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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM AUGUST 1, 1999 TO DECEMBER 31, 1999
COMMISSION FILE NUMBER 0-20772
QUESTCOR PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 33-0476164
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
26118 RESEARCH ROAD 94545
HAYWARD, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 732-5551
CYPROS PHARMACEUTICAL CORPORATION
(FORMER NAME)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(TITLE OF CLASS)
Indicate by mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of March 12, 2001 the Registrant had 24,981,471 shares of Common Stock,
no par value, outstanding, and the aggregate market value of the shares held by
non-affiliates on that date was $18,736,103 based upon the last sales price of
the Registrant's Common Stock reported on the American Stock Exchange.*
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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* Excludes 321,620 shares of Common Stock held by directors, executive officers
and shareholders whose beneficial ownership exceeds ten percent of the shares
outstanding on March 12, 2001. Exclusion of shares held by any person should
not be construed to indicate that such person possesses the power, direct or
indirect, to direct or cause the direction of the management or policies of
the Registrant, or that such person is controlled by or under common control
with the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants Definitive Proxy Statement filed with the
Commission pursuant to Regulation 14A in connection with the 2001 Annual Meeting
are incorporated by reference into Part III of this Report.
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PART I.
ITEM 1. BUSINESS OF QUESTCOR.
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this Item 1 "Business of
Questcor," including without limitation "Risk Factors," and Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations", as
well as those discussed in any documents incorporated by reference herein or
therein.
OVERVIEW
Questcor Pharmaceuticals, Inc., formerly Cypros Pharmaceutical Corporation,
(the "Company" or "Questcor") is an integrated specialty pharmaceutical company
focused on the development, acquisition and marketing of innovative, acute care
and critical care hospital/specialty pharmaceutical products.
On November 17, 1999, the Company completed its merger with RiboGene Inc.
("RiboGene") and subsequently changed its name to Questcor Pharmaceuticals, Inc.
Under the terms of the merger agreement, each share of RiboGene common stock was
exchanged for 1.509 shares of the Company's common stock and each outstanding
share of RiboGene Series A preferred stock was converted into 1.509 shares of
Series A preferred stock of the Company. As a result, the Company issued
8,735,000 shares of common stock and 2,156,000 shares of preferred stock valued
at $23,643,000 to the former RiboGene shareholders. Stock options and
transaction costs increased the total merger consideration to $30,019,000. The
objective of the merger was to increase efficiency and synergy, by combining the
Company's clinical development portfolio and growing sales and marketing
presence with RiboGene's clinical development programs and its business
development expertise. In conjunction with the November 1999 acquisition of
RiboGene, the Company changed its fiscal year end from July 31 to December 31.
The Company currently markets three products in the United States:
Glofil(TM)-125 and Inulin in Sodium Chloride, which are both injectable agents
that assess kidney function by measuring glomerular filtration rate; and
Ethamolin(R), an injectable drug used to treat esophageal varices that have
recently bled. Additionally, the Company earns royalties from its strategic
partner, Crinos Industria Farmacobiologica SpA on sales, in Italy, of
Pramidin(R), an intranasal form of metoclopramide for the treatment of various
gastrointestinal disorders.
The Company is manufacturing Neoflo(TM), its proprietary topical triple
antibiotic wound care product for its over-the-counter marketing partner,
NutraMax Products, Inc. ("NutraMax"), utilizing Questcor's patented Dermaflo(TM)
drug delivery technology. Under an agreement entered into in November 1998,
NutraMax is converting the product into finished adhesive strips and patches for
distribution to the mass merchandise market. In May 2000, NutraMax Products,
Inc. filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code.
The NutraMax bankruptcy filing has had a negative impact on the Company's sales
and cash flow during calendar year 2000 and first quarter of 2001. In February
2001, NutraMax's plan of reorganization was approved by the U.S. Bankruptcy
Court. Since NutraMax emerged from Chapter 11, NutraMax has further reduced its
forecast for adhesive strips to be supplied. The Company intends to discontinue
the manufacturing and marketing of Neoflo(TM) and close the manufacturing
operation in Lee's Summit. On April 2, 2001, NutraMax filed a motion with the
U.S. Bankruptcy Court to reject our supply agreement effective April 2, 2001.
The Company's current development programs focus on two areas: (1)
Emitasol(R) phase III clinical trials and (2) the development of its
cytoprotective drug Ceresine(TM). Emitasol(R), an intranasal form of
metoclopramide, is currently being developed for two indications: diabetic
gastroparesis and delayed onset emesis associated with cancer chemotherapy. The
diabetic gastroparesis drug candidate is being developed in collaboration with a
subsidiary of Shire Pharmaceuticals Group plc ("Shire"), in the United States.
In the 4th quarter of 2000, a Phase II clinical trial in the treatment of
diabetic gastroparesis was completed. A Phase III study is planned to commence
in 2002. Depending on the identification of a co-development partner to fund the
development activities, an additional European Phase III clinical trial for a
delayed onset emesis
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indication could be commenced in 2002. The Company has conducted clinical trials
of Cordox(TM) for uses such as a blood preservative, which did not yield proof
of concept, and may expand its clinical trials of Ceresine(TM), another
cytoprotective agent, under investigation as a potential treatment for
congenital lactic acidosis, a frequently fatal disease occurring predominantly
in children. The Company also has two intranasal drug candidates, on which pilot
trials have been conducted: Migrastat(TM) for migraine headache and
Hypnostat(TM) for insomnia.
Based on the Company's history of operating losses and expectation of
continued operating losses in the future, an important aspect of the Company's
ability to conduct its business in the future is the ability to secure
sufficient equity capital to fund its operations. The Company is, at present, in
negotiations with different potential financial investors who have indicated an
interest in investing in the Company and have offered to contribute equity
capital. Should the Company be unable to secure financing by the end of the
second quarter of 2001, the Company is at increasing risk of not being able to
continue as a going concern and may not be able to remain financially viable.
On March 29, 2001, the Company entered into a letter agreement with
Sigma-Tau Finanziaria S.p.A. ("Sigma-Tau"), a leading research-based Italian
pharmaceutical company, that provides for an investment in the Company of $1.5
million, plus $100,000 to purchase a warrant to invest another $1.5 million
within the next six months, and a four (4) week period during which the two
companies will discuss strategic co-development and co-promotion opportunities
which may potentially exist between the companies. The initial investment was
consummated on April 12, 2001, and Sigma-Tau now owns approximately 10.2% of
Questcor's outstanding common stock. If the warrant is exercised in full,
Sigma-Tau would own 18.5% of Questcor's outstanding common stock.
Our independent auditors issued an opinion on our financial statements as
of December 31, 2000 and for the year then ended which included an explanatory
paragraph expressing substantial doubt about our ability to continue as a going
concern.
STRATEGY
The Company's objective is to develop and market acute care and critical
care hospital/specialty pharmaceutical products. The Company's strategy includes
the acquisition and development of late stage drug candidates, the acquisition
of marketed products that complement existing products and, where appropriate,
the formation of corporate alliances to facilitate and fund the clinical
development of the Company's drug candidates.
The Company's operating objectives include 1) developing a strong
regulatory and clinical development group to obtain fast and cost effective
regulatory approval of the Company's drug candidates; 2) building a strong
hospital/specialty market oriented sales, marketing and distribution capability
to increase and support sales of the products currently being marketed and of
new complementary products which may be acquired in the future; and 3) building
a sustainable cash flow by reducing the overall cash consumption or "burn" rate.
Acquisition of approved pharmaceutical products for promotion by sales force.
The Company has built a sales, marketing, and distribution capability to
support and increase the sales of the currently marketed products by the
Company. The Company is looking to acquire additional hospital/ specialty based
products, currently on the market, that are available to be licensed or
purchased, and where product sales are expected to respond positively to the
Company's sales and marketing promotions through increased revenues and
contributions to gross margin. Products to be considered for acquisition would
have to be complementary to the Company's existing products and synergistic with
promotional efforts currently undertaken by the Company's sales force. The
Company currently has a group of 18 sales and marketing professionals to sell
and promote the company's products in the hospital/specialty market.
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Acquisition and development of late stage drug candidates.
An important element of the Company's strategy is the ability to in-license
late stage drug candidates to complement its existing products in the acute and
critical care hospital/specialty products market. The Company may need to
increase its existing clinical development and regulatory affairs staff to
effectively manage United States Food and Drug Administration (FDA) regulatory
submissions for both internally generated and in-licensed products.
Strategic Alliances and Corporate Partnering.
An important part of the Company strategy includes the development of
strategic alliances for out-licensing of marketed products in other world
markets and corporate partnering of drug candidates in various stages of
clinical development. The Company has agreements to develop, market and license
its products and research technology with Ahn-Gook Pharmaceuticals, Seoul,
Korea; Crinos Industria Farmacobiologica SpA, Como, Italy; C.S.C.
Pharmaceuticals Handels GmbH, Vienna, Austria; Dainippon Pharmaceuticals Co.
Ltd., Osaka, Japan; Laboratorios Silesia S.A., Santiago, Chile; NutraMax
Products, Inc., Gloucester, MA; Rigel Pharmaceuticals, Inc., South San
Francisco, CA; Shire Pharmaceuticals Group plc, Andover, United Kingdom; Tularik
Inc., South San Francisco, CA. Through agreements with other firms it has
acquired three marketed products, Inulin, Glofil(TM)-125, and Ethamolin(R), and
several late and early stage clinical development products including
Emitasol(R), Migrastat(TM) and Hypnostat(TM).
The Company intends to continue its objective to out-license to appropriate
partners in certain geographic areas the marketing and distribution rights to
Emitasol(R) for the treatment of gastrointestinal disorders and delayed onset
emesis in return for upfront licensing fees and royalties on revenues. Including
the agreement with Shire Pharmaceuticals, the Company currently has five
licensing agreements for Emitasol(R) and expects to add more in the future
throughout the world.
The Company has several drug candidates in clinical development where
corporate partnering of the clinical development and regulatory submissions
might be the best opportunity for an early approval by the FDA. An example of
this is Ceresine(TM) for treatment of congenital lactic acidosis. See
"Cytoprotective Drugs". The Company also has two products, Migrastat(TM) for
migraine headaches and Hypnostat(TM) for insomnia, in earlier stages of
development, which could be the subjects of corporate partnering.
Successful late stage Phase III clinical trials for such potentially
important treatments as diabetic gastroparesis, delayed onset emesis, and
congenital lactic acidosis, will require the enrollment of many patients.
Together, the cost of these trials, if funded solely by the Company, will exceed
the current financial resources of the Company.
MARKETED PHARMACEUTICAL PRODUCTS
The Company's products include Glofil(TM)-125 and Inulin, which were
acquired in August 1995; Ethamolin(R), which was acquired in November 1996; and
Neoflo(TM), a technology which was acquired in November 1997.
Glofil(TM)-125 and Inulin. Kidney disease afflicts more than two million
persons in the United States and is increasing primarily due to the increase in
diabetes mellitus, hypertension and systemic lupus erythematosus cases. Kidney
disease results in over $12 billion annually in healthcare costs in the United
States. The measurement of kidney function, glomerular filtration rate, or GFR,
is critical to the understanding of the disease state and its appropriate
therapeutic intervention. GFR has historically been estimated by the measurement
of endogenous serum creatinine and by creatinine clearance. These diagnostic
assays overestimate kidney function by as much as 100% in some patients. The
Company believes that the use of renal filtration markers, such as Inulin or
Glofil(TM)-125, offers a more accurate and direct means of determining GFR, and
thereby results in better clinical decision making.
