreement may be executed in several counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
11. Governing Law. This agreement has been executed and delivered in the state
of Minnesota and shall in all respects be governed by, and construed and
enforced in accordance with, the laws of the state of Minnesota, including all
matters of construction, validity and performance, but without giving effect to
the choice of law provisions thereof.
12. Entire Agreement. This agreement supersedes any and all other oral or
written agreements or policies made relating to the subject matter hereof;
provided that, this agreement shall not supersede or limit in any way Employee's
rights under any benefit plan, program or arrangements in accordance with their
terms.
EXHIBIT 10.53
PURCHASE AGREEMENT
AND
LETTER OF INVESTMENT INTENT
Orphan Medical, Inc.
Ridgedale Office Center
13911 Ridgedale Drive
Minnetonka, MN 55305
Ladies and Gentlemen:
Each of the undersigned (each a "Subscriber") hereby agrees to
purchase, and the Company hereby agrees to sell to each Subscriber, that number
of shares of common stock (the "Shares") of Orphan Medical, Inc., a Minnesota
corporation (the "Company"), as is set forth opposite each Subscriber's name and
signature below, for a purchase price of Eight Dollars ($8.00) per Share and
upon the other terms and conditions set forth below. Each Subscriber shall wire
funds equal to such Subscriber's purchase price for the Shares being purchased
by such Subscriber, which wire transfer shall be made on or before the close of
business on February 23, 2000. The date on which the Company shall have received
the entire purchase price from all Subscribers shall be referred to as the
"Closing Date." Subscriber acknowledges that the Company is relying upon the
accuracy and completeness of the representations contained herein in complying
with its obligations under applicable securities laws.
1. Representation of Subscriber. Each Subscriber acknowledges and
represents to the Company as follows:
(a) The Shares are being purchased by Subscriber for investment
purposes in Subscriber's name solely for Subscriber's own beneficial interest
and not as nominee for, or on behalf of, or for the beneficial interest of, or
with the intention to transfer to, any other person, trust or organization.
(b) Subscriber is in a financial position to hold the Shares for
an indefinite period of time and is able to bear the economic risk and withstand
a complete loss of Subscriber's investment in the Shares.
(c) Subscriber believes that Subscriber, either alone or with
the assistance of Subscriber's professional advisor, has such knowledge and
experience in financial and business matters that Subscriber is capable of
evaluating the merits and risks of the prospective investment in the Shares.
Subscriber has obtained, to the extent Subscriber deems necessary, Subscriber's
own professional advice with respect to assessing the risks inherent in an
-1-
<PAGE>
investment in the Shares and the suitability of an investment in the Shares in
light of Subscriber's financial condition and investment needs.
(d) Subscriber believes that the investment in the Shares is
suitable for Subscriber based upon Subscriber's investment objectives and
financial needs, and Subscriber has adequate means for providing for
Subscriber's current financial needs and business contingencies and has no need
for liquidity of investment with respect to the Shares.
(e) Subscriber has been given access to information regarding
the Company and has utilized such access to Subscriber's satisfaction for the
purpose of obtaining such information as Subscriber has determined to be
necessary or appropriate to assess the merits and risks of an investment in the
Company and the Shares.
(f) Subscriber recognizes that the Shares as an investment
involve a high degree of risk including, but not limited to, those risks
described in Exhibit 99 to the Company's Annual Report on Form 10-K and most
recent Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission.
(g) Subscriber understands that the Company may be required to
sell additional shares of its capital stock in the future to finance its
anticipated development and operational efforts. Subscriber understands that
such additional shares may have rights and preferences that may be superior in
certain respects to the rights attributable to the Shares and, depending upon
future developments, the Company's financial condition, the Company's success in
achieving its development objectives and the general economic environment at
that time, may be sold at a price which is less than the price which Subscriber
pays for the Shares. No representations are being made by the Company that it
will be successful in selling any shares of its capital stock that it may seek
to sell in the future or that it will be otherwise able to raise sufficient
monies, through borrowings, internal operations or otherwise, to achieve its
development, revenues or other business or financial objectives.
