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 June 30, 2000
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[ ] 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.
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(Exact name of registrant as specified in its charter)
Minnesota 41-1784594
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(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
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(Address of principal executive offices (Registrant's telephone number,
and zip code) including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes __X__ No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 par value 8,421,325
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(Class) (Outstanding at July 31, 2000)
<PAGE>
INDEX
ORPHAN MEDICAL, INC.(R)
Page No.
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PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements (Unaudited)
Balance Sheets - June 30, 2000 and December 31, 1999. 3
Statements of Operations - Three and six months ended June 30, 2000 and
June 30, 1999. 4
Statements of Cash Flows - Six months ended June 30, 2000 and June 30,
1999. 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 8
Item 3. Quantitative and Qualitative Disclosures about Market Risks 26
PART II. OTHER INFORMATION
--------------------------
Items 1 through 3 and 5 have been omitted since all items are inapplicable
or answers negative.
Item 4. Submission of Matters to Vote of Security Holders 27
Item 6. Exhibits and Reports on Form 8-K 28
Signature 29
Antizol(R), Antizol-Vet(R), Caprogel(TM), Busulfex(TM), Intrachol(TM),
Colomed(TM), Cystadane(R), Elliotts B(R) Solution, Sucraid(R), Xyrem(TM), "The"
Orphan Drug Company(TM), Orphan Medical(R), Inc. and Dedicated to Patients with
Uncommon Diseases(R) are trademarks of the Company.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ORPHAN MEDICAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,882,260 $ 205,678
Available-for-sale securities 13,358,506 3,827,236
Accounts receivable, less allowance for doubtful accounts of
$163,800 and $113,000 for 2000 and 1999, respectively 1,419,100 1,089,712
Other receivables 5,425 5,425
Inventories 752,054 545,543
Prepaid expenses 103,221 167,700
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Total current assets 17,520,566 5,841,294
Property and equipment 844,330 715,337
Accumulated depreciation (429,870) (362,404)
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414,460 352,933
Other assets 29,239 46,951
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Total assets $ 17,964,265 $ 6,241,178
============ ============
Liabilities and shareholders' equity
Current liabilities:
Accounts payable 1,039,016 564,102
Accrued outdated product return allowance 341,618 281,750
Accrued compensation 546,032 299,121
Accrued expenses 1,353,133 1,534,997
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Total current liabilities 3,279,799 2,679,970
Commitments
Shareholders' equity:
Senior Convertible Preferred Stock, $.01 par value; 14,400
shares authorized; 8,393 and 8,088 shares issued and
outstanding 84 81
Series B Convertible Preferred Stock, $.01 par value; 5,000
shares authorized; 3,060 and 2,950 shares issued and
outstanding 31 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;
8,421,290 and 6,606,207 issued and outstanding 84,213 66,062
Additional paid-in capital 57,175,319 43,743,664
Accumulated deficit (42,567,601) (40,243,874)
Unrealized gain (loss) on available-for-sale securities (7,580) (4,755)
------------ ------------
Total shareholders' equity 14,684,466 3,561,208
------------ ------------
Total liabilities and shareholders' equity $ 17,964,265 $ 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.
3
<PAGE>
SEE ACCOMPANYING NOTES.
STATEMENTS OF OPERATIONS
ORPHAN MEDICAL, INC.
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
--------------------------- ---------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues, net $ 3,025,127 $ 1,524,458 $ 5,767,583 $ 2,926,298
Cost of sales 433,692 277,405 893,046 526,330
----------- ----------- ----------- -----------
Gross Profit 2,591,435 1,247,053 4,874,537 2,399,968
Operating expenses:
Research and development 1,340,604 1,359,047 3,107,006 2,667,810
Sales and marketing 1,503,995 798,932 2,308,585 1,536,917
General and administrative 984,897 654,070 1,720,326 1,367,095
----------- ----------- ----------- -----------
Total operating expenses 3,829,496 2,812,049 7,135,917 5,571,822
----------- ----------- ----------- -----------
Loss from operations (1,238,061) (1,564,996) (2,261,380) (3,171,854)
Other income:
Interest, net 231,545 61,362 357,019 147,282
----------- ----------- ----------- -----------
Net loss (1,006,516) (1,503,634) (1,904,361) (3,024,572)
Less: Preferred stock dividends 214,156 145,812 425,582 288,062
----------- ----------- ----------- -----------
Net loss attributable to common
shareholders $(1,220,672) $(1,649,446) $(2,329,943) $(3,312,634)
=========== =========== =========== ===========
Basic and diluted loss per
common share $ (.15) $ (.25) $ (.30) $ (.50)
=========== =========== =========== ===========
Weighted average number of
shares outstanding 8,378,087 6,566,652 7,832,310 6,586,273
=========== =========== =========== ===========
</TABLE>
4
<PAGE>
STATEMENTS OF CASH FLOWS
ORPHAN MEDICAL, INC.