Glofil(TM)-125 and Inulin are FDA-approved products for the measurement of
GFR. Nephrology, transplant, and nuclear medicine departments at major medical
centers are the primary users of these products. Glofil(TM)-125 is an injectable
radioactive diagnostic agent, which provides rapid information on GFR
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with great accuracy. It is currently sold by the Company in 4 mL vials through
the 117 nationwide radiopharmacies of Syncor International under a distribution
agreement entered into with the Company in January 1996. Inulin is a
non-radioactive injectable diagnostic agent, which provides a measure of GFR.
Inulin is currently sold in 50 mL ampules with actual patient dosing correlated
to patient weight.
The Company believes that there is opportunity for increased utilization of
Glofil(TM)-125. Present diagnostic procedures for measuring kidney function
include serum creatinine and creatinine clearance tests. These two tests are the
most commonly performed methods of measuring kidney function because of their
low cost, however both methods significantly overestimate kidney function in the
estimated 500,000 patients with severe renal disease. The use of Glofil(TM)-125
has been established in published clinical studies as being a more direct,
accurate measure of kidney function yielding much more reliable results than
serum creatinine or creatinine clearance tests. This improved accuracy can be
essential in monitoring disease progression and implementing intervention and,
assessing the degree of success of kidney grafts post transplant. The Company
believes that, as new interventional therapies emerge for the treatment of early
stage renal disease, the routine use of Glofil(TM)-125 will take on much greater
importance, however at this point, most early stage patients are not felt to
require this degree of accuracy in the determination of renal function. The
Company has identified a trial of a potentially nephrotoxic agent for the
treatment of a viral disease where more precise determination of GFR would be
useful to the sponsor. In this trial, Glofil(TM)-125 was used to detect
potential renal damage before other methods could.
The biggest impediments to the growth in the sales of Glofil(TM)-125 are
the lack of availability of the test to the practicing clinician, the potential
loss of reimbursement for the test and the inability of the Company to include
Glofil(TM)-125 in the protocols of other entities' clinical studies of renal
therapeutics. Routine testing with Glofil(TM)-125 requires dedicated laboratory
facilities and trained technicians. The Company's promotional efforts are
focused on establishing testing sites in all major market areas in the U.S.
Inulin, which is sold by the Company, is an alternative agent for GFR
measurement. However, the preparation and use of Inulin is time consuming and it
does not provide the practical advantages of Glofil(TM)-125. The Company is
aware of no new diagnostic agents being introduced or in development that would
be a competitive threat to Glofil(TM)-125.
Ethamolin(R). Approximately 75,000 people in the United States have or are
approaching end stage liver disease. End stage liver disease, also known as
hepatic cirrhosis, results in approximately 25,000 deaths annually and ranks
ninth among the leading causes of death. Hepatic cirrhosis promotes the
formation of esophageal varices through development of portal hypertension. When
portal venous blood pressure rises, the varicosities may cause life threatening
upper gastrointestinal hemorrhage associated with a 35-50% mortality rate. At
least 50,000 patients in the United States have either actively bleeding
esophageal varices or are at imminent risk of bleeding.
Early and effective treatment of esophageal varices to achieve hemostasis
is essential to the outcome of the bleeding patient. The most common
pharmaceutical treatment protocol involves the injection of a sclerosing agent
into the varix, achieving clot formation and obliteration of the varix. This
form of hemostasis is called sclerotherapy and usually requires multiple
treatment sessions. Ethamolin(R) is the only sclerotherapy agent approved by the
FDA for the treatment of esophageal varices that have recently bled and the
Company believes that it is the market leader in this therapeutic category.
There is strong competition from another drug, Sotradecol(R), which is not FDA
approved for esophageal varices, and from band ligation, a form of surgery, but
the Company believes that Ethamolin(R) is the only sclerosant that is actively
promoted at this time.
The Dermaflo(TM) Technology.
In November 1997, the Company acquired the Dermaflo(TM) technology, a
patented topical drug delivery system, from Enquay, Inc. for a combination of
cash and royalties on net sales. The technology is a polymer matrix system that
can store a variety of different drugs and release them at a desired rate over
an extended period of time so that optimal clinical response is obtained.
Included in the assets acquired were two FDA approved products, Neoflo(TM) and
Sildaflo(TM) and required manufacturing equipment.
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The Company has a multi-year agreement with NutraMax Products, Inc.
("NutraMax"), a leading supplier of first aid and wound care products, under
which the Company is supplying Neoflo(TM), its proprietary triple antibiotic
product using the Dermaflo(TM) technology to NutraMax for conversion and sale in
the form of adhesive strips and patches. NutraMax has the exclusive right to
sell the finished products to the retail and industrial first aid markets.
Further, the agreement calls for the Company and NutraMax to jointly develop
several new products using the Dermaflo(TM) technology and to share the
development expense and profits from future sales. The Company began shipping
the product to NutraMax in March 1999. In May 2000, NutraMax filed a voluntary
petition under Chapter 11 of the U.S. Bankruptcy Code. The NutraMax filing has
had a negative impact on the Company's sales and cash flow during calendar year
2000 and first quarter of 2001. Approximately $190,000 of the Company's sales to
NutraMax is included in the unsecured creditors class and is subject to a
reduced payment. While the precise amount of the payout is not known at this
time, it is estimated that not more than 25% of the original claim of $190,000
will be recovered. In February 2001 NutraMax's plan of reorganization was
approved by the Bankruptcy Court. Since NutraMax emerged from Chapter 11,
NutraMax has further reduced its forecast for adhesive strips to be supplied. On
April 2, 2001, NutraMax filed a motion with the U.S. Bankruptcy Court to reject
our supply agreement effective April 2, 2001. The NutraMax product is
manufactured in the Company's facility in Lee's Summit, Missouri. The Company
has determined it cannot economically manufacture and market the Neoflo(TM) and
Sildaflo(TM) hospital products itself and is seeking to divest itself of these
products. The Company intends to cease its manufacturing operations at Lee's
Summit after completion of the remaining orders for NutraMax scheduled for April
2001.
DRUG DEVELOPMENT
The Company's development programs include, Emitasol(R) Phase II and Phase
III trials and the development of cytoprotective drugs.
Emitasol(R)
The Company, through its merger with RiboGene, Inc., acquired Emitasol(R),
an intranasal form of metoclopramide. Metoclopramide is an approved antiemetic
and is available in both oral and intravenous forms to treat diabetic
gastroparesis and to prevent acute chemotherapy-induced emesis. The Company and
its partners are developing Emitasol(R) for the treatment of diabetic
gastroparesis (stomach paralysis) and for delayed onset emesis (nausea and
vomiting) associated with cancer chemotherapy. Emitasol(R) is currently being
developed in North America as well as in certain countries in Europe through
corporate partners. It is on the market in Italy as Pramidin(R), licensed to and
distributed by Crinos Industria Farmacobiologica SpA for the treatment of
gastrointestinal disorders. Emitasol(R) is proposed as a method to control
diabetic gastroparesis and to prevent delayed emesis associated with cancer
chemotherapy. Currently, there are no drugs specifically approved to treat
delayed emesis. The Company believes that Emitasol(R), when given intranasally,
may be effective in treating diabetic gastroparesis and in preventing delayed
onset emesis. Advantages may include ease of administration, an increased level
of efficacy as compared to alternatives and cost effectiveness.
The Company, together with its North American collaborative partner Shire,
concluded a U.S. Phase II clinical trial in diabetic gastroparesis in the fourth
quarter of 2000. For some diabetics, proper digestion may be difficult. Variable
blood glucose levels may lead to a condition known as gastroparesis or stomach
paralysis. Gastroparesis can result in general loss of appetite, nausea and
vomiting, and in some cases severe dehydration. Many prescription medications
are used to treat gastroparesis, including bethanecal, cisapride and
erythromycin. Each of these drugs has limited effectiveness and side effects.
Metoclopramide is approved for treating gastroparesis. The Company believes that
the intranasal form of metoclopramide may provide diabetics with gastroparesis
an easier route of administration resulting in better patient compliance. The
Company is planning to commence a Phase III clinical trial for the control of
diabetic gastroparesis in 2002. Positive results in this trial may allow for the
submission of a New Drug Application, or NDA to the FDA, which the Company,
based on the current clinical development plan, hopes will occur in 2003. See
"Strategic Alliances and Corporate Collaborators."
Delayed onset emesis. Nausea and vomiting (emesis) are common side effects
of cancer chemotherapy. Chemotherapy-induced emesis is considered to occur in
two phases: acute (within 24 hours of the initiation of
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chemotherapy) and delayed (on the second and subsequent days). Several drugs
have been approved by the FDA for preventing nausea and vomiting associated with
emetogenic chemotherapy, including injectable forms of ondansetron, granisetron
and metoclopramide. Ondansetron and granisetron are representatives of a newer
class of drugs called serotonin antagonists or setrons, and are considered
highly effective in controlling acute chemotherapy-induced emesis. There are
conflicting reports, however, about the efficacy of serotonin antagonists in
controlling delayed onset emesis. There are in fact no FDA-approved treatments
specifically for delayed onset emesis. Increasing numbers of these patients are
being treated as outpatients and experience delayed onset emesis when they are
no longer under the immediate care of a medical professional. Any medication for
such emesis episodes should therefore be suitable for self-administration by the
patient. Injectable medications are unlikely to be suitable in this context. It
appears that current practice is to provide patients initially with oral
antiemetics in tablet form. Tablets are not, however, particularly suitable for
patients who are nauseated and may vomit.
Prior clinical trials for Emitasol(R) have demonstrated that metoclopramide
is absorbed and effective when given intranasally. Phase I trials indicated that
the overall amount of metoclopramide which reaches the plasma is very similar
whether the drug is given intranasally, intravenously or orally. Given the
similarity in uptake of the three dosage forms, similarity might also be
expected in their clinical performance. For acute emesis the expected similarity
in performance has been demonstrated for the intranasal and intravenous dosage
forms. In a prior Phase III study, Emitasol(R) provided protection against acute
emesis comparable to that previously reported for intravenous metoclopramide.
The Company therefore anticipates that intranasal metoclopramide may be
effective for controlling delayed onset emesis, an activity suggested for oral
metoclopramide in the clinical literature.
According to the American Cancer Society, about 1.3 million new patients
are diagnosed with cancer in the United States each year, many of whom are
treated with chemotherapy. Chemotherapy is typically administered as a series of
separate courses over a period of several months. On average, patients have six
separate courses of chemotherapy per year. In total, therefore, the number of
courses of chemotherapy administered to cancer patients each year in the United
States is estimated to be several million. Additionally, according to the Center
for Disease Control, there are 16 million diabetics in the United States, of
which 40 to 50 percent may show signs of gastroparesis.
On October 19, 2000, the Company announced the results of the Phase II
study of Emitasol(R) (Metoclopramide Nasal Spray) in the treatment of diabetic
gastroparesis, a serious complication of diabetes that substantially reduces
quality of life. The study found encouraging results in terms of safety and a
preliminary evaluation of efficacy.
In this open-label, multicenter Phase II study, 89 subjects, diagnosed with
diabetes and symptoms of gastroparesis, were randomized to three treatment
groups: 18 subjects received oral metoclopramide at 10 mg q.i.d., 35 received
Emitasol(R) (Metoclopramide Nasal Spray) at 10 mg q.i.d. and 36 received
Emitasol(R) at 20 mg q.i.d., for a period of six weeks. Pharmacokinetics, safety
and preliminary efficacy analyses were performed.
In summary, the study showed that both Emitasol(R) (Metoclopramide Nasal
Spray) and oral metoclopramide were bioavailable when administered to diabetic
gastroparesis patients. This study in disease state subjects differed from
previous pharmacokinetic studies, which were conducted in normal subjects. The
trial also suggested that Emitasol(R) (Metoclopramide Nasal Spray) treatment may
enhance the clinical response versus oral metoclopramide. No adverse events
reported were categorized as serious.
