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 March 31, 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 8,347,721
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(Class) (Outstanding at April 30, 1999)
<PAGE>
INDEX
ORPHAN MEDICAL, INC.(R)
PART I. FINANCIAL INFORMATION Page No.
- ----------------------------- --------
Item 1. Financial Statements (Unaudited)
Balance Sheets - March 31, 2000 and December 31, 1999. 3
Statements of Operations - Three months ended March 31, 2000 and
March 31, 1999. 4
Statements of Cash Flows - Three months ended March 31, 2000 and
March 31, 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 25
PART II. OTHER INFORMATION
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Items 1, 3 and 5 do not apply and have been omitted.
Item 2. Changes in Securities and Use of Proceeds 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 27
Signature 28
Antizol(R), Antizol-Vet(R), Caprogel(TM), Busulfex(R), Intrachol(TM),
Colomed(TM), Cystadane(R), Elliotts B(R) Solution, Sucraid(R), Xyrem(R), "The"
Orphan Drug Company(TM), Orphan Medical(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>
MARCH 31 DECEMBER 31,
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2000 1999
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<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,990,593 $ 205,678
Available-for-sale securities 12,684,333 3,827,236
Accounts receivable, less allowance for doubtful accounts of
$128,000 and $113,000 for 2000 and 1999, respectively 1,337,222 1,089,712
Other receivables 5,425 5,425
Inventories 474,359 545,543
Prepaid expenses 131,490 167,700
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Total current assets 17,623,422 5,841,294
Property and equipment:
Property and equipment 760,410 715,337
Accumulated depreciation (394,878) (362,404)
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365,532 352,933
Other assets 38,095 46,951
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Total assets $ 18,027,049 $ 6,241,178
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Liabilities and shareholders' equity
Current liabilities:
Accounts payable 162,090 564,102
Accrued outdated product return allowance 325,743 281,750
Accrued compensation 285,285 299,121
Accrued expenses 1,982,230 1,534,997
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Total current liabilities 2,755,348 2,679,970
Commitments -- --
Shareholders' equity:
Senior Convertible Preferred Stock, $.01 par value; 14,400 shares
authorized; 8,488 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;
8,347,721 and 6,606,207, issued and outstanding 83,477 66,062
Additional paid-in capital 56,751,301 43,743,664
Accumulated deficit (41,558,437) (40,243,874)
Unrealized gain (loss) on available-for-sale securities (4,755) (4,755)
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Total shareholders' equity 15,271,701 3,561,208
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Total liabilities and shareholders' equity $ 18,027,049 $ 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
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STATEMENTS OF OPERATIONS
ORPHAN MEDICAL, INC.
(Unaudited)
For the Three Months Ended
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March 31, March 31,
2000 1999
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Revenues $ 2,742,456 $ 1,401,839
Cost of sales 459,353 248,925
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Gross Profit 2,283,103 1,152,914
Operating expenses:
Research and development 1,766,403 1,308,763
Sales and marketing 804,590 737,985
General and administrative 735,429 713,025
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Total operating expenses 3,306,422 2,759,773
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Loss from operations (1,023,319) (1,606,859)
Other income:
Interest, net 125,474 85,920
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Net loss (897,845) (1,520,939)
Less: Preferred stock dividends 211,426 142,250
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Net loss attributable to common
shareholders $ (1,109,271) $ (1,663,189)
============ ============
Basic and diluted loss per
common share $ (0.15) $ (0.25)
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Weighted average number of
shares outstanding 7,288,125 6,597,995
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SEE ACCOMPANYING NOTES.
4
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STATEMENTS OF CASH FLOWS
ORPHAN MEDICAL, INC.
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
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March 31, March 31,
2000 1999
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<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (897,844) $ (1,520,939)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 32,474 26,770
Compensatory options 16,991 51,196
Changes in operating assets and liabilities:
Accounts payable and accrued expenses 75,378 (227,705)
Inventories 71,184 (15,545)
Accounts receivable and current assets (202,444) 393,345
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Net cash used in operating activities (904,261) (1,292,878)
INVESTING ACTIVITIES
Purchase of office equipment (45,073) (19,665)
Purchases of short-term investments (12,639,256) (2,487,558)
Maturities of short-term investments 3,782,159 2,999,694
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Net cash provided by (used in) investing activities (8,902,170) 492,471
FINANCING ACTIVITIES:
Employee stock purchase plan 366,756 --
Stock option and warrant exercise proceeds 1,506,348 651,670
Private common stock placement 10,719,963 --
Common stock redeemed -- (676,563)
Cash dividends (1,721) (973)
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Net cash provided by financing activities 12,591,346 (25,866)
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Increase (decrease) in cash and cash equivalents 2,784,915 (826,273)
Cash and cash equivalents at beginning of
period 205,678 2,980,342
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Cash and cash equivalents at end of
period $ 2,990,593 $ 2,154,069
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash interest received $ 138,427 $ 74,210
============ ============
</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 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. The Company expects to seek
additional products for 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-month period ended March 31, 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, and agreements with drug distributors.