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
-----------------------------
June 30, June 30,
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,904,361) $ (3,024,572)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 67,466 54,034
Compensatory options 93,673 51,195
Changes in operating assets and liabilities:
Accounts payable and accrued expenses 599,829 (724,714)
Inventories (206,511) (139,550)
Accounts receivable and current assets (247,197) 508,878
------------ ------------
Net cash used in operating activities (1,597,101) (3,274,729)
INVESTING ACTIVITIES
Purchase of office equipment (128,993) (31,934)
Purchases of short-term investments (16,769,636) (3,475,208)
Maturities of short-term investments 7,235,540 7,020,611
------------ ------------
Net cash provided by (used in) investing activities (9,663,089) 3,513,469
FINANCING ACTIVITIES:
Employee stock purchase plan 382,617 --
Stock option exercise proceeds 1,863,722 684,171
Private common stock placement 10,692,154 --
Common stock redeemed -- (676,563)
Cash dividends (1,721) (973)
------------ ------------
Net cash provided by financing activities 12,936,772 6,635
------------ ------------
Increase (decrease) in cash and cash equivalents 1,676,582 245,375
Cash and cash equivalents at beginning of
Period 205,678 2,980,342
------------ ------------
Cash and cash equivalents at end of
Period $ 1,882,260 $ 3,225,717
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash interest received $ 206,417 $ 185,082
============ ============
</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. 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 six
products that have been approved for marketing by the Food and Drug
Administration (the "FDA") and is currently developing one potential product and
assessing numerous others for potential development.
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 six month periods ended June
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,
contract drug development companies, manufacturers, technical service companies,
license and research agreements, agreements with drug distributors, and other
sales and marketing agreements. At June 30, 2000, the Company estimates that it
could incur approximately $3.5 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 June 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 June 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 June 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 have consisted primarily of obtaining
the rights for pharmaceutical products, hiring the personnel required to
implement the Company's business plan, managing the development of these
products, preparing for the commercial introduction of six products and fund
raising. At June 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. The Company has not
generated sufficient levels of revenue from its approved products to date to
fund its operating activities and has sustained significant operating losses
each year since inception. In addition, the Company expects operating losses to
continue through 2000.
THREE MONTHS ENDED JUNE 30, 2000 VS. THREE MONTHS ENDED JUNE 30, 1999 Net loss
applicable to common shareholders was $1.2 million for the three months ended
June 30, 2000 compared to $1.6 million for the three months ended June 30, 1999.
The decrease in the loss results principally from an increase in revenues from
approved products. 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(R) (sodium oxybate) Oral Solution. The Company
had an increase in general and administrative expenses resulting from
compensation expenses associated with staffing and building infrastructure for
the anticipated launch of Xyrem. The preferred stock dividend increased in the
second quarter of 2000 over the second 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 98% to $3.0 million for the three months ended June 30, 2000
compared to $1.5 million the prior year. Sales of Antizol(R) (fomepizole)
Injection again exceeded the Company's expectations. The antidote has become a
standard
8
<PAGE>
treatment for ethylene glycol (anti-freeze) poisoning and in the two years since
its FDA approval has established a strong presence in the antidote market.
Antizol sales are difficult to forecast since it is used to treat an incidence
rather than a disease. Therefore, the Company doesn't expect third quarter sales
to exceed sales of the drug in either of the first two quarters. Busulfex(R)
(busulfan) Injection sales also continue to grow. One year 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 increased to 86% for the 2000 quarter compared to 82% for
the 1999 quarter. Cost of sales increased 56% to $0.4 million for the three
months ended June 30, 2000 compared to $0.3 million for the same period the
prior year. The increase in cost of sales is primarily the result of the
increase in revenue discussed above. 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 decreased 1% from $1.4 million for the three
months ended June 30, 1999 to $1.3 million for three months ended June 30, 2000.