Efficacy results were of an exploratory nature due to the design of the
study, but were positive overall. The subject's response to the treatment was
assessed at baseline and at weekly intervals by a symptom assessment
questionnaire (SAQ). Symptoms in the SAQ included nausea, vomiting, anorexia,
feeling bloated, feeling full after a small meal and persistent fullness after
eating. The analysis of overall SAQ score reduction for subjects completing the
study according to the protocol indicated a significantly enhanced response for
both the 10 mg and 20 mg Emitasol(R) groups, when compared to the oral
metoclopramide 10 mg group (p = 0.026 and p = 0.008, respectively). In
individual symptoms, significant improvements in score were observed in the
intranasal 20 mg group when compared to the oral 10 mg group in anorexia (p =
0.019),
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persistent fullness (p = 0.003) and feeling full after a small meal (p = 0.010).
The intranasal 10 mg group showed a significantly increased improvement from the
oral 10 mg group in feeling full after a small meal (p = 0.021).
The single-dose pharmacokinetic profile of metoclopramide was determined
for all treatment groups both at the beginning and the end of treatment. The
bioavailability of metoclopramide following its intranasal administration was
68% to 83% when compared to the oral route as the AUC(0-t) for the 10 mg oral,
10 mg intranasal and 20 mg intranasal doses was 269.5, 224.0 and 366.1 ng/mL,
respectively (treatment day 1). There were no significant differences in
terminal half-life and in time to reach maximum concentration (Tmax) among the
groups. However, there was a lag-time of approximately 20 minutes in the
absorption of metoclopramide for the oral group in comparison to the intranasal
groups.
The safety of both routes of metoclopramide administration was evaluated by
examination of adverse events, active monitoring of nasopharyngeal symptoms,
vital signs and hematological and biochemical tests. Seven of the 89 subjects
discontinued treatment prior to study completion. Those dropping out were
equally distributed among the three treatment arms of the study. Of the adverse
events that occurred during the study, none was categorized as serious and most
were reported as mild. There was no statistical difference between the treatment
groups reported nasopharynx-related adverse events, mostly nasal irritation. All
but two of the nasopharyngeal adverse events were categorized as mild and none
as severe. The incidence of neurological adverse events such as sleepiness,
nervousness or dizziness was low. Three subjects (16.6%) reported such events in
the 10 mg oral group, none (0%) in the 10 mg intranasal and six subjects (16.6%)
in the 20 mg intranasal group. There were no extrapyramidal reactions in any
subjects.
The Company is pleased with the results of the Phase II study, both in
terms of the efficacy and safety analyses. Intranasal delivery of
pharmaceuticals such as metoclopramide avoids the oral route and may provide
more reliable pharmacological effects in patients experiencing gastrointestinal
problems. The Company intends to begin the Phase III study in 2002, as there is
a clinical need to treat patients experiencing substantial gastrointestinal
signs and symptoms as a consequence of their diabetes.
Although the Company, together with its collaborative partner Shire, has
recently concluded a Phase II clinical trial of Emitasol(R) for the treatment of
diabetic gastroparesis, substantial additional development, clinical testing and
investment will be required prior to seeking regulatory approval for
commercialization of this product in the United States. There can be no
assurance that a Phase III clinical trial of Emitasol(R) will demonstrate the
safety and efficacy of the product to the extent necessary to obtain regulatory
approvals for the indications being studied, or at all. The failure to
demonstrate adequately the safety and efficacy of Emitasol(R) could delay or
prevent regulatory approval of the product.
CYTOPROTECTIVE DRUGS
Cytoprotective drugs for acute care settings that treat ischemic injury are
not currently available and the market opportunities for the Company may be
significant, potentially totaling several million cases annually in the United
States. The Company believes that its drugs, if approved, may reduce the number
of fatalities associated with ischemia-related and inherited metabolic disorders
and also reduce the high cost of rehabilitation and ongoing care in the United
States of these patients.
The Company's drugs are administered intravenously which allows for rapid
delivery to the ischemic tissue or orally which facilitates chronic
administration. In order to ensure early interventions, they are intended to be
standard components in hospital emergency rooms, operating theater suites,
endoscopy suites and radiology suites. Chemically demonstrated lack of toxicity
should suit them for this purpose, but such a demonstration is dependent on
ongoing and future clinical trials, which may not be successful.
Ceresine(TM).
Ceresine(TM) is a small non-peptide molecule, which acts on glycolysis at a
different site from Cordox(TM). The Company has licensed or obtained two issued
U.S. patents covering the use of Ceresine(TM) in cerebral ischemia and received
orphan drug designation for Ceresine(TM) in this indication. The Company
believes that
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Ceresine(TM) stimulates a specific enzyme which is present in the membrane of
the mitochondria that removes a precursor of lactic acid, known as pyruvic acid,
from the cytoplasm of the cell by transporting it into the mitochondria and
converting it to acetyl coA. This results in a reduction of lactic acid in the
cell. Increased post-ischemia accumulation of lactic acid is a major causal
factor in the cessation of glycolysis, the resultant decrease in cellular ATP
levels and eventual cell death. Numerous studies have shown that Ceresine(TM)
reduces post-ischemia lactic acid levels in humans subjected to various
traumatic events, which would otherwise have resulted in increased lactic acid
or lactic acidosis.
Ceresine(TM) has been employed by clinical investigators in patients on an
experimental basis for the intravenous treatment of lactic acidosis. Published
clinical studies and the Company's own Phase I data have established that
Ceresine(TM) reduces serum lactic acid and exhibited no serious side effects at
the dose levels studied. Ceresine(TM) has also been shown in human studies to
cross the blood-brain barrier and to reduce cerebrospinal fluid lactic acid
levels in congenital lactic acidosis patients.
Approximately 100 patients participated in the Phase I and two Phase II
trials of Ceresine(TM) under the Company's Investigational New Drug application,
or IND and the drug was well tolerated. The Company's Phase II clinical trial
data on Ceresine(TM) in closed head injury patients showed that the drug crosses
the blood-brain barrier at high levels and very quickly after crossing reduces
lactate levels substantially. This effect lasted for at least 12 hours. Serum
lactate levels were also reduced substantially in the drug-treated group. In
July 1998, the FDA granted expedited development status to Ceresine(TM) in head
injury under Subpart E of the FDA regulations. The Company is not currently
pursuing clinical development of Ceresine(TM) in head injury.
Congenital Lactic Acidosis (CLA) is a heterogeneous group of disorders
characterized by mitochondrial dysfunction. Mitochondria are sub cellular
organelles responsible for production of energy necessary for cellular function
and survival. When mitochondria do not function normally there are inadequate
stores of energy (ATP) produced and the accumulation of poisonous metabolic
intermediates such as lactate.
Clinically, disorders of mitochondrial dysfunction may affect cells of the
nervous system (retardation, seizures, strokes, migraines, psychiatric
disturbances, weakness, poor gastrointestinal function), muscles (weakness,
cramping, pain), kidneys (electrolyte abnormalities), heart (cardiomyopathy,
heart block), liver (hypoglycemia, hepatic failure), eyes (blindness), ears
(deafness) and other organs (failure to grow normally). When the mitochondrial
problem is severe, the condition is lethal. In other less extreme instances,
there may not be any clinical symptoms. Up to one in 4,000 people may be
affected with a mitochondrial disorder. Diagnosis of the disorder may be made on
physical examination, medical history review, and in some cases special
laboratory tests. These laboratory tests may include identification of the gene
responsible for the mitochondrial dysfunction. Muscle biopsy is often performed
to identify the mitochondrial disorder, however the test is not always
diagnostic.
There is currently no effective licensed therapy for CLA. Temporizing
measures such as dietary therapy include avoidance of fasting and use of
increased dietary fat. Vitamins have been given without proven benefit.
Avoidance of stress and sleep deprivation have also been advocated.
Ceresine(TM) has been administered orally to individuals with CLA with
anecdotal reports of benefit. Some side effects have been observed with chronic
dosing including peripheral neuropathies that required drug interruptions or
dose reductions although individuals nearly always were able to continue on
treatment.
The treatment of CLA with Ceresine(TM) has been granted orphan status by
the Office of Orphan Products at the FDA. This confers seven years of marketing
exclusivity to the first licensed agent as well as certain tax advantages. An
additional six months of exclusivity would be granted upon licensure if adequate
studies have been conducted in pediatric subjects. Through this route,
Ceresine(TM) could be licensed in a more expeditious fashion and benefit from
marketing restriction.
To accelerate NDA filing, collaborations have been developed with two
academic sites actively investigating Ceresine(TM) in individuals with
Congenital Lactic Acidosis. Upon finalization of these two relationships,
databases would become available to the Company. These databases could be used
as part of the clinical information necessary for NDA filing with regulatory
authorities. If a clinical benefit is demonstrated regulatory authorities could
act favorably on the application.
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Cordox(TM).
Cordox(TM) is a phosphoryllated sugar that the Company has had reason to
believe, based on extensive pre-clinical and mechanistic data, stimulates and
maintains glycolysis in cells undergoing ischemia by circumventing the
ischemia-induced blockage of this process. The drug also appears to inhibit
various aspects of immune system activation which underlie reperfusion injury.
The Company has licensed or obtained several issued U.S. patents which cover the
use of Cordox(TM) in several acute ischemic indications, and a U.S. patent on a
novel formulation of Cordox(TM).
During the year ended December 31, 1999, the Company commenced a Phase III
trial of Cordox(TM) in patients with Sickle Cell Anemia undergoing painful
crises. In addition, the Company also received a U.S. patent covering the use of
Cordox(TM) in Sickle Cell Anemia patients to reduce painful occlusive ischemic
episodes. In May 2000, after a thorough review of trial design and end points,
priorities, and resources, the Company decided to terminate subject enrollment
in Protocol #FDP-301B, "A dose-ranging study of the efficacy and tolerability of
multiple doses of Cordox(TM) (fructose-1, 6-diphosphate) as adjunct therapy in
the management of an acute, sickle cell related, painful, vaso-occlusive
episode".
Cordox(TM) as an enhancement to Red Blood Cell Storage: Cordox(TM) is a
potential source of high energy phosphates (ATP) and 2,3-DPG that could maintain
stored red cells in a more functional state for longer periods of time than is
currently possible with existing additive solutions. Prolongation of storage
times is especially desirable for rare blood types, preoperative blood donation
for autologous use, and military readiness. The Company has in-licensed a patent
for the use of Cordox(TM) in red cell storage.
In collaboration with the Hoxworth Blood Center in Cincinnati, Ohio, the
Company has been investigating the ability of Cordox(TM) to improve the
biochemical and physical characteristics of stored human red blood cells. Under
an Investigational Review Board approved protocol, human red cells are obtained
from normal subjects and stored in current anticoagulant and additive solutions
with or without various concentrations of Cordox(TM). Periodically, small
amounts of blood are removed from the stored unit and tested for biochemical and
physical features. Characteristics of red cells that correlate with survival
after transfusion are evaluated. Prolongation of desirable features beyond the
normal storage time of 6 weeks would provide the data necessary to perform a
series of transfusion experiments with red cells stored in Cordox(TM).
As of March 2001 the Company has not closed out the study at the Hoxworth
Blood Center in Cincinnati but does have a preliminary final report on the
ability of Cordox(TM) to improve the biochemical and physical characteristics of
stored human red blood cells. Preliminary indications are that Cordox(TM) does
not reach its intended target and that further transfusion experiments are
needed. During storage at 4 degrees centigrade, red cell concentrate incubated
with Cordox(TM) did not demonstrate improved levels of ATP or 2,3 DPG compared
to red blood cells stored in currently licensed blood additive solutions. In
addition experiments with 13C labeled Cordox(TM) have failed to show metabolism
to lactate in stored red blood cells. These groups of experiments are continuing
to be analyzed. However, to date, it appears that Cordox(TM) does not enter red
blood cells. This is a prerequisite for Cordox(TM) to have a beneficial effect
on cellular metabolism.
