SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 2000
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to _______
Commission File Number 0-24760
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Orphan Medical, Inc.
--------------------
(Exact name of registrant as specified in its charter)
Delaware 41-1784594
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
13911 Ridgedale Drive, Suite 250, (612) 513-6900
Minnetonka, MN 55305 --------------
-------------------- (Registrant's telephone number,
(Address of principal executive offices including area code)
and zip code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes __X__ No ______
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 par value 8,428,129
---------------------------- ---------
(Class) (Outstanding at November 1, 2000)
<PAGE>
INDEX
ORPHAN MEDICAL, INC.(R)
Page No.
PART I. FINANCIAL INFORMATION --------
-----------------------------
Item 1. Financial Statements (Unaudited)
Balance Sheets - September 30, 2000 and December 31, 1999. 3
Statements of Operations - Three and nine months ended
September 30, 2000 and September 30, 1999. 4
Statements of Cash Flows - Nine months ended September 30,
2000 and September 30, 1999. 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 8
PART II. OTHER INFORMATION
--------------------------
Items 1 through 5 have been omitted since all items are
inapplicable or answers negative. 27
Item 6. Exhibits and Reports on Form 8-K 28
Signature 29
Antizol(R), Antizol-Vet(R), Caprogel(TM), Busulfex(R), Intrachol(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.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BALANCE SHEETS
ORPHAN MEDICAL, INC.
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,557,806 $ 205,678
Available-for-sale securities 12,297,460 3,827,236
Accounts receivable, less allowance for doubtful accounts of
$129,900 and $113,000 for 2000 and 1999, respectively 1,343,227 1,089,712
Other receivables 5,425 5,425
Inventories 1,493,206 545,543
Prepaid expenses 67,267 167,700
------------ ------------
Total current assets 16,764,391 5,841,294
Property and equipment: 860,716 715,337
Accumulated depreciation (464,905) (362,404)
------------ ------------
395,811 352,933
Other assets 20,743 46,951
------------ ------------
Total assets $ 17,180,945 $ 6,241,178
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 940,324 $ 564,102
Accrued outdated product return allowance 389,289 281,750
Accrued compensation 667,446 299,121
Accrued expenses 2,185,717 1,534,997
------------ ------------
Total current liabilities 4,182,776 2,679,970
Commitments
Shareholders' equity:
Senior Convertible Preferred Stock, $.01 par value; 14,400
shares authorized; 8,706 and 8,008 shares issued and
outstanding 87 81
Series B Convertible Preferred Stock, $.01 par value; 5,000
shares authorized; 3,174 and 2,950 shares issued and
outstanding 32 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;
8,428,129 and 6,606,207 issued and outstanding, 84,281 66,062
Additional paid-in capital 57,640,601 43,743,664
Accumulated deficit (44,719,252) (40,243,874)
Unrealized gain (loss) on available-for-sale securities (7,580) (4,755)
------------ ------------
Total shareholders' equity 12,998,169 3,561,208
------------ ------------
Total liabilities and shareholders' equity $ 17,180,945 $ 6,241,178
============ ============
</TABLE>
NOTE: THE BALANCE SHEET AT DECEMBER 31, 1999 HAS BEEN DERIVED FROM THE AUDITED
FINANCIAL STATEMENTS AT THAT DATE BUT DOES NOT INCLUDE ALL OF THE INFORMATION
AND FOOTNOTES REQUIRED BY GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR COMPLETE
FINANCIAL STATEMENTS.
SEE ACCOMPANYING NOTES.
3
<PAGE>
STATEMENTS OF OPERATIONS
ORPHAN MEDICAL, INC.