Expenditures incurred under these commitments and reported as research and
development expense totaled approximately $1.4 million for the three-month
period ended March 31, 2000. At March 31, 2000, the Company estimates that it
could incur approximately $2.2 million of 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.
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4. BORROWINGS
The Company has renewed 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 March 31, 2000, the Company has not borrowed under this arrangement. In
connection with the financing transaction in August 1999, the Company received a
$2.05 million commitment in the form of a line of credit from UBS Capital.
Amounts outstanding under this line of credit bear an interest rate of 7.5% and
mature on August 2, 2002. To date, the Company has not borrowed under either of
these arrangements.
5. EQUITY TRANSACTIONS
On February 23, 2000, the Company completed the sale of 1,265,000 shares of its
Common Stock at a price of $8.00 per share. The Company received net proceeds of
$9,720,000 from the transaction.
On February 25, 2000, the Company completed the sale of 100,000 shares of its
Common Stock at a price of $10.00 per share. The Company received proceeds of
$1,000,000 from the transaction.
The shares from both of these transactions have been registered under the
Securities Act of 1933, as amended.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
THREE MONTHS ENDED MARCH 31, 2000 VS. THREE MONTHS ENDED MARCH 31, 1999
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 period ended March 31,2000 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.
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 seven products, introducing and promoting
these products and fund raising. The Company operates in a single business
segment: pharmaceutical product development and marketing. At March 31, 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. In
addition, the Company expects operating losses to continue at least through
2000.
FINANCIAL RESULTS
Net loss applicable to common shareholders was $1.1 million for the quarter
ended March 31, 2000 compared to a net loss of $1.7 million for the quarter
ended March 31, 1999, a decrease of $0.6 million or 35%. The decrease results
principally from an increase of revenues from approved products offset by higher
research and development spending for Xyrem(R) (sodium oxybate) Oral Solution.
In addition, the Company had slightly higher sales and marketing spending to
support the higher sales volume in commercialized products and pre approval
spending for Xyrem. The Company also had a small increase in general and
administrative expenses resulting from compensation expense associated with
staffing. The preferred stock dividend, increased for the quarter ended March
31, 2000 over the quarter ended March 31, 1999 due to the issuance of additional
preferred stock in August 1999. The preferred stock dividend increased the net
loss applicable to common shareholders in the current quarter.
8
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Net sales increased $1.3 million or 96% to $2.7 million for the quarter ended
March 31, 2000 from $1.4 million for the quarter ended March 31, 1999. The
increase in net sales reflects a full quarter of Busulfex(R) (busulfan)
Injection sales for the quarter ended March 31, 2000 as compared to the partial
quarter of sales of Busulfex due to the initial commercialization of this
product in February 1999. Sales of Busulfex in the quarter are consistent with
the Companies expectations. Sales of Antizol(R) (fomepizole) Injection have
increased significantly for the quarter ended March 31, 2000 over the quarter
ended March 31 1999. This increase is attributable to Antizol becoming a
standard of care product for ethylene glycol (anti-freeze) poisonings and, as
such, is now being stocked by more emergency care facilities and used for more
poisonings. The Company expects Antizol revenues to be variable because future
orders will most likely be based on use or as poisonings occur. In addition,
international sales increased to approximately 20% of total sales for the
quarter ended March 31, 2000 compared to 3% the prior year. International sales
for the quarter ended March 31, 2000 consisted primarily of Busulfex and
Cystadane(R) (betaine anhydrous) Oral Solution.
Gross profit margins increased slightly to 83% for the quarter ended March 31,
2000 compared to 82% for the quarter ended March 31, 1999. Cost of sales
increased $0.3 million or 85% to $0.5 million for the quarter ended March 31,
2000 from $0.2 million for the quarter ended March 31, 1999. The increase in
cost of sales compared to the prior year is primarily the result of an increase
in net sales in the first quarter. 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, both domestically and internationally.