This is the result of lower research and development spending for Busulfex
offset by increased spending for Xyrem. The Company expects research and
development expense to increase significantly over current levels in subsequent
quarters due to an acceleration of the development plans for Xyrem. In February
1999, the Company began shipping Xyrem for use in its Treatment IND trial and
expects to charge enrolled patients for the drug utilized in the trial. Any
income generated by the Treatment IND, which is not expected to be material,
will be used to offset development expense. Clinical spending for Xyrem will
continue to be dependent on a number of factors, including among others: the
number of human subjects required for a trial, the number of human subjects
screened and enrolled in a trial, and the number of active clinical sites.
Sales and marketing expense increased 88% from $0.8 million for the three months
ended June 30, 1999 to $1.5 million for the three months ended June 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 51% from $0.7 million for the three
months ended June 30, 1999 to $1.0 million for the three months ended June 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. 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
9
<PAGE>
expense from financing activities. Other income increased 277% from $61,400 in
the 1999 second quarter to $231,500 in the 2000 second 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 the 2000 second quarter compared to $0.1 million for the 1999
second quarter. 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.
SIX MONTHS ENDED JUNE 30, 2000 VS. SIX MONTHS ENDED JUNE 30, 1999
Net loss applicable to common shareholders was $2.3 million for the first six
months of 2000 compared with a net loss of $3.3 million for the first six months
of 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 six months of 2000 over the
first six 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 97% from $2.9 million in the first six months of 1999 to
$5.8 million in the first six months of 2000. Sales of Antizol again exceeded
the Company's expectations. The antidote has become a standard of treatment for
ethylene glycol (anti-freeze) poisoning and in the two years since its FDA
approval has established a strong presence in the antidote market. Busulfex
sales also continue to grow. One year after its launch in the U.S. it is
increasingly being considered for use in many bone marrow and stem cell
transplant preparatory regimens.
10
<PAGE>
Gross profit margins increased to 85% for the six months ended June 30, 2000
compared to 82% for the same period the prior year. Cost of sales increased 70%
to $0.9 million for the six months ended June 30, 2000 compared to $0.5 million
for the same period in 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 16% to $3.1 million for the six
months ended June 30, 2000 compared to $2.7 million for the same period the
prior year. The increase is the result of increased spending for Xyrem. The
Company expects research and development expense to increase over current levels
in subsequent quarters due to increased development activity associated with the
development of Xyrem. In February 1999, the Company began shipping Xyrem for use
in its Treatment IND trial and expects to charge enrolled patients for the drug
used in the trial. Any income generated by the Treatment IND, which is not
expected to be material, will be used to offset development expense. Clinical
spending for Xyrem will continue to be dependent on a number of factors,
including among others: the number of human subjects required for a trial, the
number of human subjects screened and enrolled in a trial, and the number of
active clinical sites.
Sales and marketing expense increased 50% to $2.3 million for the six months
ended June 30, 2000 from $1.5 million for the six months ended June 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 26% to $1.7 million for the six
months ended June 30, 2000 from $1.4 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 142% from
$147,300 in the first six months of 1999 to $357,000 in the first six months of
2000. This increase is the result of additional invested funds from the sale of
preferred stock in the third quarter 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
$0.4 million for the first six months of 2000 compared to $0.3 million for the
first six 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 Stock and the Series B
Convertible Preferred Stock. The Company intends to continue to satisfy its
devidend 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.
11
<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 the 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 resulted in aggregate net proceeds, after
commissions and expenses, of $47.0 million.
Net working capital (current assets less current liabilities) increased from
$3.2 million at December 31, 1999 to $14.2 million at June 30, 2000. Cash and
cash equivalents, and available-for-sale securities increased from $4.0 million
at December 31, 1999 to $15.2 million at June 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 $3.5 million at
June 30, 2000. The $1.9 million increase resulted principally from activities
related to the Xyrem development project. The Company expects future commitments
for Xyrem to increase significantly 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 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 met both of the
thresholds at June 30, 2000. The Company's net tangible assets at June 30, 2000
equaled approximately $14.7 million and the Company's market capitalization was
approximately $81.6 million (based on the last sale price of $9.6875 and
8,421,290 shares outstanding as of June 30, 2000). The Company does not expect
to
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<PAGE>
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 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 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.