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
------------------------------ ------------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues, net $ 2,610,662 $ 1,427,649 $ 8,378,246 $ 4,353,947
Cost of sales 440,687 213,608 1,333,733 739,938
------------ ------------ ------------ ------------
Gross Profit 2,169,975 1,214,041 7,044,513 3,614,009
Operating expenses:
Research and development 1,691,460 1,030,299 4,822,755 3,698,110
Sales and marketing 1,287,551 860,447 3,647,184 2,397,364
General and administrative 1,145,227 628,692 2,790,217 1,995,787
------------ ------------ ------------ ------------
Total operating expenses 4,124,238 2,519,438 11,260,156 8,091,261
------------ ------------ ------------ ------------
Loss from operations (1,954,263) (1,305,397) (4,215,643) (4,477,252)
Other income:
Interest, net 229,613 76,183 586,632 223,465
------------ ------------ ------------ ------------
Net loss (1,724,650) (1,229,214) (3,629,011) (4,253,787)
Less: Preferred stock dividends 221,861 186,147 647,443 474,209
------------ ------------ ------------ ------------
Net loss attributable to common
shareholders $ (1,946,511) $ (1,415,361) $ (4,276,454) $ (4,727,996)
============ ============ ============ ============
Basic and diluted loss per
common share $ (0.23) $ (0.21) $ (.053) $ (0.72)
============ ============ ============ ============
Weighted average number of
shares outstanding 8,424,305 6,586,875 8,031,082 6,586,427
============ ============ ============ ============
</TABLE>
4
<PAGE>
STATEMENTS OF CASH FLOWS
ORPHAN MEDICAL, INC.
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
------------------------------
September 30, September 30,
2000 1999
------------ -------------
OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (3,629,011) $ (4,253,787)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 102,501 79,532
Compensatory options 101,494 51,195
Changes in operating assets and liabilities:
Accounts payable and accrued expenses 1,506,504 (634,447)
Inventories (947,663) (300,934)
Accounts receivable and current assets (126,873) 264,517
------------ ------------
Net cash used in operating activities (2,993,048) (4,793,924)
INVESTING ACTIVITIES
Purchase of office equipment (145,378) (33,667)
Purchases of short-term investments (22,959,780) (6,229,077)
Maturities of short-term investments 14,486,731 7,971,374
------------ ------------
Net cash provided by (used in) investing activities (8,618,427) 1,708,630
FINANCING ACTIVITIES:
Employee stock purchase plan 392,046 --
Stock option and warrant exercise proceeds 1,882,435 802,414
Proceeds from the issuance preferred stock -- 2,875,861
Private common stock placement 10,692,154 --
Common stock redeemed -- (676,563)
Cash dividends on preferred stock (3,032) (995)
------------ ------------
Net cash provided by financing activities 12,963,603 3,000,717
------------ ------------
Increase (decrease) in cash and cash equivalents 1,352,128 (84,577)
Cash and cash equivalents at beginning of
Period 205,678 2,980,342
------------ ------------
Cash and cash equivalents at end of
Period $ 1,557,806 $ 2,895,765
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash interest received $ 530,890 $ 204,611
============ ============
</TABLE>
SEE ACCOMPANYING NOTES
5
<PAGE>
ORPHAN MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
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 (STMS). A drug has high
medical value if it offers a major improvement in the safety or efficacy of
patient treatment and has no substantial equivalent substitute. The Company has
products in three STMS that have been approved for marketing by the Food and
Drug Administration (the "FDA") and is currently developing one potential
product. The Company is seeking additional products for development. Since
inception, the Company has received approval for marketing of six products.
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, these financial statements do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal, recurring accruals) considered necessary for fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000. For further information, refer to
the audited financial statements and accompanying notes contained in the
Company's Annual Report filed on Form 10-K for the year ended December 31, 1999.
2. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
3. COMMITMENTS
The Company has various commitments under agreements with outside consultants
and contractors to provide services relating to drug development, drug
acqusition, manufacturing and marketing. At September 30, 2000, the Company
estimates that it could incur approximately $3.0 million of additional
expenditures in subsequent periods under existing commitments. Commitments for
research and development expenditures will likely fluctuate from quarter to
quarter and from year to year depending on, among other factors, the timing of
product development and the progress of clinical development programs.
6
<PAGE>
4. BORROWINGS
The Company has a commercial revolving line of credit with a bank, which expires
on May 15, 2001. 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 September 30, 2000, the Company has not borrowed under this arrangement.