Research and development expense increased $0.5 million or 35% to $1.8 million
for the quarter ended March 31, 2000 from $1.3 million for the quarter ended
March 31, 1999. The increase is the result of increased spending for Xyrem
offset by decreased spending on Busulfex. The Company expects research and
development expense, principally clinical and regulatory spending for Xyrem to
increase over current levels in subsequent quarters due to the commencement in
2000 of additional clinical trials supporting additional future Xyrem claims and
the expected completion of the submission an NDA for Xyrem scheduled for the
Fall of 2000.
Sales and marketing expense increased $0.1 million or 9% to $0.8 million for the
quarter ended March 31, 2000 from $0.7 million for the quarter ended March 31,
1999. This increase is largely attributable to increased compensation and
staffing in preparation for Xyrem approval. Sales and marketing expenses are
expected to increase because of the pre-approval market preparation related to
Xyrem and on-going marketing activities for Busulfex.
General and administrative expense increased slightly for the quarter ended
March 31, 2000 as compared to the quarter ended March 31, 1999. This increase is
principally
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related to increased salary expense resulting from staffing increases and salary
adjustments. General and administrative expenses are not expected to increase
significantly in subsequent quarters.
Other income is the sum of interest income from investment activities less
interest expense from financing activities. Other income increased 49% to
$125,474 for the quarter ended March 31, 2000 from $85,920 for the quarter ended
March 31, 1999. This increase is the result of additional invested funds from
the successful preferred stock offering in the third quarter of 1999 and the
successful private common stock offering 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 first quarter compared to $0.1 million for the 1999
first quarter. Preferred stock dividends are payable in arrears on August 1 and
February 1 of each year. The Company satisfied its dividend payment obligation
by issuing additional preferred stock, as permitted by the terms of the Senior
Convertible Stock. The Company intends to continue to satisfy its dividend
payment obligations by the issuance of additional preferred stock through August
1, 2000 (after which date the Company is obligated to the pay stock dividend in
cash or additional common shares), which will cause preferred stock dividends to
increase in subsequent quarters.
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 March 31, 2000 and
1999, respectively.
2000 1999
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Domestic $2,193,443 $1,359,195
International 549,013 42,644
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Total $2,742,456 $1,401,839
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LIQUIDITY AND CAPITAL RESOURCES
Since July 2, 1994, the effective date the Company was spun-off from Chronimed,
it has financed its operations principally from initial working capital
balances, net proceeds from public offerings in 1995 and 1996, net proceeds from
a 1998 and 1999 private placement of convertible preferred stock, interest
income and product sales. In February 2000, the Company completed a private
placement of 1.365 million shares of newly issued common stock, resulting in net
proceeds of $10.7 million. The various public and private placement transactions
resulted in aggregate net proceeds, after commissions and expenses, of $44.3
million.
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Net working capital (current assets less current liabilities) increased from
$3.2 million at December 31, 1999 to $14.9 million at March 31, 2000. Cash and
cash equivalents, and available-for-sale securities increased from $4.0 million
at December 31, 1999 to $15.7 million at March 31, 2000 as a result of the
private placement in February 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. In connection with the financing transaction in August
1999, the Company received a $2.05 million commitment in the form of a line of
credit from UBS Capital. Amounts outstanding under this line of credit bear an
interest rate of 7.5% and mature on August 2, 2002. To date, the Company has not
borrowed under either of these arrangements.
The Company's commitments for outside development spending increased from
approximately $1.6 million at December 31, 1999 to approximately $2.2 million
March 31, 2000. The $0.6 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, and sales
and marketing to increase significantly over 1999 levels. Management believes
the Company's current working capital and anticipated operating cash flows from
product sales will be sufficient to fund its operations at least through
December 31, 2000.
In connection with the 1998 private placement of convertible preferred stock,
the Company agreed to certain restrictions and covenants, which could limit its
ability to obtain additional financing. The most important of these restrictions
are: (1) the Company cannot incur additional indebtedness, except for
indebtedness secured solely by the Company's trade receivables, until it has
profitable operations, subject to certain limitations and (2) the Company
cannot, without the approval of a majority of the preferred stockholders, issue
additional equity securities unless the selling price per share
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exceeds the then conversion price, presently $8.14 per share, of the outstanding
convertible preferred stock or the sale of equity is accomplished in a public
offering. Even without these restrictions, the Company can make no assurances
that additional financing opportunities will be available or, if available, on
acceptable terms.
RISK FACTORS
An investment in our common stock involves a number of risks, including among
others, risks associated with companies that operate in the pharmaceutical
industry. These risks are substantial and inherent in our operations and
industry. You should carefully consider the following information about these
risks, together with the information in the rest of this prospectus, before
buying shares of common stock.
WE HAVE A HISTORY OF LOSSES, WHICH WE EXPECT TO CONTINUE.