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 quarters ended June 30, 2000 and
1999, respectively and the six months end June 30, 2000 and 1999 respectively.
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
------------------------------------- -------------------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------------ ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Domestic $ 2,181,670 $ 1,404,749 $ 4,394,145 $ 2,757,043
International 843,457 119,709 1,373,438 169,255
----------------------------------------------------------------------------
Total $ 3,025,127 $ 1,524,458 $ 5,767,583 $ 2,926,298
============================================================================
</TABLE>
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 because anticipated gross profits from product revenues
will not offset our
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<PAGE>
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 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:
o announcements by us or our competitors of new product
developments or clinical testing results;
o governmental approvals, refusals to approval, regulations or
actions;
o developments or disputes relating to patents or proprietary
rights;
o public concern over the safety of therapies;
o financial performance;
o fluctuations in financial performance from period to period;
and
o small float or number of shares of our stock available for
sale and trade.
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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.
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 June 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
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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 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
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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 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 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
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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.
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
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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:
o for cause if we breach the contract;
o if we become insolvent or bankrupt;
o if we do not apply specified minimum resources and efforts to
develop the compound under license; or
o 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.
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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 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.
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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 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 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 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
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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:
o 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 expected to result in a limited
contribution to the Company's revenues.
o 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.
o 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.
o 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.
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o 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.
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
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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:
o to obtain, and enforce proprietary protection for our products
under United States and foreign patent laws and other
intellectual property laws;
o to preserve the confidentiality of our trade secrets; and
o 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
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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
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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
Item 4. Submission of Matters to Vote of Security Holders
The annual meeting of the shareholders of the Company was held on June 6, 2000.
Two matters were submitted to the shareholders for approval: (1) the election of
directors, and (2) a proposal to ratify the selection of Ernst & Young LLP as
the independent public accountants for the Company.
Six nominees, namely John Howell Bullion, Michael Greene, Julius A Vida Ph.D.,
W. Leigh Thompson, Ph.D., M.D., William M. Wardell, M.D., Ph.D., and Lawrence C.
Weaver, Ph.D., D.Sc. (Hon.), were duly elected as directors of the Company until
the next annual meeting of shareholders. Each nominee received at least
approximately ninety-nine percent of the votes cast in favor of his election.
Results of the voting were as follows:
Votes Cast for Votes
Director the Director Withheld
-------- ------------ --------
John Howell Bullion 6,983,859 39,909
Michael Greene 6,983,404 40,364
Julius A Vida Ph.D. 6,982,425 41,343
W. Leigh Thompson, Ph.D., M.D. 6,680,824 42,984
William M. Wardell, M.D., Ph.D. 6,983,924 39,844
Lawrence C. Weaver, Ph.D., D.Sc. (Hon.) 6,983,924 39,844
The proposal to ratify the selection of Ernst & Young LLP as the independent
public accountants for the Company was approved by the Company's shareholders. A
total of 6,995,008 shares of the Company's common stock voted in favor of the
proposal, 24,935 shares of the Company's common stock voted against the proposal
and 3,825 shares of the Company's common stock abstained from voting. There were
no broker non-voters in connection with the shareholders vote for this proposal.
The proposal to ratify the selection of Ernst & Young LLP as the independent
public accountants for the Company received approximately ninety-nine percent of
the vote cast.
27
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT INDEX
----------- ---------------------------------------------------- ---------------
Exhibit Sequentially
Number Description Numbered Page
----------- ---------------------------------------------------- ---------------
27 Financial Data Schedule - For SEC EDGAR filing 30
----------- ---------------------------------------------------- ---------------
(b) Reports on Form 8-K
Not applicable
28
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Orphan Medical, Inc.
--------------------
Registrant
Date August 14, 2000 By /s/ Timothy G. McGrath
------------------ -------------------
Timothy G. McGrath
Chief Financial Officer
(duly authorized officer and
principal financial officer)
29