(h) Subscriber is an "accredited investor" as defined in Rule
501(a) of Regulation D of the Securities Act.
(i) Subscriber was not organized for the specific purpose of
acquiring the Shares.
(j) This Purchase Agreement and Letter of Investment Intent has
been duly authorized by all necessary action on the part of Subscriber, has been
duly executed by an authorized officer or representative of Subscriber, and is a
legal, valid and binding obligation of Subscriber enforceable in accordance with
its terms.
-2-
<PAGE>
(k) Subscriber certifies, under penalties of perjury, that
Subscriber is NOT subject to the backup withholding provisions of section
3406(a)(i)(C) of the Internal Revenue Code of 1986, as amended (Note: you are
subject to backup withholding if (i) you fail to furnish your Social Security
number or taxpayer identification number herein; (ii) the Internal Revenue
Service notifies the Company that you furnished an incorrect Social Security
number or taxpayer identification number; (iii) you are notified that you are
subject to backup withholding; or (iv) you fail to certify that you are not
subject to backup withholding or you fail to certify your Social Security number
or taxpayer identification number.)
(l) Subscriber acknowledges that a legend will be placed on the
certificates evidencing the Shares, which legend shall refer to the restrictions
on transferability.
Subscriber is aware of the significance to the Company of the
foregoing representations, and they are made with the intention that the Company
will rely on them.
2. Representations and Warranties of the Company. The Company
represents and warrants to each Subscriber as follows:
(a) That this Agreement has been duly authorized by all
necessary corporate action on behalf of the Company, has been duly executed and
delivered by an authorized officer of the Company, and is a valid and binding
agreement on the part of the Company; and
(b) That all corporate action necessary to the authorization,
issuance, and delivery of the Shares has been taken on or prior to the date
hereof.
3. Registration. The Company hereby covenants and agrees that,
within 60 days after the date hereof, the Company shall prepare and file a
registration statement on Form S-3 under the Securities Act of 1933, as amended,
relating to the Shares and shall use its best efforts to cause such registration
statement to become effective. The Company shall bear all fees, costs and
expenses incurred in connection with such registration other than fees and
disbursements of special counsel and accountants for the Subscribers.
The parties agree that the Subscribers will suffer damages, and that it
would not be feasible to ascertain the extent of such damages with precision, if
the Registration Statement has not been declared effective under the Securities
Act on or prior to the 120th day following the later of the Closing Date or the
date the Subscribers have provided to the Company all information necessary for
the preparation of the Registration Statement. Such 120th day shall be referred
to as the "Target Effective Date". Accordingly, if the Registration Statement
has not been so declared effective, the Company agrees to pay to the Subscribers
in cash, on the first day after the Target Effective Date, as liquidated damages
and not as a penalty, an amount equal to 1% of the aggregate purchase price paid
by such Subscribers to the Company for the Shares (such
-3-
<PAGE>
amount to be allocated among such Subscribers in proportion to their respective
investment amounts). If, as of the 30th day following the Target Effective Date,
the Registration Statement still shall not have been declared effective, then
the Company agrees to pay to each Subscriber in cash, at the end of the first
full month thereafter, and at the end of every successive month thereafter until
the earlier of (i) the date the Registration Statement is declared effective, or
(ii) the second anniversary of the Closing Date, or (iii) such time as all of
the Shares can be sold within any given three-month period without regard to the
trading volume of the Common Stock pursuant to Rule 144, as liquidated damages
and not as a penalty, an amount equal to 2% of the aggregate purchase price paid
by such Subscribers to the Company for the Shares (such amount to be allocated
among such Subscribers in proportion to their respective investment amounts).
4. Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to Section 3 of this
Agreement that the selling Subscribers shall furnish to the Company such
information regarding them and the securities held by them as the Company shall
reasonably request and as shall be required in order to effect any registration
by the Company pursuant to Section 3 of this Agreement.