We have been unprofitable since our inception in January 1993. We expect
operating losses at least through 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, 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.
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POSSIBLE VOLATILITY OF STOCK PRICE.
There is generally significant volatility in the market prices of securities of
early stage companies, and particularly of early stage pharmaceutical companies.
Contributing to this volatility are various factors and events that can affect
our stock price in a positive or negative manner. These factors and events
include, but are not limited to:
* announcements by us or our competitors of new product
developments or clinical testing results;
* governmental approvals, refusals to approval, regulations or
actions;
* developments or disputes relating to patents or proprietary
rights;
* public concern over the safety of therapies;
* financial performance;
* fluctuations in financial performance from period to period; and
* small float or number of shares of our stock available for sale
and trade.
These and other factors and events may have a significant impact on our business
and on the market price of the common stock.
WE CANNOT BE SURE THAT FUTURE CAPITAL WILL BE AVAILABLE TO MEET OUR EXPECTED
CAPITAL REQUIREMENTS.
We expect spending for research and development, and sales and marketing to
increase significantly in fiscal 2000. Although we believe that we have
sufficient capital to meet out current business objectives, if we expand our
business plans, we may need additional capital. Adequate funds for our
operations, continued development, and expansion of our business plans, whether
from financial markets or from other sources, may not be available when needed
on acceptable terms, or at all. If we issue additional securities your holding
may be diluted.
POSSIBLE VOLATILITY OF STOCK PRICE AND REDUCED LIQUIDITY OF THE MARKET FOR THE
STOCK - POSSIBLE LOSS OF NASDAQ NATIONAL MARKET LISTING AND FAILURE TO QUALIFY
FOR NASDAQ SMALL CAP MARKET LISTING.
There is a risk that the market value and the liquidity of the public float for
our common stock could be adversely affected in the event we no longer meet the
Nasdaq's requirements for continued listing on the National Market. For
continued listing on the Nasdaq National Market, a company must satisfy a number
of requirements, which in our case includes either: (1) net tangible assets in
excess of $4.0 million as reported on Form 10-Q or Form 10-K or (2) a market
capitalization of at least $50.0 million. At March 31, 2000, our net tangible
assets equaled $15.3 million and our market capitalization was approximately
$90.8 million (based on the last sale price of $10.875 and 8,347,721 shares
outstanding as of March 31, 2000). Net tangible assets are defined as total
assets less the
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sum of total liabilities and intangible assets. Market capitalization is defined
as total outstanding shares multiplied by the last sales price quoted by Nasdaq.
Therefore, we currently meet the Nasdaq National Market listing requirements.
However, we cannot assure you that this threshold will continue to be met or
that we will continue to have adequate capital to meet the net tangible asset
requirement.
THERE IS A LIMITED MARKET FOR OUR PRODUCTS.
Most orphan drugs have a potential United States market of less than $25 million
annually and many address annual markets of less than $1 million. We cannot
assure you that sales of our products will be adequate to make us profitable
even if the products are accepted by medical specialists and used by patients.
WE RELY ON THE LIMITED PROTECTION OF THE ORPHAN DRUG ACT.
UNITED STATES
Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs
intended to treat a "rare disease or condition." The Orphan Drug Act generally
defines "rare disease or condition" as one that affects populations of fewer
than 200,000 people in the United States. The Orphan Drug Act provides us with
certain limited protections for our products.
The first step in obtaining the limited protection under the Orphan Drug Act is
acquiring the FDA's approval of "orphan drug designation," which must be
requested before a New Drug Application ("NDA") is approved by the FDA. After
the FDA grants orphan drug designation, it publishes the generic identity of the
therapeutic agent, the sponsor, 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
for the FDA to grant "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. Orphan drug status 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
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Antizol, Elliotts B(R) Solution (buffered intrathecal electrolyte/dextrose
injection), Cystadane, Sucraid(R) (sacrosidase) oral solution, and Busulfex.
We have obtained orphan drug designation for Xyrem and plan to submit an NDA for
approval in the fall of 2000. Sodium oxybate is the generic identity of the
therapeutic agent for Xyrem. Despite orphan drug designation for Xyrem, another
pharmaceutical company could attempt to develop sodium oxybate for the same
designated indication as Xyrem or may seek approval of an NDA for their drug
prior to the approval of an NDA for Xyrem. If the FDA first approves another
sponsor's NDA for sodium oxybate and for the same indication as Xyrem, that
sponsor will be entitled to exclusive marketing rights. In that case, the FDA
would not approve our application to market Xyrem for seven years, if at all. We
are aware that the FDA has granted Teva (formerly Biocraft) orphan drug
designation for the use of sodium oxybate to treat the symptoms of narcolepsy,
however, we have obtained the exclusive right to use Teva's data for one
controlled study in our NDA submission. We cannot assure you that the FDA will
approve Xyrem first for the designated indication. We also cannot assure you
that the FDA will not grant orphan drug designation and marketing approval to
other competing products prior to approving our NDA for Xyrem.