5. RECLASSIFICATIONS
Certain prior period balances have been reclassified in order to conform with
the presentation for the period ended September 30, 2000. These
reclassifications have no impact on the net loss or shareholders' equity as
previously reported.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
CAUTIONARY STATEMENT
This Quarterly Report on Form 10-Q contains statements that are not descriptions
of historical facts. The words or phrases "will likely result", "look for", "may
result", "will continue", "is anticipated", "expect", "project", or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
may be forward-looking statements that are subject to risks and uncertainties.
Actual results could differ materially from those currently anticipated due to a
number of factors, including those identified in the section of this Quarterly
Report filed on Form 10-Q for the quarterly period ended September 30, 2000
titled Risk Factors.
GENERAL
Orphan Medical, Inc. was incorporated on June 17, 1994 in order to carry on the
business previously conducted by the Orphan Medical Division of Chronimed, Inc.
("Chronimed"). The Company's activities since inception have consisted primarily
of obtaining the rights for pharmaceutical products, hiring the personnel
required to implement the Company's business plan, managing the development and
registration of these products, preparing for the commercial introduction of six
products, building the sales of these products, and fund raising. At September
30, 2000, six of the Company's products have been approved by the Food and Drug
Administration ("FDA") for marketing and are commercially available and one
product was in active development. To date the Company has not generated
sufficient revenues from its approved products to fund its operating activities
and has sustained significant operating losses each year since inception. In
addition, the Company expects operating losses to continue through 2000 and
2001.
RECENT DEVELOPMENTS On October 2, 2000 the Company announced the submission to
the FDA of a new drug application (NDA) for Xyrem(R) (sodium oxybate) oral
solution as a treatment for symptoms of narcolepsy. The FDA has 60 days after
submission of the NDA to accept or reject the application for review. On October
17, 2000, the Company announced that the FDA had granted the Company's Xyrem NDA
priority review status. This status obligates FDA to a goal of acting on the NDA
within six-months from the date of submission. The FDA grants priority review
status for new drugs that represent a significant advancement over available
therapies. Assignment of priority review status and approval of the NDA could
result in the marketing of Xyrem in mid 2001.
The NDA requests approval of Xyrem as a treatment for symptoms of narcolepsy, a
chronic neurological disorder. In particular, Xyrem is intended to treat
cataplexy. Narcolepsy is accompanied by fragmented nocturnal sleep, with
sleepiness and inadvertent naps occurring in daytime hours whereas persons
without the disease usually have more integrated and organized sleep at night.
The symptom of excessive daytime sleepiness afflicts all narcolepsy patients.
The unique central activity of Xyrem provides a positive change in sleep
architecture. Without suppressing Rapid Eye Movement (REM) sleep, Xyrem
increases delta wave sleep, the restorative component of sleep.
8
<PAGE>
Cataplexy is the daytime manifestation of postural muscle weakness that normally
occurs during REM sleep. This symptom, which occurs in an estimated 60-75% of
narcolepsy patients, is triggered by emotional reactions such as laughter,
anger, or surprise. Cataplexy can be very debilitating. In its most severe form,
cataplexy causes a person to collapse suddenly and remain unable to move for a
few seconds up to several minutes. Clinical trials that are included in this NDA
indicate that Xyrem reduces the incidence and severity of cataplexy.
Narcolepsy is estimated to affect approximately 125,000 individuals in the
United States. The incidence in Europe is believed to mirror that of the United
States.
Stimulants are used to address excessive daytime sleepiness associated with
narcolepsy. Because stimulants do not treat cataplexy, tricyclic antidepressants
and serotonin selective-reuptake inhibitors are usually prescribed attempting to
control this symptom. Long-term treatment with these agents can be problematic
due to limited efficacy, tolerance, and adverse side effects such as dry mouth,
weight gain, tachycardia, and loss of libido. Because these agents suppress REM,
abrupt cessation of treatment can result in "rebound" cataplexy, a return of
cataplexy more severe than pre-treatment levels.