5. Anti-Dilution Protection. If at any time prior to the date the
Registration Statement referenced in Section 3 is declared effective, the
Company shall issue or sell any Common Stock of the Company, any warrants,
options or other rights to acquire Common Stock, or any other securities that
are convertible into Common Stock, for a purchase or exercise price less than
$8.00 per share (the "Lower Price"), then, immediately upon such issuance or
sale, each Subscriber shall be entitled to receive an additional number of
shares as follows:
[(x/y)-1] * z
where:
x = the purchase price per Share paid for the Shares by the Subscribers;
y = Lower Price; and
z = number of Shares previously issued to such Subscriber pursuant to
this Agreement.
6. Attendance at Board Meetings. The Company hereby agrees that, for
so long as the Subscribers in the aggregate own at least 10% of the total number
of outstanding shares of Common Stock of the Company, the Company shall notify
such individual as shall be designated from time to time by the Subscribers of
all regular meetings and special meetings of the Board of Directors of the
Company at least two business days in advance of such meetings, and afford one
representative designated by such Subscribers, and acceptable to the Company,
the right and opportunity to attend any such meeting.
-4-
<PAGE>
Dated: February 21, 2000
Subscribers: Purchase Price:
- ----------- --------------
Caduceus Capital Trust 400,000 Shares $3,200,000
By: /s/ Sven Borho
---------------------------------------
Its: OrbiMed Advisors - Investment Advisors
---------------------------------------
Caduceus Capital II L.P. 180,000 Shares $1,440,000
By: /s/ Sven Borho
---------------------------------------
Its: OrbiMed Advisors - General Partner
---------------------------------------
Paine Webber Eucalyptus Fund LLC 650,000 Shares $5,200,000
By: /s/ Sven Borho
---------------------------------------
Its: OrbiMed Advisors - Investment Advisors
---------------------------------------
Paine Webber Eucalyptus Fund Ltd. 35,000 Shares $280,000
By: /s/ Sven Borho
---------------------------------------
Its: OrbiMed Advisors - Investment Advisors
---------------------------------------
This Purchase Agreement and Letter of Investment Intent is accepted as of
February 21, 2000.
ORPHAN MEDICAL, INC.
By: /s/ John Howell Bullion
-------------------------------------
Its Chief Executive Officer
-5-
EXHIBIT 10.54
PURCHASE AGREEMENT
AND
LETTER OF INVESTMENT INTENT
Orphan Medical, Inc.
Ridgedale Office Center
13911 Ridgedale Drive
Minnetonka, MN 55305
Ladies and Gentlemen:
The undersigned ("Subscriber") hereby agrees to purchase, and the
Company hereby agrees to sell to Subscriber, that number of shares of common
stock (the "Shares") of Orphan Medical, Inc., a Minnesota corporation (the
"Company"), as is set forth opposite Subscriber's name and signature below, for
a purchase price of Ten Dollars ($10.00) per Share and upon the other terms and
conditions set forth below. Subscriber shall wire funds equal to such
Subscriber's purchase price for the Shares being purchased by such Subscriber,
which wire transfer shall be made on or before the close of business on February
25, 2000. The date on which the Company shall have received the entire purchase
price from Subscriber shall be referred to as the "Closing Date." Subscriber
acknowledges that the Company is relying upon the accuracy and completeness of
the representations contained herein in complying with its obligations under
applicable securities laws.
1. Representation of Subscriber. Subscriber acknowledges and
represents to the Company as follows:
(a) The Shares are being purchased by Subscriber for investment
purposes in Subscriber's name solely for Subscriber's own beneficial interest
and not as nominee for, or on behalf of, or for the beneficial interest of, or
with the intention to transfer to, any other person, trust or organization.
(b) Subscriber is in a financial position to hold the Shares for
an indefinite period of time and is able to bear the economic risk and withstand
a complete loss of Subscriber's investment in the Shares.