Even if the FDA approves an NDA for a drug with an orphan drug designation, the
FDA may still approve the same drug for a different indication, or a molecular
variation of the same drug for the same indication. We are aware that the FDA
granted to Sparta Pharmaceutical, which has been acquired by SuperGen Inc.,
orphan drug designation for an intravenous busulfan for a closely related
indication. If the FDA approves an NDA for Sparta's drug, Sparta could seek
orphan drug status. In addition, the FDA does not restrict doctors from
prescribing an approved drug for uses not approved by the FDA for that drug.
Thus, a doctor could prescribe another company's drug for indications for which
our product has received FDA approval and orphan drug status. Significant "off
label" use, that is, prescribing approved drugs for unapproved uses, could
adversely affect the marketing potential of any of our products that have
received orphan drug status and NDA approval.
The possible amendment of the Orphan Drug Act by Congress has been the subject
of congressional discussion from time to time over the last several 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.
15
<PAGE>
EUROPE
An orphan drug act was recently passed in Europe that provides for up to ten
years of market exclusivity for the first company to obtain regulatory approval
for an orphan indication or a designated drug. This law, however, has yet to be
put into effect. For a pharmaceutical product to qualify, the prevalence (or
incidence), whichever is greater, must not exceed five patients per 10,000
population. We cannot provide assurance that this law will be enacted or that
any of our pharmaceutical products will qualify for orphan drug protection in
Europe or that another company will not obtain an approval, which would block us
from marketing our product in Europe.
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
16
<PAGE>
relating to the development, manufacturing, distribution and marketing of our
products. Some of these problems may be beyond our financial and technical
capacity to solve. The failure to adequately address any such problems could
have a material adverse effect on our business and our prospects. In addition,
the efforts of government entities and third party payors to contain or reduce
the costs of health care may adversely affect our sales and limit the commercial
success of our products.
We cannot completely insulate our drug development portfolio from the
possibility of clinical or commercial failures. Some products that we have
selected for development may not produce the results expected during clinical
trials or receive FDA approval. Drugs approved by the FDA may not generate
product sales of an acceptable level. We have discontinued the development of
eleven products from our portfolio since inception: L-Cycloserine in 1994;
Glucaric Acid in 1996; and nine other products in 1997. We discontinued the nine
products in 1997 in order to focus our development efforts and resources on
those products that fit within three selected strategic therapeutic market
segments: Antidotes; Oncology Support; and Sleep Disorders. In December 1998, we
sold our rights to colloidal bismuth subcitrate for $750,000. We are evaluating
the potential value of our rights in other discontinued products. We cannot
assure you that any of these discontinued products have any value. Depending on
available financing, we may continue to develop one or more of the discontinued
products. We cannot assure you that we will continue development on all other
proposed products or that we will continue marketing all FDA approved products.
SIGNIFICANT GOVERNMENT REGULATION CONTINUES ONCE A PRODUCT IS APPROVED FOR SALE.
After a reviewing division of the FDA approves a drug, the FDA's Division of
Drug Marketing, Advertising and Communication must approve such drug's marketing
claims, which are the basis for the drug's labeling, advertising and promotion.
We cannot be sure that the Division of Drug Marketing, Advertising and
Communication will approve our proposed marketing claims. The failure of the
Division of Drug Marketing, Advertising and Communication to approve our
proposed marketing claims could have a material adverse effect on our business
and prospects.
The FDA requires that a company conduct "post-marketing adverse event
surveillance programs" to monitor any side effects that occur after the
company's drug is approved for marketing. If the surveillance 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
17
<PAGE>
delays and loss of sales, which would have a material adverse effect on our
business and our prospects.
In addition, the Drug Enforcement Administration (DEA) regulates handling and
control of indications, which have potential for abuse in the U.S. While
legislation has passed determining the level of control which the DEA will
subject Xyrem, however, this level of control may increase if illicit use of
analogs of GHB continues or Xyrem becomes a significant diversion issue within
the U.S.
Certain foreign countries regulate the sales price of a product after marketing
approval is granted. We cannot be sure that we can sell our products at
satisfactory prices in foreign markets even if foreign regulatory authorities
grant marketing approval.