Glial Excitotoxin Release Inhibitors (GERISs)
The Glial Excitotoxin Release Inhibitors (GERIs) series of neuroprotective
compounds prevent ischemic brain damage originating from astrocytes (astroglial
cells). Astrocytes serve important metabolic functions and are thought to be
responsible for the bulk of brain swelling following stroke or injury. The
swelling constricts blood vessels and worsens the injury -- resulting ischemia
and subsequent cell death. In addition, upon onset of ischemia, astrocytes
release excitotoxins such as glutamate and aspartate over an extended period of
time -- not rapidly, as in the case of neurons -- that result in significant and
persistent damage to neurons. Because astrocyte swelling and excitotoxin
releases are late-stage events in the development of ischemia following brain
injury or stroke, there may be a more appropriate target for drug intervention
than neuron-related events.
In animal models and cell culture experiments, the GERI compounds exert a
powerful neuroprotective effect by blocking chloride-ion channels, to reduce
swelling, and by inhibiting excitotoxin release, to limit or
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prevent damage to neurons. In vitro, excitotoxin release from cultured
astrocytoma cells is fully inhibited at very low concentrations by many
compounds of the GERI series. A greater than 30-fold decrease in drug
concentration required to inhibit excitotoxin release has been achieved by
designing novel derivatives in the GERI compound family. In animal models of
global and focal brain ischemia, a number of the GERI compounds demonstrated
reduction of the infarct volume by as much as 50% in comparison to untreated
controls. In addition, the toxicity profile of existing development candidates
appears excellent.
At this time, the Company continues to define the chemical, toxicological
and pharmacological effect of a number of GERI compounds in animal models
utilizing $749,000 in funding from an NIH SBIR grant. The Company intends to
file an IND for one of the development candidates in 2002.
There can be no assurance that the Company will be successful in licensing
its other drug discovery programs or that it will realize fees or revenues from
such programs.
DRUG DISCOVERY
Subsequent to the merger with RiboGene, the Company implemented a strategy
to focus on approved pharmaceutical products and late stage drug development
candidates; as a result, the Company planned to out-license its early stage drug
targets and technology. Thus the Company discontinued its drug discovery
programs in the first quarter of 2000 and anticipates that future in-house drug
discovery research expenses associated with drug discovery will be limited to
legal, patents and other costs to license such programs.
The Dainippon Agreements
In 1998, RiboGene entered into a research agreement with Dainippon in
connection with RiboGene's two principal antibacterial targets, deformylase and
ppGpp degradase. Pursuant to the research agreement, Dainippon and the Company
agreed to collaborate in a research program directed at accelerating the
discovery of antibacterial drugs that have activity against either of these two
bacterial specific targets. Dainippon agreed to provide certain antibacterial
research and development support internally at Dainippon and research
reimbursements over a three-year period, subject to extension upon mutual
agreement by both parties.
Also in 1998, RiboGene entered into a license agreement with Dainippon.
Pursuant to the license agreement, RiboGene granted Dainippon exclusive,
worldwide rights to develop and market any and all antibacterial products
discovered by the parties during the joint research collaboration to have
activity against deformylase or ppGpp degradase. Under the terms of the license
agreement, Dainippon has responsibility for all development activities necessary
to commercialize potential lead compounds resulting from the Dainippon
collaboration, including preclinical testing, clinical development, submission
for regulatory approval, manufacturing and marketing.
In January 2000, the Company and Dainippon terminated the antibacterial
research collaboration (the Dainippon Agreement), and agreed to out-license
exclusive rights to certain aspects of the Company's proprietary drug research
technology to Dainippon. In exchange for a $2.0 million cash payment and
potential future milestone and royalty payments, the Company has granted an
exclusive, worldwide license to Dainippon to use the Company's ppGpp Degradase
and Peptide Deformylase technology for the research, development and
commercialization of pharmaceutical products. The Company has retained the right
to co-promote, in Europe and the United States, certain products resulting from
the arrangement. The Company will be entitled to receive milestone payments upon
the achievement of clinical and regulatory milestones in the amount of $5.0
million in Japan and $5.0 million in one other major market. Additionally, the
Company will receive a royalty on net sales that will range from 5% to 10%,
depending on sales volume and territory.
STRATEGIC ALLIANCES AND CORPORATE COLLABORATORS
The Shire Pharmaceuticals Group plc Agreement
The Company has an option and license agreement with Shire, for the
development of Emitasol(R), an intranasally administered drug being developed
for treatment of diabetic gastroparesis and delayed onset emesis in cancer
chemotherapy patients. In connection with this agreement, Shire made a $10.0
million equity
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investment in RiboGene by purchasing 1,429,000 shares of Series A non-voting
convertible preferred stock at $7.00 per share.
Upon the merger with the Company, the RiboGene Series A preferred stock was
converted into 2,155,715 shares of the Company's Series A preferred stock. Under
the terms of the option and license agreement, Shire will conduct clinical
trials using Emitasol(R) and, if those are successful, submit an NDA for
Emitasol(R). If FDA regulatory approval is obtained, Shire will have 60 days to
exercise an exclusive option for a license to market Emitasol(R) in North
America. Shire has agreed to make a payment to the Company of up to $10.0
million upon the exercise of the option and to pay a royalty on product sales.
The Company will provide up to $7.0 million in funding for the development of
Emitasol(R) through completion of Phase III trials and the submission of an NDA,
with the balance, if any, provided by Shire. Through December 31, 2000 the
Company has provided $4.1 million of funding for the development of Emitasol(R).
The agreement provides that Shire must file an NDA in North America by July 7,
2001. If Shire does not do so, Shire will no longer have the option to obtain an
exclusive license to market Emitasol(R) in North America. In view of the slower
than expected progress of Emitasol(R) towards commencing the pivotal Phase III
clinical trial, the Company and Shire are currently in discussions about the
extent of a future collaboration and are exploring the possibility that the
Company would take back the full development and all of the associated rights of
the compound.
The Rigel Pharmaceuticals Agreement
In September 2000, the Company entered into an agreement with Rigel
Pharmaceuticals, Inc. Per the terms of this agreement, the Company has assigned
to Rigel certain antiviral technology, including its Hepatitis C drug discovery
technology for the research, development and commercialization of pharmaceutical
products. In exchange, the Company received a cash payment of $750,000, 83,333
shares of Rigel's preferred stock valued at $500,000 (or $6 per share) and is
entitled to future milestone and royalty payments. As part of this agreement the
Company assigned to Rigel the exclusive worldwide license to certain patent
rights and technology relating to the interaction of the hepatitis C virus NS5A
protein and PKR which the Company received from the University of Washington
pursuant to an agreement entered into with the University of Washington in 1997.
As a result, the Company has no further interest in any patent or technology
rights under any agreement with the University of Washington.
The Tularik Agreement
In February 2001 the Company announced that it has exclusively licensed
certain antifungal drug research technology to Tularik, Inc. In exchange, the
Company received a cash payment, payment for reimbursement of patent expenses
and is entitled to future potential milestone and royalty payments. In addition,
the Company has transferred to Tularik certain biological and chemical reagents
to be used in the discovery and development of novel antifungal agents.
LICENSES
Crinos Industria Farmacobiologica SpA ("Crinos"). In January 1994, as part
of its acquisition of Emitasol and certain other intranasal products from Hyline
Laboratories, Inc., the Company entered into a license agreement with Crinos.
The agreement grants Crinos an exclusive license to manufacture and market
Emitasol(R) in Italy. The agreement expires 10 years after the first commercial
sale in Italy subject to automatic renewal for three-year periods. In October
1996, the agreement was amended to grant Crinos a non-exclusive worldwide
license to manufacture Emitasol(R). The amendment provides that the Company will
receive additional royalties on all supply arrangements between Crinos and any
licensees of the Company to Emitasol(R). The Company may terminate the license
agreement in the event Crinos fails to pay certain minimum royalties. The
Company also retains the right to all data generated by Crinos on Emitasol(R),
including clinical and manufacturing information.
Crinos has received governmental approval to market Emitasol(R) in Italy
and launched this product under the trade name Pramidin(R) in 1999 for the
treatment of gastrointestinal disorders. Pramidin(R) is marketed in
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two dosage forms under the names Pramidin(R) 10 (200 milligrams/mL of active
ingredient) and Pramidin(R) 20 (400 milligrams/mL of active ingredient). To
date, the Company has received minimal royalties from the sale of Pramidin(R)in
Italy.
CSC Pharmaceuticals Handels GmbH ("CSC"). In April 1997, RiboGene entered
into an agreement with CSC. The agreement grants CSC an exclusive license to
market and sell Emitasol(R) in Austria, Poland, Russian Federation, Bulgaria,
the Czech Republic, Slovakia, Hungary, Romania, the Community of Independent
States and eight other eastern European countries. CSC has agreed to pay a
royalty to the Company based on net sales within the countries listed above. The
agreement will expire on a country-by-country basis 10 years after the first
commercial sale in that country. Although the Company can terminate the license
if CSC does not obtain approval in any country contained in the agreement by
April 16, 1999, the Company has not done so, since CSC has filed for regulatory
approval in Austria and the Czech Republic.
Laboratorios Silesia SA. In December 1999, the Company signed a license
agreement with Laboratorios Silesia SA for marketing of
Emitasol(R)(metoclopramide nasal spray) in Chile. The Company received a small
up-front payment and will receive royalties on the net sales of Emitasol(R) in
the territory.
Ahn-Gook Pharmaceutical Co., Ltd. In December 2000 the Company entered
into an exclusive agreement with Ahn-Gook to market Emitasol(R) in Korea. Under
the terms of the agreement Ahn-Gook will obtain government approval to market
Emitasol(R). The Company received an up-front cash payment of $50,000, and is
entitled to a milestone payment of $150,000 upon approval of the drug for
distribution in Korea and royalties based on actual sales in Korea.
Angel K. Markov, M.D. -- Cordox(TM). The Company has obtained an exclusive
license from Dr. Markov to four U.S. patents covering the use of Cordox(TM) in a
number of ischemic indications. As part of the license, the Company is funding
clinical development in Dr. Markov's laboratories at the University of
Mississippi Medical Center. In this regard, the Company has undertaken
development obligations which must be met in order to maintain this license in
force. The license also requires the Company to make minimum quarterly royalty
payments. In the event the Company breaches the license agreement, such as by
not meeting specific milestones within the specified time periods or by failing
to expend specific amounts in connection with clinical trials within specified
time periods, the license will automatically terminate and all rights under the
license and information acquired by the Company concerning any products based on
the licensed technology will revert to Dr. Markov. In the event of termination,
the Company will retain the rights to market products for which sales occurred
within the calendar year prior to the termination, and all other products and
information related to those products based on the licensed technology will
revert to Dr. Markov. To date, the Company has not met all milestones in the
agreement. The Company has entered into negotiations with Dr. Markov and the
University of Mississippi Medical Center in order to revise the original
exclusive licensing agreement that was signed in 1993. There can be no assurance
that these negotiations will resolve favorably to the Company.
University Of Cincinnati -- Ceresine(TM). The Company has an exclusive
license from the University of Cincinnati to a U.S. patent covering the use of
Ceresine(TM) in cerebral ischemia. The Company has undertaken specific
development obligations which must be met in order to maintain its rights in
force. If specific milestones are not met by the Company within specified time
periods, the University of Cincinnati may, in its sole discretion, elect to
continue the agreement, negotiate in good faith with the Company to modify the
agreement or terminate the agreement upon 30 days' written notice in which event
all rights under the license would revert to the University of Cincinnati. To
date, the Company has met all of these milestones.