(c) Subscriber believes that Subscriber, either alone or with
the assistance of Subscriber's professional advisor, has such knowledge and
experience in financial and business matters that Subscriber is capable of
evaluating the merits and risks of the prospective investment in the Shares.
Subscriber has obtained, to the extent Subscriber deems necessary, Subscriber's
own professional advice with respect to assessing the risks inherent in an
-1-
<PAGE>
investment in the Shares and the suitability of an investment in the Shares in
light of Subscriber's financial condition and investment needs.
(d) Subscriber believes that the investment in the Shares is
suitable for Subscriber based upon Subscriber's investment objectives and
financial needs, and Subscriber has adequate means for providing for
Subscriber's current financial needs and business contingencies and has no need
for liquidity of investment with respect to the Shares.
(e) Subscriber has been given access to information regarding
the Company and has utilized such access to Subscriber's satisfaction for the
purpose of obtaining such information as Subscriber has determined to be
necessary or appropriate to assess the merits and risks of an investment in the
Company and the Shares.
(f) Subscriber recognizes that the Shares as an investment
involve a high degree of risk including, but not limited to, those risks
described in Exhibit 99 to the Company's Annual Report on Form 10-K and most
recent Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission.
(g) Subscriber understands that the Company may be required to
sell additional shares of its capital stock in the future to finance its
anticipated development and operational efforts. Subscriber understands that
such additional shares may have rights and preferences that may be superior in
certain respects to the rights attributable to the Shares and, depending upon
future developments, the Company's financial condition, the Company's success in
achieving its development objectives and the general economic environment at
that time, may be sold at a price which is less than the price which Subscriber
pays for the Shares. No representations are being made by the Company that it
will be successful in selling any shares of its capital stock that it may seek
to sell in the future or that it will be otherwise able to raise sufficient
monies, through borrowings, internal operations or otherwise, to achieve its
development, revenues or other business or financial objectives.
(h) Subscriber is an "accredited investor" as defined in Rule
501(a) of Regulation D of the Securities Act.
(i) Subscriber was not organized for the specific purpose of
acquiring the Shares.
(j) This Purchase Agreement and Letter of Investment Intent has
been duly authorized by all necessary action on the part of Subscriber, has been
duly executed by an authorized officer or representative of Subscriber, and is a
legal, valid and binding obligation of Subscriber enforceable in accordance with
its terms.
-2-
<PAGE>
(k) Subscriber certifies, under penalties of perjury, that
Subscriber is NOT subject to the backup withholding provisions of section
3406(a)(i)(C) of the Internal Revenue Code of 1986, as amended (Note: you are
subject to backup withholding if (i) you fail to furnish your Social Security
number or taxpayer identification number herein; (ii) the Internal Revenue
Service notifies the Company that you furnished an incorrect Social Security
number or taxpayer identification number; (iii) you are notified that you are
subject to backup withholding; or (iv) you fail to certify that you are not
subject to backup withholding or you fail to certify your Social Security number
or taxpayer identification number.)
(l) Subscriber acknowledges that a legend will be placed on the
certificates evidencing the Shares, which legend shall refer to the restrictions
on transferability.
Subscriber is aware of the significance to the Company of the
foregoing representations, and they are made with the intention that the Company
will rely on them.
2. Representations and Warranties of the Company. The Company
represents and warrants to Subscriber as follows:
(a) That this Agreement has been duly authorized by all
necessary corporate action on behalf of the Company, has been duly executed and
delivered by an authorized officer of the Company, and is a valid and binding
agreement on the part of the Company; and
(b) That all corporate action necessary to the authorization,
issuance, and delivery of the Shares has been taken on or prior to the date
hereof.
3. Registration. The Company hereby covenants and agrees that,
within 60 days after the date hereof, the Company shall prepare and file a
registration statement on Form S-3 under the Securities Act of 1933, as amended,
relating to the Shares and shall use its best efforts to cause such registration
statement to become effective. The Company shall bear all fees, costs and
expenses incurred in connection with such registration other than fees and
disbursements of special counsel and accountants for the Subscriber.
4. Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to Section 3 of this
Agreement that the selling Subscriber shall furnish to the Company such
information regarding them and the securities held by them as the Company shall
reasonably request and as shall be required in order to effect any registration
by the Company pursuant to Section 3 of this Agreement.
-3-
<PAGE>
Dated: February 24, 2000
Subscriber: Shares Purchased Purchase Price:
- ---------- ---------------- --------------
DG LUX LACUNA APO BIOTECH FUND 100,000 $1,000,000
By: /s/ Dr. Michael Fischer
----------------------------------------
Dr. Michael Fischer
Its: Medical Strategy, General Manager
---------------------------------
This Purchase Agreement and Letter of Investment Intent is accepted as of
February 24, 2000.
ORPHAN MEDICAL, INC.
By: /s/ John Howell Bullion
--------------------------------------
Its Chief Executive Officer
-4-
EXHIBIT 10.59
The following is a Form of Change of Control Agreement to be entered into
between the Company and certain executives.
CHANGE OF CONTROL AGREEMENT
This agreement is made as of first day of January, 2000, between
Orphan Medical, Inc., a Minnesota corporation (the "Company"), and _____________
("Employee"), residing in ________.
WITNESSETH THAT:
WHEREAS, the Company believes that it is in the best interests of
the Company to maintain management capable of protecting and enhancing the best
interests of the Company and its shareholders; and
WHEREAS, in connection therewith, the Company believes that it is
important for Employee to be available to assist and advise the Company and its
board of directors in the event the Company or its shareholders receives a
proposal for transfer of control of the Company, without being influenced by any
uncertainties which may exist with regard to Employee's future employment.
NOW, THEREFORE, to assure the Company that it will have continued
access to the dedicated services of Employee notwithstanding the possibility,
threat or occurrence of a bid to take over control of the Company, and to induce
Employee to remain in the employ of the Company, the Company and Employee agree
as follows:
1. Definitions.
As used herein, the following terms shall have the meanings set
forth below:
(i) A "Change in Control" shall mean the occurrence of any of the
following events:
(a) a change in control of the Company of a nature required to
be reported in response to Item 6(e) of Schedule 14A of Regulation
14A promulgated under the Securities Exchange Act of 1934, as
amended ("Exchange Act"), whether or not the Company is then subject
to such reporting requirement; or
(b) any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 promulgated under the Exchange Act), directly
or indirectly, of securities of the Company representing (a) at
least 15% but no more than 50% of the combined voting power of the
Company's then outstanding securities unless the transaction is
approved by the Board of Directors of the Company in advance of the
event, or by a majority of the Continuing Directors within 30 days
after the event, or (b) more than 50% of the combined voting power
of the Company's then outstanding securities (regardless of any
approval of the Board of Directors); or
(c) individuals who at the date hereof constitute the Board of
Directors of the Company cease to constitute a majority thereof,
provided that such change is the direct or indirect result of a
proxy fight and contested election for positions on the Board; or
(d) the sale, lease, exchange or other transfer, directly or
indirectly, of all or substantially all of the assets of the
Company, in one transaction or in a series of related transactions;
or
<PAGE>
Change of Control Agreement
Page 2
(e) a merger or consolidation to which the Company is a party
if the shareholders of the Company immediately prior to the
effective date of such merger or consolidation have "beneficial
ownership" (as defined in Rule 13d-3 promulgated under the Exchange
Act) immediately following the effective date of such merger or
consolidation of securities of the surviving company representing
(a) 50 percent or more, but not more than 85 percent, of the
combined voting power of the surviving corporation's then
outstanding securities, unless such merger or consolidation has been
approved in advance by the Board of Directors of the Company in
advance of the event, or by a majority of the Continuing Directors
within 30 days after the event or (b) less than 50 percent of the
combined voting power of the surviving corporation's then
outstanding securities (regardless of any approval by the continuity
directors); or
(f) the Board of Directors of the Company determines, in its
sole and absolute discretion, that there has been a change in
control of the Company.