WE RELY ON OTHERS FOR PRODUCT DEVELOPMENT OPPORTUNITIES.
We engage only in limited research to identify new pharmaceutical compounds. To
build our product portfolio, we have adopted a license and acquisition strategy.
This strategy for growth requires us to identify and acquire pharmaceutical
products targeted at niche markets within selected strategic therapeutic market
segments. These products usually require further development and approval by
regulatory bodies before they can be marketed. We cannot assure you that any
such products can be successfully developed, approved or marketed. We must rely
upon the willingness of others to sell or license pharmaceutical product
opportunities to us. Other companies, including those with substantially greater
resources, compete with us to acquire such products. We cannot assure you that
we will be able to acquire rights to additional products on acceptable terms, if
at all. Our failure to acquire or license any new pharmaceutical products or
products that fit within one of our strategic therapeutic market segment, or our
failure to promote and market any products successfully or products within an
existing strategic therapeutic market segment, could have a material adverse
effect on our business and our prospects.
We have contractual development rights to certain compounds through various
license agreements. Generally, the licensor can unilaterally terminate these
agreements for several reasons, including, but not limited to the following
reasons:
* for cause if we breach the contract;
* if we become insolvent or bankrupt;
* if we do not apply specified minimum resources and efforts to
develop the compound under license; or
* if we do not achieve certain minimum royalty payments, or in
some cases, minimum sales levels.
We cannot assure you that we can meet all specified requirements and avoid
termination of any license agreements. We cannot assure you that if any
agreement is terminated, we
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<PAGE>
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
saleable 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
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future. We cannot assure you that any change would not adversely affect
production of Busulfex, Antizol, Antizol-Vet(R) (fomepizole) for injection,
Xyrem, or any other drug the Company might attempt to develop or market.
DRUG PRODUCT MANUFACTURE
From bulk drug substance, drug product manufacturers formulate a finished drug
product and package the product for sale or for use in clinical trials. We
depend substantially on an affiliate of Boehringer Ingelheim for drug product
manufacturing of Busulfex, Antizol, and Antizol-Vet. If we were to lose
Boehringer as a manufacturer, we would be required to identify a new
manufacturer for drug products that provided approximately 90% of 1999 and all
of 1998 revenues and are expected to generate over 90% of 2000 total revenues.
We have identified Catalytica Pharmaceuticals, Inc. and Global Pharm, Inc. as
drug product manufacturers for Xyrem and expect to contract with either or both
of these companies for its manufacture. Currently, however, we do not have a
contract with either firm. If we do not contract with either of these firms, we
would be required to identify a new drug product manufacturer before an NDA is
submitted for Xyrem. We cannot assure you that our drug product manufacturing
arrangements might 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. The DEA imposes
regulations and restrictions on the manufacture of bulk and finished drug
product (quotas) and the requirement for reporting distribution of Xyrem during
the clinical trial phase of drug development. Clinical trials can only be
conducted in sites appropriately registered for research of such scheduled
drugs. Specific import and export restrictions also apply. Such regulations
could impose loss of continuity in the supply of drug product for clinical
trials. Our supply and manufacturing contractors must comply with these
regulatory requirements. 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.
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WE DEPEND UPON OTHERS FOR DISTRIBUTION.
We have an exclusive agreement with Cardinal Health, Inc. to provide a variety
of services to support the effective distribution of our products. Cardinal will
provide integrated distribution and operations services to process and support
transactions between us and our wholesalers, specialty distributors, and direct
customers. Cardinal also will provide reimbursement management, patient
assistance and information hotline services, and specialty distribution and
marketing services to physician practices. Cardinal currently distributes
Busulfex, Cystadane, Elliotts B Solution, Antizol, Antizol-Vet, and Sucraid.
Cardinal also will distribute our proposed products should those products
receive marketing clearance from the FDA. We will substantially depend upon
Cardinal's ability to successfully distribute Busulfex, Elliotts B Solution,
Antizol, Antizol-Vet, and Sucraid and potentially any other of our products that
may receive marketing clearance from the FDA in the future.
Chronimed Inc. is the principal distributor, on a non-exclusive basis, in the
United States for Cystadane. Chronimed distributes this product directly to
patients through its mail order pharmacy. We substantially depend upon
Chronimed's ability to successfully distribute Cystadane directly to patients in
the United States.
We cannot assure you that other distribution companies would be available or
continue to be available on commercially acceptable terms. The loss of a
distributor or failure to renew agreements with an existing distributor would
have a material adverse effect on our business and prospects.
WE RELY ON FOREIGN MARKETING ALLIANCES AND HAVE NO ASSURANCE OF FOREIGN
LICENSEES.