Earlier this year, Orphan Medical announced positive preliminary results from
pivotal clinical trials of Xyrem that support this NDA submission and indicate
that Xyrem reduces serious symptoms of narcolepsy, in particular cataplexy and
excessive daytime sleepiness.
The Company is continuing efforts to broaden the proprietary protection relating
to Xyrem. In addition to orphan drug status (which can become orphan drug
designation with an approval), rights to patents covering the use of GHB in the
treatment of fibromyalgia have been obtained by the Company in the United States
and Europe. A patent covering the current formulation in North America, Europe
and Japan is also being pursued
During the third quarter, the Company also announced that the Food and Drug
Administration (FDA) accepted for filing its supplemental new drug application
(NDA) for Antizol(R) (fomepizole) Injection for the treatment of methanol
poisoning and was granted priority review status for the application. Methanol
is a common toxic chemical that is found in many household substances such as
windshield wiper fluid and cleaning solutions. Methanol poisoning may cause
severe morbidity, including blindness or death. According to 1998 Annual Report
of the American Association of Poison Control Centers Toxic Exposure
Surveillance System, 585 patients were treated for methanol poisoning in 1998.
Given the number of poisonings and that awareness of Antizol is high in
hospitals with emergency facilities, the Company does not expect approval of the
methanol indication to increase sales materially
THREE MONTHS ENDED SEPTEMBER 30, 2000 VS. THREE MONTHS ENDED SEPTEMBER 30,
1999
Net loss applicable to common shareholders was $1.9 million for the three months
ended September 30, 2000 compared to $1.4 million for the three months ended
September 30, 1999. The significant increase in revenue for the quarter ended
September 30, 2000 compared to the same period the prior year was more than
offset by increased expense levels resulting in an increase in the net loss
applicable to common shareholders. The
9
<PAGE>
Company had increased research and development expenses related to the NDA
submission for Xyrem. In addition, the Company had higher sales and marketing
spending for the support of higher sales volume in commercialized products and
pre-approval planning for Xyrem. The Company had an increase in general and
administrative expenses resulting from compensation expenses associated with
continued staffing and building infrastructure for the anticipated commercial
launch of Xyrem. The preferred stock dividend increased in the third quarter of
2000 over the third quarter of 1999 due to issuance of additional preferred
shares in August 1999. This preferred stock dividend increased the net loss
applicable to common shareholders in the current quarter.
Net sales increased 83% to $2.6 million for the three months ended September 30,
2000 compared to $1.4 million the prior year. Sales of Antizol(R) (fomepizole)
Injection again exceeded the Company's expectations. The antidote has become a
standard treatment for ethylene glycol (anti-freeze) poisoning and in the nearly
three years since its FDA approval has established a strong presence in the
antidote market. Busulfex(R) (busulfan) Injection sales also continue to grow.
Eighteen months after its launch in the U.S. it is increasingly being considered
for use in many bone marrow and stem cell transplant preparatory regimens. The
Company has been successful in obtaining protocol status for Busulfex in a
growing number of oncology protocols at leading bone marrow transplant centers.
Gross profit margins decreased to 83% for the 2000 quarter compared to 85% for
the 1999 quarter. Cost of sales was $0.4 million for the three months ended
September 30, 2000 compared to $0.2 million for the same period the prior year.
Cost of sales as a percentage of net sales will fluctuate from quarter to
quarter and from year to year depending on, among other factors, demand for the
Company's products, new product introductions and the mix of approved products
shipped.
Research and development expense increased 64% from $1.0 million for the three
months ended September 30, 1999 to $1.7 million for three months ended September
30, 2000. The increase results from reduced research and development spending on
Busulfex offset by increased spending for Xyrem in completing the submission of
the NDA. Two clinical trials for Xyrem in process at September 30, 2000 will be
completed in the fourth quarter of 2000. A Phase III(b) trial will necessitate
on going research and development spending in subsequent quarters. Clinical
spending for this trial will be dependent on a number of factors, including
among others: the number of human subjects screened and enrolled in the trial,
and the number of active clinical sites.