(ii) "Continuing Directors" shall include only those directors of the
Company on the date hereof and those directors, as of a date 30 days prior to an
event that would otherwise be considered a "Change in Control," who were
nominated by Continuing Directors and duly elected by shareholders at an annual
meeting thereof or nominated and elected by directors who were "Continuing
Directors."
(iii) "Cause" shall mean termination by the Company of Employee's
employment based upon (a) the willful and continued failure by Employee
substantially to perform his duties and obligations (other than any such failure
resulting from his incapacity due to physical or mental illness) or (b) the
willful misconduct of Employee which is materially injurious to the Company or
any of its subsidiaries, monetarily or otherwise. For purposes of this
paragraph, an act, or failure to act, shall be considered "willful" if done, or
omitted to be done, by Employee in bad faith and without reasonable belief that
the action or omission was in the best interests of the Company.
(iv) "Disability" shall mean any physical or mental condition which would
qualify Employee for a disability benefit under the long-term disability plan of
the Company.
2. Term of Agreement.
This agreement shall commence on the date hereof and shall continue
in effect until (i) Employee and the Company mutually agree in writing to
terminate this agreement, (ii) termination of Employee's employment with the
Company in a manner other than as set forth in section 3(i) hereof, or (iii)
Employee reaches the age of sixty-five (65).
3. Termination of Employment.
(i) Employee shall be entitled to receive the cash payment and other
benefits provided in section 4 hereof if, during the term of this agreement, the
Company, within twelve (12) months of a Change in Control, shall have terminated
Employee without Cause, required the Employee to relocate or offered employee
continued employment at a lower pay level and lesser level of responsibility.
(ii) Nothing contained herein shall be deemed to constitute a guarantee of
employment or limit the Company's right to terminate Employee prior to a Change
in Control or for Cause following a Change in Control. Employee's rights upon
termination of employment prior to a Change in Control or after the expiration
of the term of this agreement or after the expiration of the prescribed periods
following a Change in Control set forth in section 3(i) shall be governed by the
standard employment termination policy applicable to Employee in effect at the
time of termination.
4. Benefits Upon Termination Under Section 3(i)
<PAGE>
Change of Control Agreement
Page 3
Upon the termination of Employee pursuant to section 3(i) hereof, Employee
shall be entitled to receive the benefits specified in this section 4. The
amounts due to Employee under this section 4 shall be paid to Employee not later
than Employee's last day of employment. All payments to Employee pursuant to
this Section 4 shall be subject to any applicable payroll or other taxes
required by law to be withheld.
(i) The Company shall pay to Employee (a) the full base salary earned by
him and unpaid through the effective date of Employee's termination, at the rate
in effect at the time notice of termination was given, plus (b) an amount
representing credit for any vacation earned by him in the current calendar year,
but not taken.
(ii) In lieu of any further base salary payments to Employee for periods
subsequent to the date that the termination of Employee's employment becomes
effective, the Company shall pay as severance pay to Employee a lump sum amount
in cash equal to the following: the highest annual salary and incentive payment
within the last two years divided by 12 multiplied by the number of months
listed below for the appropriate officer's responsibility:
CHIEF OPERATING OFFICER 18 MONTHS
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER 12 MONTHS
VICE PRESIDENT OF MARKETING AND SALES 12 MONTHS
VICE PRESIDENT REGULATORY AFFAIRS 12 MONTHS
(iii) All options to purchase the Company's Common Stock and all other
incentive awards granted to Employee under the Company's 1994 Long-Term
Incentive and Stock Option Plan or any other stock option or incentive
compensation plan adopted by the Company (each, a "Plan" and, together, the
"Plans") shall become immediately exercisable or vested, as the case may be;
provided, however, such options or awards shall be exercisable or payable, as
the case may be, only in a manner consistent with the terms of the Plans and
related stock option or other agreements, as applicable and as in effect upon
the date of termination.