Our strategy to address foreign markets is to license foreign marketing and
distribution rights after a new drug application (referred to in the industry as
an "NDA") is submitted or approved in the United States. We consider Europe,
Japan, and Canada our most attractive foreign markets. Our current foreign
developments are:
* EUROPE. We have licensed the marketing and distribution rights
for Busulfex, Antizol, Cystadane and Sucraid in Europe. If our
licensees are unsuccessful in their distribution efforts, we may
find it difficult to contract with other distributors for these
products within Europe. Distribution of Busulfex is limited to
"named patient" or "emergency use" basis until full regulatory
approval is obtained. This "emergency use" distribution of
Busulfex is not expected to result in much, if any, contribution
to the Company's revenues.
* AUSTRALIA AND NEW ZEALAND. We have licensed marketing and
distribution rights for Cystadane and Sucraid in Australia and
New
21
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Zealand, but sales of these products have not been material. We
do not expect sales to increase in the near future to the point
that they become material.
* ISRAEL. We have licensed marketing and distribution rights for
Busulfex, Cystadane, Elliotts B Solution and Sucraid in Israel.
Full regulatory approval was obtained in Israel in February
2000. We do not expect such distribution to result in material
revenues.
* CANADA. We have licensed marketing and distribution rights for
Antizol and Cystadane in Canada. We do not expect such
distribution to result in material revenues.
* CENTRAL AMERICA. We have licensed marketing and distribution
rights for Elliotts B Solution in Central America, but sales
have not been material. We do not expect domestic or foreign
sales of Elliotts B Solution to become material.
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.
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<PAGE>
In the United States, we expect continuing federal and state proposals to
implement government control of the pricing and profitability of prescription
pharmaceuticals. Cost controls, if mandated by a government agency, could
decrease, or limit, the price we receive for our products or products we may
develop in the future. We may not be able to recover our development costs,
which could be substantial. We may not be able to realize an appropriate profit
margin. This could have a material adverse effect on our business. Furthermore,
federal and state regulations govern or influence reimbursement of health care
providers for medical treatment of certain patients. We cannot assure you that
actions taken by federal and/or state governments, if any, with regard to health
care reform will not have a material adverse effect on our business and
prospects.
Certain private health insurers and third-party payors may attempt to control
costs further by selecting exclusive providers of pharmaceuticals. If such
arrangements are made with our competitors, these insurers and third-party
payors would not reimburse patients who purchase our competing products. This
would diminish the market for our products and could have a material adverse
effect on our business and prospects.
PATENTS AND OTHER PROPRIETARY RIGHTS ARE SIGNIFICANT FACTORS IN THE
PHARMACEUTICAL INDUSTRY.
The pharmaceutical industry and the investment community places considerable
importance and value on obtaining patent and trade secret protection for new
technologies, products and processes. The patent position of pharmaceutical
firms is often highly uncertain and generally involves complex legal, technical
and factual questions. Our success depends on several issues, including, but not
limited to our ability:
* to obtain, and enforce proprietary protection for our products
under United States and foreign patent laws and other
intellectual property laws;
* to preserve the confidentiality of our trade secrets; and
* to operate without infringing the proprietary rights of third
parties.
We evaluate the desirability of seeking patent or other forms of protection for
our products in foreign markets based on the expected costs and relative
benefits of attaining such protection. We cannot assure you that any patents
will be issued from any applications or that any issued patents will afford us
adequate protection or competitive advantage. Also, we cannot assure you that
any issued patents will not be challenged, invalidated, infringed or
circumvented. Parties not affiliated with us have obtained or may obtain United
States or foreign patents or possess or may possess proprietary rights relating
to our products. We cannot assure you that patents now in existence or later
issued to others will not adversely affect the development or commercialization
of our products.
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<PAGE>
We believe that the active ingredients or compounds in our FDA approved and
proposed products, Cystadane, Elliotts B Solution, Antizol, Antizol-Vet, Xyrem
and Sucraid, are in the public domain and presently are not subject to patent
protection in the United States. However, we have filed a patent application
with respect to our formulation of Xyrem oral solution. United States patents
issued to the licensor covers our formulation and use of Busulfex. We could,
however, incur substantial costs asserting any infringement claims that we may
have against others.
We seek to protect our proprietary information and technology, in part, through
confidentiality agreements and inventors' rights agreements with our employees.