Sales and marketing expense increased 50% from $0.9 million for the three months
ended September 30, 1999 to $1.3 million for the three months ended September
30, 2000. This increase is largely attributable to higher spending related to
current commercialized products and significantly higher spending in
pre-approval market planning for Xyrem. Sales and marketing expenses will likely
continue to increase in subsequent quarters, however, at substantially reduced
rates of increase.
General and administrative expense increased 82% from $0.6 million for the three
months ended September 30, 1999 to $1.1 million for the three months ended
September 30, 2000. The increase in general and administrative expenses is
related to building infrastructure including the addition of staff to prepare
for the anticipated Xyrem launch.
10
<PAGE>
General and administrative expenses are not expected to rise significantly above
current levels.
Other income is the sum of interest income from investment activities less
interest expense from financing activities. Other income increased 201% from
$76,183 in the 1999 third quarter to $229,613 in the 2000 third quarter. This
increase is the result of additional invested funds from the sale of preferred
stock in the third quarter of 1999 and the sale of common stock in the first
quarter of 2000. Other income is expected to decline in subsequent quarters as
currently invested funds are used to fund Xyrem development activities, and for
working capital requirements.
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
$0.2 million for both the 2000 and 1999 third quarters. 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 Preferred Stock and the Series B Convertible Preferred
Stock. The Company intends to continue to satisfy its dividend payment
obligations by the issuance of additional preferred stock through August 1,
2000. After August 1, 2000, the Company is obligated to pay the preferred stock
dividend for the Senior Convertible Preferred Stock in cash or additional common
shares. The Company is obligated to pay the dividend for the Series B
Convertible Preferred Stock in cash or through the issuance of additional
preferred shares, which will cause preferred stock dividends to increase in
subsequent quarters.
NINE MONTHS ENDED SEPTEMBER 30, 2000 VS. NINE MONTHS ENDED SEPTEMBER 30, 1999
Net loss applicable to common shareholders was $4.3 million for the nine months
ended September 30, 2000 compared to $4.7 million for the nine months ended
September 30, 1999. The decrease in the loss results principally from increased
revenues from approved products offset by higher research and development
spending on Xyrem. In addition, the Company had higher sales and marketing
spending for the support of increased sales in commercialized products and
pre-approval market planning efforts for the anticipated launch of Xyrem. The
Company also had increased general and administrative expense resulting from
additional spending on infrastructure, including staffing, in preparation for
the launch of Xyrem. The preferred stock dividend increased in the first nine
months of 2000 over the first nine months of 1999 due to the issuance of
additional preferred stock in August 1999. This preferred stock dividend
increased the net loss applicable to common shareholders in the current period.
Net sales increased 92% to $8.4 million for the nine months ended September 30,
2000 compared to $4.4 million for the nine months ended September 30, 1999.
During the current year, sales of Antizol have exceeded the Company's
expectations. The antidote has now clearly become a standard of treatment for
ethylene glycol (anti-freeze) poisoning and in the nearly three years since its
FDA approval has established a strong presence in the antidote market. Busulfex
sales also continue to grow. Eighteen months after its launch in the U.S. it is
increasingly being considered for use in many bone marrow and stem cell
transplant preparatory regimens.
11
<PAGE>
Gross profit margins increased to 84% for the nine months ended September 30,
2000 compared to 83% for the same period the prior year. Cost of sales for the
period ended September 30, 2000 was $1.3 million compared to $0.7 million for
the same period the prior year. Cost of sales as a percentage of net sales will
fluctuate from quarter to quarter and from year to year depending on, among
other factors, demand for the Company's products, new product introductions and
the mix of approved products shipped.
Research and development expense increased 30% to $4.8 million for the nine
months ended September 30, 2000 compared to $3.7 million for the same period the
prior year. The increase is the result of increased spending for Xyrem leading
up to the submission of the NDA. There is an additional clinical trial being
conducted for Xyrem that will necessitate research and development spending in
subsequent quarters. Clinical spending for this trial will be dependent on a
number of factors, including among others: the number of human subjects required
for the trial, the number of human subjects screened and enrolled in the trial,
and the number of active clinical sites.