(iv) In addition to all other amounts payable to Employee under this
section 4, Employee shall be entitled to receive all benefits payable or
distributable to Employee under any Company pension plan and any other plan or
agreement relating to retirement benefits in accordance with the policies in
respect thereof in effect as of the date of the Change in Control.
(v) The Company shall pay to Employee all legal fees and expenses incurred
by Employee in seeking to obtain or enforce any right or benefit provided to
Employee by this agreement.
(vi) Should the Employee refuse continued employment at a similar pay and
responsibility level, the Employee will not be eligible for the benefits as
described in 4. (ii) above.
Notwithstanding anything contained in this agreement to the contrary, the
maximum amount to be paid by Company to Employee pursuant to the terms of this
Agreement and this section 4 shall be limited to an amount which does not
constitute an "excess parachute payment" within the meaning of section 280G of
the Internal Revenue Code of 1954, as amended, or any successor provision or
regulations promulgated thereunder.
Employee shall not be required to mitigate the amount of any payment
provided for in this section 4 by seeking other employment or otherwise. The
amount of any payment or benefit provided in this section 4 shall not be reduced
by any compensation earned by Employee as a result of any employment by another
employer.
5. Successors; and Binding Agreement.
(i) The Company will use its best efforts to require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise),
to all or substantially all of the business and/or assets of the Company, by
written agreement in form and substance satisfactory to Employee, expressly to
assume
<PAGE>
Change of Control Agreement
Page 4
and agree to perform the Company's obligations under this agreement arising out
of any such succession in the same manner and to the same extent that the
Company would be required to perform this agreement. As used in this agreement,
"Company" shall mean the Company as hereinbefore defined and any successor to
its business and/or assets as aforesaid which executes and delivers the
agreement provided for in this section 5(i) or which otherwise becomes bound by
all the terms and provisions of this agreement by operation of law.
(ii) This agreement is personal to Employee and Employee may not assign or
transfer any part of his rights or duties hereunder, or any compensation due to
him hereunder, to any other person. Notwithstanding the foregoing, this
agreement shall inure to the benefit of and be enforceable by Employee's
personal or legal representatives, executors, administrators, heirs,
distributees, devisees and legatees.
6. Modification; Waiver. No provision of this agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in a
writing signed by Employee and such officer as may be specifically designated by
the Board of Directors of the Company. No waiver by either party hereto at any
time of any breach by the other party hereto of any condition or provision shall
be deemed a waiver of similar or dissimilar provisions or conditions at the same
or at any prior or subsequent time.
7. Notice. All notices, requests, demands and all other communications required
or permitted by either party to the other party by this agreement (including,
without limitation, any notice of termination of employment) shall be in writing
and shall be deemed to have been duly given when delivered personally or mailed
by regular, certified or registered mail, return receipt requested, at the
address of the other party, as follows:
If to the Company, to:
Orphan Medical, Inc.
Ridgedale Office Center
Suite 475
13911 Ridgedale Drive
Minnetonka, Minnesota 55305
Attention: Chief Executive Officer
If to Employee, to:
Name
Address
8. Severability. If any term or provision of this agreement or the application
hereof to any person or circumstances shall to any extent be invalid or
unenforceable, the remainder of this agreement or the application of such term
or provision to persons or circumstances other than those as to which it is held
invalid or unenforceable shall not be affected thereby, and each term and
provision of this agreement shall be valid and enforceable to the fullest extent
permitted by law.
9. Headings. The headings in this agreement are inserted for convenience or
reference only and shall not be a part of or control or affect the meaning of
this agreement.
10. Counterparts. This agreement may be executed in several counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
11. Governing Law. This agreement has been executed and delivered in the state
of Minnesota and shall in all respects be governed by, and construed and
enforced in accordance with, the laws of the state of Minnesota, including all
matters of construction, validity and performance, but without giving effect to
the choice of law provisions thereof.