MANUFACTURING
The Company does not currently manufacture any of its acquired products or
its products in development, except for the NutraMax product. The commercial
products, Glofil(TM)-125, Inulin and Ethamolin(R) and clinical trial supplies
for Cordox(TM) and Ceresine(TM) are manufactured for the Company under contract
by approved manufacturers. Alternate manufacturers have been qualified for
Cordox(TM) and Ceresine(TM). In the case of Inulin, Cordox(TM) and Ceresine(TM),
the Company is responsible for obtaining the bulk drug from a third party and
delivering it to the finished goods manufacturer. In the case of Inulin and
Ceresine(TM), the Company has
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qualified alternative sources of supply for the bulk drug. There can be no
assurance that any of the Company's bulk or finished goods contract
manufacturers will continue to meet the Company's requirements for quality,
quantity and timeliness or the FDA's current good manufacturing practice
requirements or that the Company would be able to find a substitute bulk
manufacturer for Cordox(TM), or a substitute finished goods manufacturer for
Inulin, Glofil(TM)-125 and Ethamolin(R)or any other of its products, nor that
all cGMP requirements will be met, nor that lots will not have to be recalled
with the attendant financial consequences to the Company.
The Company manufactures the Neoflo(TM) bulk in Lee's Summit. These
products have been manufactured only for NutraMax. The Company was unable to
generate a profit from its manufacturing and distribution relationship with
NutraMax. Faced with declining forecasts for production volumes from NutraMax
for 2001, and a motion filed by NutraMax with the U.S. Bankruptcy Court on April
2, 2001 to reject the Company's supply agreement effective that date; the
Company intends to discontinue manufacturing operations after completion of the
remaining order for NutraMax.
The Company's limited manufacturing experience and its dependence upon
others for the manufacture of bulk or finished forms of its products may
adversely affect the future profit margin on the sale of those products and the
Company's ability to develop and deliver products on a timely and competitive
basis. In the event the Company is unable to manufacture its products, directly
or indirectly through others, on commercially acceptable terms, it may not be
able to commercialize its products as planned.
SALES AND MARKETING
In May 2000, the Company hired a Vice President Sales and Marketing and as
of December 31, 2000, had hired, trained and deployed a total of nineteen
product specialists and marketing personnel to support the commercial sales of
Glofil(TM)-125, and Ethamolin(R). The Product Specialists are promoting
Ethamolin(R) to hospital-based gastroenterologists, who treat patients with
liver disease who develop bleeding esophageal varices, a life threatening
disorder. Ethamolin(R) is an FDA approved product for the specific indication of
esophageal varices that have recently bled. The promotion of Glofil(TM)-125
targets organ transplant centers and those patients who are at greatest risk of
kidney failure. The company currently has one open position in the commercial
group and handles the distribution of all products in-house.
COMPETITION
A number of larger companies offer competing sclerotherapy agents products
to Ethamolin(R) such as Sotradecol(R) and Scleromate, which are manufactured by
Elkins-Sinn and Palisades Glenwood, respectively. Ethamolin(R) is an injectable
drug used to treat patients with BEVs that have bled recently to prevent
bleeding. BEV is a condition that results from dilated veins in the walls of the
lower part of the esophagus and sometimes, the upper part of the stomach.
Increased pressure causes the veins to balloon outward and potentially rupture.
Other competitive agents include Rubber Band Ligation methods such as those
manufactured by Boston-Scientific called Multi-band Superview, as well as
Multi-band Six Shooter, manufactured by Wilson-Cook, Multi-band Ligator by Bard
and Octreotide(R) by Novartis. The competition to market FDA-approved active BEV
therapies is intense and no assurance can be given that the Company's product
candidates will be commercially successful products.
A number of companies offer both clinical competition as well as research
competition to Glofil(TM)-125. The clinical competition includes serum
creatinine and creatinine clearance methods such as Tc-DTPA, which is
manufactured by Mallinckrodt, Inc. as well as Omnipaque(R), which is
manufactured by Sanofi, a division of Sanofi-Synthelabo. Research competition
includes Conray(R)-iothalamate (nonradiolabeled) meglumine, which is also
manufactured by Mallinckrodt, Inc. and employed through the Mayo Clinic. The
competition to market FDA-approved drugs to measure kidney function by
evaluating GFR, is intense and no assurance can be given that the Company's
product candidates will be commercially successful products.
Several large companies compete with Emitasol(R) in the delayed onset
emesis market, including Zofran(R) (ondansetron hydrochlordide) by
Glaxo-Wellcome, Kytril(R) (granisetron hydrochloride) by SmithKline Beecham and
Reglan(R) (metoclopramide) by A.H. Robins. These competitive products, however,
are available in oral and intravenous delivery forms only. The competition to
develop FDA-approved drugs for
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delayed onset emesis and diabetic gastroparesis is intense and no assurance can
be given that the Company's product candidates will be developed into
commercially successful products.
A number of larger companies have both clinical competition as well as
research competition to Cordox(TM) and Ceresine(TM) which both may be successful
in treating ischemic disorders. Ischemic disorders include heart attack, stroke,
surgery, trauma and various anemias such as sickle cell anemia. The Company is
unaware of any competitors at this time to Ceresine(TM). The competition to
market FDA-approved drugs to treat ischemic disorders is intense and no
assurance can be given that the Company's product candidates will be
commercially successful products.
Most of the Company's competitors are larger than the Company and have
substantially greater financial, marketing and technical resources. In addition,
many of these competitors have substantially greater experience than the Company
in developing, testing and obtaining FDA and other approvals of pharmaceuticals.
Furthermore, if the Company commences commercial sales of the pharmaceuticals in
its pipeline, it will also be competing with respect to manufacturing efficiency
and marketing capabilities, areas in which it has limited or no experience. If
any of the competitors develop new technologies that are superior to the
Company's technologies, the ability of the Company to expand into the
pharmaceutical markets will be materially and adversely affected.
Competition among products will be based, among other things, on product
efficacy, safety, reliability, availability, price and patent position. An
important factor will be the timing of market introduction of the Company's or
competitors' products. Accordingly, the relative speed with which the Company
can develop products, complete the clinical trials and approval processes and
supply commercial quantities of the products to the market is expected to be an
important competitive factor. The Company's competitive position will also
depend upon its ability to attract and retain qualified personnel, to obtain
patent protection or otherwise develop proprietary products or processes and to
secure sufficient capital resources for the often substantial period between
technological conception and commercial sales.
GOVERNMENT REGULATION
The manufacture and sale of the Company's products are subject to extensive
regulation by United States and foreign governmental authorities prior to
commercialization. In particular, drugs are subject to rigorous preclinical and
clinical testing and other approval requirements by the FDA, state and local
authorities and comparable foreign regulatory authorities. The process for
obtaining the required regulatory approvals from the FDA and other regulatory
authorities takes many years and is very expensive. There can be no assurance
that any product developed by the Company will prove to meet all of the
applicable standards to receive marketing approval in the United States or
abroad. There can be no assurance that these approvals will be granted on a
timely basis, if at all. Delays and costs in obtaining these approvals and the
subsequent compliance with applicable federal, state and local statutes and
regulations could materially adversely affect the Company's ability to
commercialize its products and its ability to earn sales revenues.
The research activities required by the FDA before a drug can be approved
for marketing begin with extensive preclinical animal and laboratory testing.
The tests include laboratory evaluation of product chemistry and animal studies
for the safety and efficacy of the drug. The results of these studies are
submitted to the FDA as part of an IND which is reviewed by the FDA prior to
beginning clinical trials, first in normal volunteers and then in patients with
the disease.
Clinical trials involve the administration of the investigational new drug
to healthy volunteers or to patients, under the supervision of a qualified
physician/principal investigator. Clinical trials are conducted in accordance
with governmental statutes, regulations and guidelines and under protocols that
detail the objectives of the study, the parameters to be used to monitor safety
and the efficacy criteria to be evaluated. Each protocol must be submitted to
the FDA as part of the IND. Further, each clinical study must be evaluated by an
independent Institutional Review Board, referred to as the IRB, at the
institution at which the study will be conducted. The IRB considers, among other
things, ethical factors, the safety of human subjects and the possible liability
of the institution, and approves the informed consent to be obtained from all
subjects
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and patients in the clinical trials. The Company will have to monitor the
conduct of clinical investigators in performing clinical trials and their
compliance with FDA requirements.
Clinical trials are typically conducted in three sequential phases (Phase
I, Phase II and Phase III), but these phases may overlap. There can be no
assurance that Phase I, Phase II or Phase III testing will be completed
successfully within any specified time period, if at all, with respect to any of
the Company's drugs. Furthermore, the Company or the FDA may suspend clinical
trials at any time if it is felt that the subjects or patients are being exposed
to an unacceptable health risk or that the investigational product lacks any
demonstrable efficacy.
The results of the pharmaceutical development, preclinical studies and
clinical studies are submitted to the FDA in the form of an NDA for approval of
the marketing and commercial shipment of the drug. The testing and approval
process is likely to require substantial time (frequently five to eight years or
more) and expense and there can be no assurance that any approval will be
granted on a timely basis, if at all. The FDA may deny an NDA if applicable
regulatory criteria are not satisfied, require additional testing or
information, or require post-marketing testing and surveillance to monitor the
safety of the Company's drugs. Notwithstanding the submission of the NDA and any
additional testing data or information, the FDA may ultimately decide that the
application does not satisfy its regulatory criteria for approval. Finally, drug
approvals may be withdrawn if compliance with labeling and current good
manufacturing practices regulatory standards is not maintained or if unexpected
safety or efficacy problems occur following initial marketing.
Among the conditions for clinical studies and NDA approval is the
requirement that the prospective manufacturer's quality control and
manufacturing procedures conform to cGMP, which must be followed at all times.
In complying with standards set forth in these regulations, manufacturers must
continue to expend time, monies and effort in the area of production and quality
control to ensure full technical compliance.
Also, companies that engage in pharmaceutical development, such as the
Company, are required to pay user fees of more than $300,000 upon submission of
an NDA. No fee is required for the submission of an NDA for an orphan drug and
waivers of the use fee are also available under other circumstances. In addition
to regulations enforced by the FDA, the Company is subject to regulation under
the Occupational Safety and Health Act, the Environmental Protection Act, the
Toxic Substances Control Act, the Resource Conservation and Recovery Act and
other present and potential future federal, state or local regulations. For
marketing outside the United States, the Company is subject to foreign
regulatory requirements governing human clinical trials and marketing approval
for drugs. The requirements governing the conduct of clinical trials, product
licensing, pricing and reimbursement vary widely from country to country.
PATENTS AND PROPRIETARY RIGHTS
The Company's success may depend in large measure upon its ability to
obtain patent protection for its products, maintain confidentiality and operate
without infringing upon the proprietary rights of third parties. The Company has
obtained patent coverage, either directly or through licenses from third
parties, for some of its products. The Company currently owns or has licensed a
total of thirteen issued and five allowed U.S. and foreign patents covering
Cordox(TM) and Ceresine(TM) in a variety of ischemic disorders. It also holds an
exclusive license to five U.S. and foreign patents on the Dermaflo(TM)
technology. Additionally, the Company has eight U.S. patents and three exclusive
licenses associated with RiboGene's drug discovery and development programs.