Sales and marketing expense increased 52% to $3.6 million for the nine months
ended September 30, 2000 from $2.4 million for the nine months ended September
30, 1999. This increase is largely attributable to higher spending related to
the current commercialized products and significantly higher spending in
pre-approval market planning for Xyrem. Sales and marketing expenses will likely
continue to increase in subsequent quarters, however, at substantially reduced
rates of increase.
General and administrative expense increased 40% to $2.8 million for the nine
months ended September 30, 2000 from $2.0 million for the same period in the
prior year. This increase related to building infrastructure, including the
addition of staff to prepare for the anticipated launch of Xyrem. General and
administrative expenses are not expected to increase significantly above current
levels in subsequent quarters.
Other income is the sum of interest income from investment activities less
interest expense from financing activities. Other income increased 163% from
$0.2 million in the first nine months of 1999 to $0.6 million in the first nine
months of 2000. This increase is the result of additional invested funds from
the sale of preferred stock in the third quarter of 1999 and the sale of common
stock in the first quarter of 2000. Other income is expected to decline in
subsequent quarters as currently invested funds are used to fund Xyrem
development activities, and for working capital requirements.
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
$0.6 million for the first nine months of 2000 compared to $0.5 million for the
first nine months of 1999. These dividends were first paid on February 1, 1999
and 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 Preferred Stock and the
Series B Convertible Preferred Stock. The Company intends to continue to satisfy
its dividend payment obligations by the issuance of additional preferred stock
through August 1, 2000. After August 1, 2000, the Company is obligated to pay
the preferred stock dividend for the Senior Convertible Preferred Stock in cash
or additional common shares. The Company is obligated to pay the dividend for
the Series
12
<PAGE>
B Convertible Preferred Stock in cash or through the issuance of additional
preferred shares, which will cause preferred stock dividends to increase in
subsequent quarters.
13
<PAGE>
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 net proceeds from several public
and private financings, 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 since inception
resulted in aggregate net proceeds, after commissions and expenses, of $47.5
million.
Net working capital (current assets less current liabilities) increased from
$3.2 million at December 31, 1999 to $12.6 million at September 30, 2000. Cash
and cash equivalents, and available-for-sale securities increased from $4.0
million at December 31, 1999 to $13.9 million at September 30, 2000. The Company
continues to invest its excess cash in interest bearing, investment grade
securities. The Company has a $500,000 commercial revolving line of credit with
a bank, expiring on May 15, 2001.
The Company's commitments for outside development spending increased from
approximately $1.6 million at December 31, 1999 to approximately $3.0 million at
September 30, 2000. The $1.4 million increase resulted principally from
activities related to the Xyrem development project. The Company expects future
commitments for Xyrem to decrease over current levels.
The Company expects spending during 2000 for research and development as well as
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 for at least
the next twelve months.
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 met both of the
thresholds at September 30, 2000. The Company's net tangible assets at September
30, 2000 equaled approximately $13.0 million and the Company's market
capitalization was approximately $104.3 million (based on the last sale price of
$12.375 and 8,428,129 shares outstanding as of September 30, 2000). Although the
Company does not expect to be profitable in fiscal 2000, the Company
nevertheless expects 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 through the year 2001 and thereafter.
In connection with the 1998 and 1999 private placements 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 the
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 selling price per share exceeds the then
conversion price of the outstanding convertible preferred stock or the
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sale of equity is accomplished in a public offering. The present conversion
price is $8.14 for the Senior Convertible Preferred Stock and $6.50 for the
Series B Convertible Preferred Stock. Even without these restrictions, the
Company can make no assurances that additional financing opportunities will be
available or, if available, on acceptable terms.
GEOGRAPHIC SALES INFORMATION
The Company tracks sales in two geographic regions, domestic and international.