<PAGE>
Change of Control Agreement
Page 5
12. Entire Agreement. This agreement supersedes any and all other oral or
written agreements or policies made relating to the subject matter hereof;
provided that, this agreement shall not supersede or limit in any way Employee's
rights under any benefit plan, program or arrangements in accordance with their
terms.
IN WITNESS WHEREOF, the parties hereto have executed this agreement all as
of the date set forth in the first paragraph.
ORPHAN MEDICAL, INC.
By
--------------------------------------
John Howell Bullion
Chief Executive Officer
EMPLOYEE
----------------------------------------
(Employee)
EXHIBIT 23.1
ORPHAN MEDICAL, INC.
CONSENT OF ERNST & YOUNG LLP
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (Nos. 333-29487 and 333-94759) pertaining to the Orphan Medical, Inc.
1994 Stock Option Plan and Employee Stock Purchase Plan, the Registration
Statements on Form S-3 (Nos. 333-90651, 333-68701, 333-66651, 333-60197 and
333-51287) and in the related Prospectuses and the Registration Statement on
Form S-3 pertaining to the registration of 1,365,000 shares of Common Stock
filed March 29, 2000 and in the related Prospectus of our report dated February
4, 2000, (except Note 14, as to which the date is February 25, 2000) with
respect to the financial statements and schedule of Orphan Medical, Inc.
included in its Annual Report on Form 10-K for the year ended December 31, 1999.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 29, 2000
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints John Howell Bullion, his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities to sign the Annual Report on Form 10-K of Orphan Medical,
Inc. for the 12 months ended December 31, 1999, and any and all amendments to
such Annual report on Form 10-K and to file same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange,
granting unto said attorneys-in-fact and agents, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or the substitutes for such attorney-in-fact and
agent, may lawfully do or cause to be done by virtue hereof.
Name Title Date
---- ----- ----
/s/ John Howell Bullion March 13, 2000
- ---------------------------------------
John Howell Bullion
Chairman of the Board, Chief Executive Officer
& Secretary (Principal Executive Officer)
and Director
/s/ Lawrence C. Weaver
- --------------------------------------- Director March 13, 2000
Lawrence C. Weaver, Ph.D., D.Sc. (Hon.)
/s/ W. Leigh Thompson
- --------------------------------------- Director March 13, 2000
W. Leigh Thompson, Ph.D. M.D.
/s/ William M. Wardell
- --------------------------------------- Director March 13, 2000
William M. Wardell, Ph.D., M.D.
/s/ Michael Greene
- --------------------------------------- Director March 13, 2000
Michael Greene
/s/ Julius Vida
- --------------------------------------- Director March 13, 2000
Julius Vida, Ph.D., M.B.A.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING BALANCE SHEETS OF ORPHAN MEDICAL, INC. AS OF DECEMBER 31, 1999, AND
THE RELATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 205,678
<SECURITIES> 3,827,236
<RECEIVABLES> 1,202,712
<ALLOWANCES> 113,600
<INVENTORY> 545,543
<CURRENT-ASSETS> 5,841,294
<PP&E> 715,337
<DEPRECIATION> 362,404
<TOTAL-ASSETS> 6,241,178
<CURRENT-LIABILITIES> 2,679,970
<BONDS> 0
0
111
<COMMON> 66,062
<OTHER-SE> 3,495,035
<TOTAL-LIABILITY-AND-EQUITY> 6,241,178
<SALES> 6,457,406
<TOTAL-REVENUES> 6,457,406
<CGS> 803,562
<TOTAL-COSTS> 803,562
<OTHER-EXPENSES> 11,163,072
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (287,989)
<INCOME-PRETAX> (5,221,239)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,221,239)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,904,111)
<EPS-BASIC> (0.90)
<EPS-DILUTED> (0.90)
</TABLE>