The Company acquired intellectual property associated with its intranasal
program, they include: Emitasol(R), for diabetic gastroparesis and delayed onset
emesis associated with chemotherapy, Migrastat(TM) (intranasal propranolol), for
migraine's treatment, and intranasal benzodiazepines for various conditions such
as anxiety, seizures, panic attacks and sleep disorders. The Company has
licensed rights to Emitasol(R) in North America, Italy, Chile, Korea, Austria,
the Russian Federation, and certain former Eastern European countries. The
Italian licensee Crinos Industria Farmacobiologica S.p.A. ("Crinos") received
approval to market Emitasol(R) (Pramidin(R)) in Italy. The Company is currently
earning small royalties on its sales of Pramidin(R). There can be no assurance
that the foreign licensees will obtain the necessary regulatory approvals to
market Emitasol(R), or that, in the event such approvals are obtained, that
Emitasol(R) will achieve market
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acceptance in such countries, or that the Company will ever realize royalties on
sales of Emitasol(R) in such countries.
In April 1997, the Company entered into an agreement with CSC
Pharmaceuticals Ltd., ("CSC") of Vienna, Austria for the sale and distribution
of Emitasol(R) in Austria, Eastern Europe and the Russian Federation. Under the
terms of the agreement, CSC is obligated to file for regulatory approval in
Austria on its behalf and three other Eastern European Union countries (as
directed by and for the benefit of the Company) for the purpose of obtaining
European Union approval to market the product via the Mutual Recognition
process. CSC filed for approval in Austria in 1998 and in the Czech Republic in
1998. In the event the Company licenses a third party in a European Union
country other than Austria, and the third party obtains marketing approval
through substantial reliance on the marketing approval obtained by CSC, on
behalf of the Company, in any of the three designated countries, the Company
will pay CSC 10% of all up front consideration received from the third party,
other than payment for equity, up to a maximum of 200% of CSC's expenses for
obtaining such marketing approval. In a separate agreement, the Company's
Italian licensee, Crinos, has agreed to manufacture Emitasol(R) for CSC and any
other licensees. There can be no assurance that CSC will obtain approval in
Austria or that if approval is obtained, CSC will file for and obtain approval
in the other EU countries.
In December 1999, the Company entered into an agreement with Laboratorios
Silesia S.A. for marketing of Emitasol(R) in Chile. The Company received a small
up-front payment and will receive royalties on the net sales of Emitasol(R) in
the territory. Located in Chile, Silesia specializes in the marketing of
pharmaceutical products to the Chilean market. The company was founded over
fifty years ago and represents, in Chile, several large multinational
pharmaceutical companies.
In September 2000, the Company entered into an agreement to sell exclusive
rights to certain of the Company's proprietary antiviral drug research
technology to Rigel Pharmaceuticals, Inc., ("Rigel") of South San Francisco,
California. The Company transferred to Rigel the exclusive rights to certain
patents, high throughput assays and compounds related to its Hepatitis C drug
discovery technology for future development by Rigel. In exchange, the Company
received a cash payment, preferred shares, and is entitled to future milestone
and royalty payments. Rigel is a post-genomics combinatorial biology company
focused on discovering novel drug targets and developing a portfolio of drug
candidates by using its new and rapid drug target identification and validation
technology. Rigel has nine product development programs in immunology and
cancer, and has entered into collaboration agreements with Cell Genesys, Janssen
Pharmaceutical -- a Johnson & Johnson Company, Novartis and Pfizer.
In December 2000, the Company entered into a license agreement with
Ahn-Gook Pharmaceuticals Co., Ltd. ("Ahn-Gook") for the marketing of Emitasol(R)
in Korea. Under the terms of the agreement, Ahn-Gook will exclusively market
Emitasol(R) in Korea and will obtain governmental approval to do so. The Company
has received an up-front cash payment and is entitled to future potential
milestone payments, as well as royalties on sales. Ahn-Gook Pharmaceuticals Co.,
Ltd. headquartered in Seoul, Korea, develops, manufactures and sells
prescription pharmaceuticals, as well as over-the-counter drugs, which are used
for the treatment of a wide range of diseases. Currently, Ahn-Gook focuses its
development efforts in gastroenterology, oncology and diseases of the
respiratory system. Emitasol(R) is being developed globally for use in treating
chemotherapy induced emesis and diabetic gastroparesis, a digestive disorder
occurring in diabetic patients. However, there can be no assurance that Ahn-Gook
will obtain governmental approval in Korea.
In February 2001, the Company agreed to exclusively license certain
antifungal drug research technology to Tularik, Inc. In exchange, the Company
received a cash payment and is entitled to receive future potential milestone
and royalty payments. In addition, the Company has transferred to Tularik, Inc.
certain biological and chemical reagents to be used in the discovery and
development of novel antifungal agents which represents the last of RiboGene's
remaining compound library.
In addition to the patents issued and allowed as mentioned above, the
Company has also filed several other patent applications in the United States
and abroad on its various products and expects to file additional applications
in the future. There can be no assurance that any of these patent applications
will be approved, except where claims have already been examined and allowed, or
that the Company will develop additional
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proprietary products that are patentable. Nor can there be any assurance that
any patents issued to the Company or its licensors will provide the Company with
any competitive advantages or will not be challenged by third parties or that
patents issued to others will not have an adverse effect on the ability of the
Company to conduct its business. Furthermore, because patent applications in the
United States are maintained in secrecy until issue, and because publication of
discoveries in the scientific and patent literature often lag behind actual
discoveries, the Company cannot be certain that it was the first chronologically
to make the inventions covered by each of its pending U.S. patent applications,
or that it was the first to file patent applications for such inventions. In the
event that a third party has also filed a U.S. patent application for any of its
inventions, the Company may have to participate in interference proceedings
declared by the United States Patent and Trademark Office to determine priority
of the invention, which could result in substantial cost to the Company, even if
the eventual outcome is favorable to the Company. In addition, there can be no
assurance that the Company's U.S. patents, including those of its licensors,
would be held valid by a court of law of competent jurisdiction. If patents are
issued to other companies that contain competitive or conflicting claims which
ultimately may be determined to be valid, there can be no assurance that the
Company would be able to obtain a license to any of these patents.
Under Title 35 of the United States Code, as amended by the General
Agreement on Tariffs and Trade implementing the Uruguay Round Agreement Act of
1994, commonly referred to as GATT, patents that issue from patent applications
filed prior to June 8, 1995 will enjoy a 17-year period of enforceability as
measured from the date of patent issue while those that issue from applications
filed on or after June 8, 1995 will enjoy a 20-year period of enforceability as
measured from the date the patent application was filed or the first claimed
priority date, whichever is earlier. Patents that issue from applications filed
on or after June 8, 1995 may be extended under the term extension provisions of
GATT for a period up to five years to compensate for any period of
enforceability lost due to interference proceedings, government secrecy orders
or appeals to the Board of Patent Appeals or the Federal Circuit.
Under the Drug Price Competition and Patent Term Restoration Act of 1984,
including amendments implemented under GATT, the period of enforceability of a
first or basic product patent or use patent covering a drug may be extended for
up to five years to compensate the patent holder for the time required for FDA
regulatory review of the product. This law also establishes a period of time
following FDA approval of certain drug applications during which the FDA may not
accept or approve applications for similar or identical drugs from other
sponsors. Any extension under the Patent Term Restoration Act and any extension
under GATT are cumulative. There can be no assurance that the Company will be
able to take advantage of the patent term extensions or marketing exclusivity
provisions of these laws. While the Company cannot predict the effect that such
changes will have on its business, the adoption of such changes could have a
material adverse effect on the Company's ability to protect its proprietary
information and sustain the commercial viability of its products. Furthermore,
the possibility of shorter terms of patent protection, combined with the lengthy
FDA review process and possibility of extensive delays in such process, could
effectively further reduce the term during which a marketed product could be
protected by patents.
The Company also relies on trade secrets and proprietary know-how. The
Company has been and will continue to be required to disclose its trade secrets
and proprietary know-how to employees and consultants, potential corporate
partners, collaborators and contract manufacturers. Although the Company seeks
to protect its trade secrets and proprietary know-how, in part by entering into
confidentiality agreements with such persons, there can be no assurance that
these agreements will not be breached, that the Company would have adequate
remedies for any breach or that the Company's trade secrets will not otherwise
become known or be independently discovered by competitors.
SCIENTIFIC AND OTHER PERSONNEL
At December 31, 2000, the Company had 46 full-time employees (as compared
to 59 full-time employees at December 31, 1999); fourteen of whom are engaged
in, or directly support the Company's research and development activities. Of
the employees engaged in research and development activities, three hold Ph.D.
degrees, and two hold M.D. degrees. In the first quarter of 2000, the Company
discontinued its drug discovery programs and terminated eleven employees
associated with early stage drug discovery.
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The Company's success will depend in large part on its ability to attract
and retain key employees. At December 31, 2000 the Company had eighteen
employees engaged directly in the marketing and selling of its on-market
products. The Company's potential growth and expansion into areas and activities
requiring additional expertise, such as clinical development and regulatory
affairs and sales and marketing, are expected to place increased demands on the
Company's management skills and resources. These demands are expected to require
an increase in management, clinical development and regulatory, and sales
personnel and the development of additional expertise by existing management
personnel. Accordingly, recruiting and retaining management and sales/marketing
personnel and qualified scientific personnel to perform research and development
work in the future will also be critical to the Company's success. There can be
no assurance that the Company will be able to attract and retain skilled and
experienced management, operational and scientific personnel on acceptable terms
given the competition among numerous pharmaceutical and biotechnology companies,
universities and other research institutions for such personnel. The failure to
attract and retain such personnel or to develop such expertise could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors -- Dependence on Key Personnel".
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RISK FACTORS
WE HAVE A HISTORY OF OPERATING LOSSES AND MAY NEVER GENERATE SUFFICIENT REVENUE
TO ACHIEVE PROFITABILITY.
We have a history of consistent operating losses. Further, we expect that
substantial and increasing operating losses will continue over the next several
years. To date, our revenues have been generated principally from sales of
Glofil(TM)-125, Inulin, Ethamolin(R), the licensing of rights to commercialize
certain research technology and the manufacturing of our proprietary topical
triple antibiotic wound care product for our over-the-counter marketing partner,
NutraMax Products, Inc. We do not expect Cordox(TM), Ceresine(TM),
Migrastat(TM), or any of the compounds currently in pre-clinical testing to be
commercially available for a number of years, if at all. Further, our revenues
will also be dependent on the FDA approval and sale of Emitasol(R) in
conjunction with Shire Pharmaceuticals Group plc. Our ability to achieve a
consistent, profitable level of operations will be dependent in large part upon
our ability to:
- finance the operations with external capital until positive cash flows
are achieved,
- acquire additional marketed products; finance product acquisitions,
- increase sales of current products,
- finance the growth of the sales/marketing and clinical
development/regulatory affairs organization,
- enter into agreements with corporate partners for product research,
development and commercialization,
- obtain regulatory approvals for new products, and
- continue to receive products from our contract manufacturers.
Although new product launches are planned, there can be no assurance that
sufficient revenues from new products will be generated nor can there be
assurance that the Company will ever generate sufficient revenues to become
profitable.
IF WE FAIL TO MAINTAIN OR ENTER INTO NEW CONTRACTS RELATED TO COLLABORATIONS AND
IN-LICENSED OR ACQUIRED TECHNOLOGY AND PRODUCTS, OUR BUSINESS COULD ADVERSELY BE
AFFECTED.
Our business model has been dependent on our ability to enter into
licensing and acquisition arrangements with commercial or academic entities to
obtain technology or marketed products for development and commercialization.
Disputes may arise regarding the inventorship and corresponding rights in
inventions and know-how resulting from the joint creation or use of intellectual
property by us and its licensors or scientific collaborators. Additionally, many
of our existing in-licensing and acquisition agreements contain milestone-based
termination provisions. Our failure to meet any significant milestones in a
particular agreement could allow the licensor or seller to terminate the
agreement. We may not be able to negotiate additional license and acquisition
agreements in the future on acceptable terms, if at all. In addition, current
license and acquisition agreements may be terminated, and we may not be able to
maintain the exclusivity of our exclusive licenses.