The Company has no assets outside of the United States. The following is a
summary of net sales by geographic region for the quarters ended September 30,
2000 and 1999, respectively and the nine months end September 30, 2000 and 1999
respectively.
For the Three Months Ended For the Nine Months Ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------ ------------- ------------ -------------
Domestic $ 2,441,859 $ 1,276,885 $ 6,836,005 $ 4,033,728
International 168,803 150,764 1,542,241 320,019
-------------------------------------------------------------
Total $ 2,610,662 $ 1,427,649 $ 8,378,246 $ 4,353,747
=============================================================
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. Any investor or potential investor should carefully consider the
following information about these risks 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 and 2001 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,
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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 PRICE VOLATILITY AND LIMITED LIQUIDITY OF STOCK.
There is generally significant volatility in the market prices and limited
liquidity 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 approve, 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.
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.
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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. 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. We met both of these criteria as of September 30,
2000, however, we cannot assure you that the market capitalization 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 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
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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 on October 2, 2000 we
submitted 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 SuperGen's drug for a different
indication, SuperGen 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 by FDA.
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 enacted in Europe that provides for up to ten years of
market exclusivity a drug that meets the requirements of the act. For a
pharmaceutical product to qualify for the benefits of the act, the prevalence or
incidence (whichever is greater) must not exceed five patients per 10,000
population. Our European partners have submitted both Busulfex and Cystadane for
designation as orphan drugs in Europe. We cannot provide assurance that any of
our pharmaceutical products will qualify for orphan drug
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protection in Europe or that another company will not obtain an approval which
would block us from marketing our product in Europe.
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.
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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 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;
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* 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 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
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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 Global Pharm. We cannot assure you that our drug product
manufacturing arrangements with Boehringer, Catalytica, and Global Pharm will
not change in the future. 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 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 agreement with Cardinal Health, Inc. to provide a variety of services
to support the effective distribution of our currently approved 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 will also provide patient assistance and
information hotline services, and specialty distribution and marketing services
to physician practices. Cardinal currently distributes Busulfex, Elliotts B
Solution, Antizol, Antizol-Vet, and Sucraid. Cardinal
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may also 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 sell our products in foreign markets is to license foreign
marketing and distribution rights to a foreign company 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 all products
except Antizol is limited to "named patient" or "emergency
use" basis until full regulatory approval is obtained. Antizol
has been approved for use in the United Kingdom but is limited
to "named patient" basis in other parts of Europe. This
"emergency use" distribution of the Company's products is
expected to result in a limited 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
Antizol, Busulfex, Cystadane, Elliotts B Solution and Sucraid
in Israel. Full regulatory approval for all products except
Antizol was obtained in Israel in February 2000. Antizol has
been submitted for approval, however, approval has not yet
been received. We do not expect such distribution to result in
material revenues.
* CANADA. We have licensed marketing and distribution rights for
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Antizol in Canada. For Cystadane we have only licensed the
distribution rights. We do not expect such distribution to
result in material revenues.
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.
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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.
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.
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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.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
Not Applicable
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PART II - OTHER INFORMATION
Items 1, 3, 4 and 5 are not applicable and, therefore, have been omitted.
Item 2 Following shareholder approval as described in the Company's March 31,
2000 Form 10-Q, in March 2000 the shareholders approved the
reorganization of the Company to change its state of incorporation
from Minnesota to Delaware. The reorganization was implemented, and
the Company became a Delaware corporation effective September 1, 2000.
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Item 6. Exhibits and Reports on Form 8-K
EXHIBIT INDEX
--------------------------------------------------------------------------------
Exhibit Sequentially
Number Description Numbered Page
--------------------------------------------------------------------------------
27 Financial Data Schedule - For SEC EDGAR filing 30
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(b) Reports on Form 8-K
Not applicable
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Orphan Medical, Inc.
--------------------
Registrant
Date November 14, 2000 By /s/ Timothy G. McGrath
----------------- ----------------------
Timothy G. McGrath
Chief Financial Officer
(duly authorized officer and
principal financial officer)
29