We cannot assure you that these agreements will not be breached, that we will
have adequate remedies for any breach, or that our trade secrets will not
otherwise be disclosed to or discovered by our competitors. We also cannot
assure you that our planned activities will not infringe patents owned by
others. We could incur substantial costs in defending infringement suits brought
against us. We also could incur substantial costs in connection with any suits
relating to matters for which we have agreed to indemnify our licensors or
distributors. An adverse outcome in any such litigation could have a material
adverse effect on our business and prospects. In addition, we often must obtain
licenses under patents or other proprietary rights of third parties. We cannot
assure you that we can obtain any such licenses on acceptable terms, if at all.
If we cannot obtain required licenses on acceptable terms, we could encounter
substantial difficulties in developing, manufacturing or marketing one or more
of our products.
WE FACE INTENSE COMPETITION IN OUR INDUSTRY.
Competition in the pharmaceutical industry is intense. Potential competitors in
the United States are numerous and include pharmaceutical, chemical and
biotechnology companies. Many of these companies have substantially greater
capital resources, marketing experience, research and development staffs and
facilities than we do. We seek to limit potential sources of competition by
developing products that are eligible for orphan drug designation and NDA
approval or other forms of protection. We cannot assure you, however, that our
competitors will not succeed in developing similar technologies and products
more rapidly than we can. Similarly, we cannot assure you that these competing
technologies and products will not be more effective than any of those that we
have developed or are currently developing.
WE EXPECT RAPID TECHNOLOGICAL AND OTHER CHANGE TO BE CONSTANT IN OUR INDUSTRY.
The pharmaceutical industry has experienced rapid and significant technological
change as well as structural changes, such as those brought about by changes in
heath care delivery or in product distribution. We expect that pharmaceutical
technology will continue to develop and change rapidly, and our future success
will depend, in large part, on our ability to develop and maintain a competitive
position. Technological development by others may result in our products
becoming obsolete before they are marketed or before we recover a significant
portion of the development and
24
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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
25
<PAGE>
PART II - OTHER INFORMATION
Items 1, 3 and 5 do not apply and have been omitted
Item 2. Changes in Securities and Use of Proceeds
The company sold 1,365,000 shares of Common Stock, receiving net proceeds of
$10.7 million during the quarter. These shares were registered under the
Securities Act of 1933, as amended, in April 2000.
Item 4. Submission of Matters to Vote of Security Holders
A special meeting of the shareholders of the Company which was originally
scheduled for January 4, 2000 was adjourned to and held on March 8, 2000. Two
matters were submitted to the shareholders for approval: (1) a proposal to
approve the reorganization of the Company to change its state of incorporation
from Minnesota to Delaware and (2) a proposal to approve the Orphan Medical,
Inc. Employee Stock Purchase Plan.
The proposal to approve the reorganization of the Company to change its state of
incorporation from Minnesota to Delaware was approved by the Company's
shareholders. A total of 3,825,859 shares of the Company's common stock voted in
favor of the proposal, 243,684 shares of the Company's common stock voted
against the proposal and 8,742 shares of the Company's common stock abstained
from voting. There were 3,155,088 broker non-voters in connection with the
shareholders vote for this proposal. The proposal to approve the reorganization
of the Company to change its state of incorporation from Minnesota to Delaware
received approximately fifty-four percent of the vote cast.
The proposal to approve the Orphan Medical, Inc. Employee Stock Purchase Plan
was approved by the Company's shareholders. A total of 6,999,915 shares of the
Company's common stock voted in favor of the proposal, 131,283 shares of the
Company's common stock voted against the proposal and 102,175 shares of the
Company's common stock abstained from voting. The proposal to approve the Orphan
Medical, Inc. Employee Stock Purchase Plan received approximately 95 percent of
the vote cast.
26
<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 29
- --------------------------------------------------------------------------------
(b) Reports on Form 8-K
The Company filed an 8-K on March 10, 2000 pertaining to the announcement of two
financing transactions.
27
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Orphan Medical, Inc.
--------------------
Registrant
Date May 15, 2000 By /s/ John H. Bullion
------------------ -------------------
John H. Bullion
Chief Executive Officer
(principal executive officer)
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING BALANCE SHEETS OF ORPHAN MEDICAL, INC. AS OF MARCH 31, 2000, AND
THE RELATED STATEMENTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2000 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> MAR-31-2000
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<SECURITIES> 12,684,333
<RECEIVABLES> 1,465,222
<ALLOWANCES> 128,000
<INVENTORY> 474,359
<CURRENT-ASSETS> 17,623,422
<PP&E> 760,410
<DEPRECIATION> 394,878
<TOTAL-ASSETS> 18,027,049
<CURRENT-LIABILITIES> 2,755,348
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0
115
<COMMON> 83,477
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</TABLE>