There can be no assurance that any collaborators will commit sufficient
development resources, technology, regulatory expertise, manufacturing,
marketing and other resources towards developing, promoting and commercializing
products incorporating our discoveries. Further, competitive conflicts may arise
among these third parties that could prevent them from working cooperatively
with the Company. The amount and timing of resources devoted to these activities
by the parties could depend on the achievement of milestones by us and otherwise
generally may be controlled by other parties. In addition, we expect that our
agreements with future collaborators will likely permit the collaborators to
terminate their agreements upon written notice to us. This type of termination
would substantially reduce the likelihood that the applicable research program
or any lead candidate or candidates would be developed into a drug candidate,
would obtain regulatory approvals and would be manufactured and successfully
commercialized. Therefore, any such termination could materially harm the
Company's business.
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There can be no assurance that any of our collaborations will be successful
in developing and commercializing products or that we will receive milestone
payments or generate revenues from royalties sufficient to offset our
significant investment in product development and other costs. Disagreements
with our collaborators could lead to delays or interruptions in, or termination
of, development and commercialization of certain potential products or could
require or result in litigation or arbitration, which could be time-consuming
and expensive and could have a material adverse effect on our business.
WE EXPECT TO INCUR EXPENSE RELATED TO OUR COLLABORATION AGREEMENT WITH SHIRE
PHARMACEUTICALS GROUP PLC
We are obligated to fund one-half of the clinical development expenses for
Emitasol(R) under our corporate partnering agreement with Shire Pharmaceuticals
Group plc, up to an aggregate of $7 million. Through December 31, 2000 we have
made payments to Shire totaling $4.1 million. In addition, we have paid $476,000
for patent related expenses.
Under the agreement with Shire, the Company is obligated to fund the
remaining balance of approximately $2.9 million as a contribution towards the
remaining development costs including the pivotal Phase III clinical trial, data
analysis and regulatory submissions to the FDA of the NDA. Should the Company be
unable to secure adequate financing, the Company may not be able to fund the
balance of the development costs and Shire could choose to declare us in breach
of the agreement or terminate the clinical development of Emitasol(R).
OUR BUSINESS COULD BE HARMED IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY RIGHTS
Our success will depend in part on our ability to:
- obtain patents for our products and technologies,
- protect trade secrets,
- operate without infringing upon the proprietary rights of others, and
- prevent others from infringing on our proprietary rights.
We will only be able to protect our proprietary rights from unauthorized
use by third parties to the extent that these rights are covered by valid and
enforceable patents or are effectively maintained as trade secrets and are
otherwise protectable under applicable law. We will attempt to protect our
proprietary position by filing United States and foreign patent applications
related to our proprietary products, technology, inventions and improvements
that are important to the development of our business.
The patent positions of biotechnology and biopharmaceutical companies
involve complex legal and factual questions and, therefore, enforceability
cannot be predicted with certainty. Patents, if issued, may be challenged,
invalidated or circumvented. Thus, any patents that we own or license from third
parties may not provide any protection against competitors. Pending patent
applications we may file in the future, or those we may license from third
parties, may not result in patents being issued. Also, patent rights may not
provide us with proprietary protection or competitive advantages against
competitors with similar technology. Furthermore, others may independently
develop similar technologies or duplicate any technology that we have developed
or we will develop. The laws of some foreign countries may not protect the
company's intellectual property rights to the same extent as do the laws of the
United States.
In addition to patents, we rely on trade secrets and proprietary know-how.
We currently seek protection, in part, through confidentiality and proprietary
information agreements. These agreements may not provide meaningful protection
or adequate remedies for proprietary technology in the event of unauthorized use
or disclosure of confidential and proprietary information. The parties may not
comply or may breach these agreements. Furthermore, our trade secrets may
otherwise become known to, or be independently developed by competitors.
Our success will further depend, in part, on our ability to operate without
infringing the proprietary rights of others. There can be no assurance that our
activities will not infringe on patents owned by others. We could
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incur substantial costs in defending ourselves in suits brought against us or
any licensor. Should our products or technologies be found to infringe on
patents issued to third parties, the manufacture, use and sale of our products
could be enjoined, and we could be required to pay substantial damages. In
addition, we, in connection with the development and use of our products and
technologies, may be required to obtain licenses to patents or other proprietary
rights of third parties. No assurance can be given that any licenses required
under any such patents or proprietary rights would be made available on terms
acceptable to the Company, if at all.
OUR INABILITY TO SECURE ADDITIONAL FUNDING COULD LEAD TO A LOSS OF YOUR
INVESTMENT
Although we recently completed a $1.6 million financing with Sigma-Tau and
the Company is continuing discussions with other potential investors who have
expressed an interest in investing in our Company, there can be no assurance
that any further capital investments will materialize, nor that these
investments can be completed at attractive terms for the Company, or that the
Company will receive any capital investments at all. In order to conduct the
operating activities of the Company, we will require substantial additional
capital resources in order to acquire new products, increase sales of existing
products, and conduct our various clinical development programs. Our future
capital requirements will depend on many factors, including the following:
- product sales performance,
- cost of clinical and development programs,
- cost for expansion and maintenance of the sales force,
- achieving lower cost of goods sold and better operating efficiencies,
- the acquisition of additional product candidates, and
- the status of the equity markets, in general, and investor's tolerance
for risk, specifically
We anticipate obtaining additional financing through corporate partnerships
and public or private debt or equity financing. However, additional financing
may not be available to us on acceptable terms, if at all. Further, additional
equity financings will be dilutive to our shareholders. If sufficient capital is
not available, then we may be required to delay, reduce the scope of, eliminate
or divest one or more of our product acquisition, clinical programs or
manufacturing efforts. We are aware that our existing capital resources,
committed payments under existing corporate partnerships and licensing
arrangements and interest income will not be sufficient to fund our current and
planned operations past the second quarter of 2001.
Our independent auditors issued an opinion on our financial statements as
of December 31, 2000 and for the year then ended which included an explanatory
paragraph expressing substantial doubt about our ability to continue as a going
concern.
OUR BUSINESS COULD BE HARMED BY INTENSE COMPETITION
The biotechnology and pharmaceutical industries are intensely competitive
and subject to rapid and significant technological change. A number of companies
are pursuing the development of pharmaceuticals and products which target the
same diseases and conditions that we will target. For example, there are
products on the market that compete with Glofil(TM)-125, Inulin and
Ethamolin(R).
Moreover, technology controlled by third parties that may be advantageous
to our business, may be acquired or licensed by competitors of the Company,
preventing us from obtaining this technology on favorable terms, or at all.
Our ability to compete will depend on our abilities to create and maintain
scientifically advanced technology and to develop and commercialize
pharmaceutical products based on this technology, as well as our ability to
attract and retain qualified personnel, obtain patent protection or otherwise
develop proprietary technology or processes and secure sufficient capital
resources for the expected substantial time period between technological
conception and commercial sales of products based upon our technology.
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Many of the companies developing competing technologies and products have
significantly greater financial resources and expertise in development,
manufacturing, clinical testing, obtaining regulatory approvals and marketing
than we do. Other smaller companies may also prove to be significant
competitors, particularly through collaborative arrangements with large and
established companies. Academic institutions, government agencies and other
public and private research organizations may also seek patent protection and
establish collaborative arrangements for clinical development, manufacturing and
marketing of products similar to ours. These companies and institutions will
compete with us in recruiting and retaining qualified scientific and management
personnel as well as in acquiring technologies complementary to our programs. We
will face competition with respect to:
- product efficacy and safety,
- the timing and scope of regulatory approvals,
- availability of resources,
- reimbursement coverage,
- price, and
- patent position, including potentially dominant patent positions of
others.
There can be no assurance that our competitors will not succeed in
developing technologies and drugs that are more effective or less costly than
any which we are developing or which would render our technology and future
drugs obsolete and noncompetitive. In addition, our competitors may succeed in
obtaining the approval of the FDA or other regulatory approvals for drug
candidates more rapidly than we will. Companies that complete clinical trials,
obtain required regulatory agency approvals and commence commercial sale of
their drugs before their competitors may achieve a significant competitive
advantage, including patent and FDA marketing exclusivity rights that would
delay our ability to market specific products. There can be no assurance that
drugs resulting from our development efforts, or from the joint efforts of our
existing or future collaborative partners, will be able to compete successfully
with competitors' existing products or products under development or that we
will obtain regulatory approval in the United States or elsewhere.
OUR RELIANCE ON CONTRACT MANUFACTURERS COULD ADVERSELY AFFECT OUR BUSINESS
We will rely on third party contract manufacturers to produce the clinical
supplies for Emitasol(R), Cordox(TM) and Ceresine(TM) and for the marketed
products, Glofil(TM)-125, Inulin and Ethamolin(R), and other products that may
be developed or commercialized in the future. Third party manufacturers may not
be able to meet our needs with respect to timing, quantity or quality. If we are
unable to contract for a sufficient supply of required products and substances
on acceptable terms, or if we should encounter delays or difficulties in our
relationships with our manufacturers, we could lose sales and our clinical
testing could be delayed, leading to a delay in the submission of products for
regulatory approval or the market introduction and subsequent sales of these
products. Moreover, contract manufacturers that we may use must continually
adhere to current good manufacturing practices regulations enforced by the FDA.
If the facilities of these manufacturers cannot pass an inspection, the FDA
approval of our products will not be granted. During December of 2000, we were
on backorder for Ethamolin(R) due to manufacturing problems at one of our third
party contract manufacturers. Although this situation has been resolved, there
is no guarantee that it will not occur in the future nor that we will not be on
backorder again.
OUR PRODUCTS MAY NOT BE ACCEPTED BY THE MARKET
Our current development programs focus on two areas: Emitasol(R) Phase III
clinical trials and the development of cytoprotective drugs that targets
congenital lactic acidosis. Emitasol(R), intranasal metoclopramide, is currently
being developed for two indications: diabetic gastroparesis and delayed onset
emesis associated with cancer chemotherapy patients. The diabetic gastroparesis
drug candidate is being developed in collaboration with a subsidiary of Shire
Pharmaceuticals Group plc ("Shire"), in the United States and has recently
completed a Phase II clinical trial in the treatment of diabetic gastroparesis.
A
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Phase III study is planned to commence in 2002. Additionally, a Phase III
clinical trial for delayed onset emesis indication is in the planning stage. The
Company may expand its clinical trials of Ceresine(TM), another cytoprotective
agent, in congenital lactic acidosis, a frequently fatal disease occurring in
children. The Company also has two intranasal drug candidates, on which pilot
trials have been conducted: Migrastat(TM) for migraine headache and
Hypnostat(TM) for insomnia. There is no guarantee that any of these drugs will
successfully complete Phase III testing. The Company expects the failure of one
or more of these drugs to successfully pass Phase III testing would likely have
a materially adverse effect on the Company's future results of operations. It
cannot guarantee, however, that the products will ever successfully pass such
testing phases, and if so, result in commercially successful products. Clinical
trial results are frequently susceptible to varying interpretations by
scientists, medical personnel, regulatory personnel, statisticians and others,
which may delay, limit or prevent further clinical development or regulatory
approvals of a product candidate. Also, the length of time that it takes for the
Company to complete clinical trials and obtain regulatory approval for product
marketing can vary by product and by the indicated use of a product. The Company
expects that this will likely be the case with future product candidates and it
cannot predict the length of time to complete necessary clinical trials and
obtain regulatory approval.
Any products that we successfully develop, if approved for marketing, may
never achieve market acceptance. These products, if successfully developed, will
compete with drugs and therapies manufactured and marketed by major
pharmaceutical and other biotechnology companies. Physicians, patients or the
medical community in general may not accept and utilize any products that we may
develop or that our corporate partners may develop.
The degree of market acceptance of any products that we develop will depend
on a number of factors, including:
- the establishment and demonstration of the clinical efficacy and safety
of the product candidates,
- their potential advantage over alternative treatment methods and
competing products,
- reimbursement policies of government and third-party payors, and
- our ability to market and promote the products effectively.
The failure of our products to achieve market acceptance could materially
harm our business.
OUR BUSINESS AND PRODUCT APPROVALS MUST COMPLY WITH STRICT GOVERNMENT REGULATION
Any products that we develop are subject to regulation by federal, state
and local governmental authorities in the United States, including the FDA, and
by similar agencies in other countries. Any product that we develop must receive
all relevant regulatory approvals or clearances before it may be marketed in a
particular country. The regulatory process, which includes extensive preclinical
studies and clinical trials of each product to establish its safety and
efficacy, is uncertain, can take many years and requires the expenditure of
substantial resources. Data obtained from preclinical and clinical activities
are susceptible to varying interpretations which could delay, limit or prevent
regulatory approval or clearance. In addition, delays or rejections may be
encountered based upon changes in regulatory policy during the period of product
development and the period of review of any application for regulatory approval
or clearance for a product. Delays in obtaining regulatory approvals or
clearances:
- would adversely affect the marketing, selling and distribution of any
products that we or our corporate partners develop,
- could impose significant additional costs on us and our corporate
partners,
- could diminish any competitive advantages that we or our corporate
partners may attain, and
- could adversely affect our ability to receive royalties and generate
revenues and profits.
Regulatory approval, if granted, may entail limitations on the indicated
uses for which the new product may be marketed that could limit the potential
market for the product. Product approvals, once granted, may
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be withdrawn if problems occur after initial marketing. Furthermore,
manufacturers of approved products are subject to pervasive review, including
compliance with detailed regulations governing FDA good manufacturing practices.
The FDA has recently revised the good manufacturing practices regulations.
Failure to comply with applicable regulatory requirements can result in warning
letters, fines, injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, refusal of the government to grant
marketing applications and criminal prosecution.
In addition, we cannot predict the extent of government regulations or the
impact of new governmental regulations that might have an adverse effect on the
development, production and marketing of the Company's products. We may be
required to incur significant costs to comply with current or future laws or
regulations.
WE MAY NOT BE REIMBURSED BY THIRD PARTY PAYERS
In both domestic and foreign markets, sales of our products will depend in
part on the availability of reimbursement from third-party payors such as state
and federal governments (for example, under Medicare and Medicaid programs in
the U.S.) and private insurance plans. In certain foreign markets, the pricing
and profitability of our products generally are subject to government controls.
In the U.S., there have been, and we expect there will continue to be, a number
of state and federal proposals that limit the amount that state or federal
governments will pay to reimburse the cost of drugs. In addition, we believe the
increasing emphasis on managed care in the U.S. has and will continue to put
pressure on the price and usage of our products, which may impact product sales.
Further, when a new therapeutic is approved, the reimbursement status and rate
of such a product is uncertain. In addition, current reimbursement policies for
existing products may change at any time. Changes in reimbursement or our
failure to obtain reimbursement for our products may reduce the demand for, or
the price of, our products, which could result in lower product sales or
revenues which could have a material adverse effect on us and our results of
operations.
In the U.S. proposals have called for substantial changes in the Medicare
and Medicaid programs. If such changes are enacted, they may require significant
reductions from currently projected government expenditures for these programs.
Driven by budget concerns, Medicaid managed care systems have been under
consideration in several states. If the Medicare and Medicaid programs implement
changes that restrict the access of a significant population of patients to its
innovative medicines, our business could be materially affected. On the other
hand, relatively little pharmaceutical use is currently covered by Medicare.
Legislation in the U.S. requires us to give rebates to state Medicaid
agencies based on each state's reimbursement of pharmaceutical products under
the Medicaid program. We also must give discounts or rebates on purchases or
reimbursements of pharmaceutical products by certain other federal and state
agencies and programs. There can be no assurance that these discounts and
rebates may become burdensome to us, which may adversely affect our current
business and future product development.
OUR BUSINESS MAY BE AFFECTED BY PRODUCT LIABILITY AND AVAILABILITY OF INSURANCE
Our business will expose us to potential liability risks that are inherent
in the testing, manufacturing and marketing of pharmaceutical products. The use
of any drug candidates ultimately developed by us or our collaborators in
clinical trials may expose us to product liability claims and possible adverse
publicity. These risks will expand for any of our drug candidates that receive
regulatory approval for commercial sale. Product liability insurance for the
pharmaceutical industry is generally expensive, if available at all. We
currently have product liability insurance, however, there can be no assurance
that we will be able to maintain insurance coverage at acceptable costs or in a
sufficient amount, if at all, or that a product liability claim would not harm
our reputation, stock price or our business.
WE WILL BE DEPENDENT ON KEY PERSONNEL
We are highly dependent on the services of Charles J. Casamento, President,
Chief Executive Officer and Chairman of the Board. Mr. Casamento has executed an
employment agreement. However, there can be no assurance that Mr. Casamento will
continue to be employed by us in the future. The loss of Mr. Casamento could
materially harm our business. The potential growth and expansion of our business
is expected to place
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increased demands on our management skills and resources. These demands are
expected to require a substantial increase in management and scientific
personnel to perform clinical and operational work as well as the development of
additional expertise by existing management personnel. Accordingly, recruiting
and retaining management and operational personnel to perform sales and
marketing, research and development work and qualified scientific personnel
development in the future will also be critical to our success. There can be no
assurance that we will be able to attract and retain skilled and experienced
management, operational and scientific personnel on acceptable terms given the
extensive competition among numerous pharmaceutical and biotechnology companies,
universities and other research institutions for such personnel.
WE COULD BE ADVERSELY AFFECTED BY LITIGATION
Although there are no material lawsuits pending against the Company, we
could be adversely affected by litigation.
ITEM 2. PROPERTIES
At December 31, 2000, the Company leased four buildings. The Company
headquarters, which includes the Executive, Finance and Administration, Sales
and Marketing, Clinical Research, and Regulatory Affairs departments, is located
in Hayward, California. The building includes 30,000 square feet of laboratory
and office space, under a lease that expires in November 2012. As a result of
the Company's termination of its drug discovery programs, the Company no longer
required its 15,000 square feet of laboratory space and office space and
subleased this space as of July 2000. The Company has entered into a new 10-year
lease agreement to lease 23,000 square feet of office space in a nearby location
and as a result, plans to sublease 100% of its current headquarter premises to
the current sublessee under the existing sublease agreement commencing in May
2001.
The Company leases two buildings in Carlsbad, California. The Company's
distribution, quality control and quality assurance functions are located in
8,203 square feet of space located at 2714 Loker Avenue West. In April 1997, the
Company subleased its other building in Carlsbad located at 2732 Loker Avenue
West to another pharmaceutical company. The Company has a new lease for the 2714
Loker Avenue West property, which commenced in November 2000 and has a term of
63 months. The lease on the 2732 Loker Avenue West property commenced in
December 1993 and has a term of 81 months. Both leases have clauses providing
for rent increases at various points in time during the terms of the leases. The
subtenant's lease covers the remainder of the Company's original lease term plus
a 36-month option, and the subtenant's rental payments to the Company exceed the
Company's rental payments to the landlord. In addition, the sublease provides
for annual rent increases. Effective February 1, 2001, the sub-lease at 2732
Loker Avenue was assigned to the landlord and the master lease was terminated.
The Company's manufacturing facility for the Dermaflo(TM) product line is
located in Lee's Summit, Missouri. The Company leased temporary space in the
Missouri building in December 1998 and on April 19, 1999, occupied its permanent
space. The Company has been paying monthly operating expenses on the temporary
space since inception and began paying monthly rental on the permanent space
commencing September 2000. The lease period ends in December 2004. The Company
is currently examining the financial impact of consolidating all of its
operations in Union City, CA.
ITEM 3. LEGAL PROCEEDINGS
In July 1998, the Company was served with a complaint in the United States
Bankruptcy Court for the Southern District of New York by the Trustee for the
Liquidation of the Business of A.R. Baron & Co., Inc. and the Trustee of The
Baron Group, Inc., the parent of A.R. Baron. The complaint alleged that A.R.
Baron and the Baron Group made preferential or fraudulent transfers of funds to
the Company prior to the commencement of bankruptcy proceedings involving A.R.
Baron and the Baron Group. The Trustee sought return of the funds, totaling $3.2
million.
During the quarter ended June 30, 2000, the Company reached an agreement to
settle the Baron litigation and pay a total amount of $525,000 to the bankruptcy
estates of the Baron entities. Additionally, the
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Company also reached a settlement agreement with a former insurer in connection
with the Baron litigation in which the insurer would pay the Company $150,000 in
exchange for policy releases. The Company believes that settling this claim for
a net payment of $375,000 was an acceptable outcome to avoid incurring further
legal fees and management diversion.
On September 26, 2000, the courts formally approved the settlement and the
case is closed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Common Stock of the Company was quoted on the Nasdaq National Market
System under the symbol "CYPR" until January 1998. In January 1998, the Company
was listed on the American Stock Exchange, Inc. under the symbol "CYP". On
November 17, 1999, the Company changed its name to Questcor Pharmaceuticals,
Inc. and began trading under the symbol "QSC".
The following table sets forth, for the periods presented, the high and low
closing bid quotations for the Company's Common Stock. The bid quotations
reflect inter-dealer prices without adjustment for retail markups, markdowns or
commissions and may not reflect actual transactions.
COMMON STOCK
CLOSING BID
------------------
QUARTER ENDED HIGH LOW
------------- ------- -------
December 31, 2000........................................ $1.5000 $0.5625
September 30, 2000....................................... 2.1875 1.3750
June 30, 2000............................................ 3.0625 1.2500
March 31, 2000........................................... 5.2500 1.3125
December 31, 1999 (stub period).......................... $1.5000 $1.1250
October 31, 1999......................................... 2.2500 1.3125
July 31, 1999............................................ 2.6875 2.0625
April 30, 1999........................................... 3.0625 2.2500
January 31, 1999......................................... 4.0000 2.3125
The last sales price of the Common Stock on March 12, 2001 was $0.75. As of
March 12, 2001 there were approximately 241 holders of record of the Company's
Common Stock.
The Company has never paid a cash dividend on its Common Stock. The
Company's dividend policy is to retain its earnings, if it achieves positive
earnings, to support the expansion of its operations. The Board of Directors of
the Company does not intend to pay cash dividends on the Common Stock in the
foreseeable future. Any future cash dividends will depend on future earnings,
capital requirements, the Company's financial condition and other factors deemed
relevant by the Board of Directors.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following table sets forth certain financial data with respect to the
Company. The selected consolidated financial data should be read in conjunction
with the Company's Consolidated Financial Statements (including the Notes
thereto) and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this Form 10-K.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
12/31/00 9/30/00 6/30/00 3/31/00
-------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Total Revenues........................................ 544 1,809 543 698
Net loss.............................................. (2,798) (1,966) (3,747) (5,251)
Net loss per share.................................... (0.11) (0.08) (0.15) (0.21)
12/31/99
STUB PERIOD 10/31/99 7/31/99 4/30/99 01/31/99
----------- -------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Total Revenues........................... 388 498 877 606 833
Net loss................................. (1,966) (2,288) (1,944) (1,748) (1,553)
Net loss per share....................... (0.09) (0.15) (0.12) (0.11) (0.10)
FIVE MONTHS
YEAR ENDED ENDED YEARS ENDED JULY 31,
DECEMBER 31, DECEMBER 31, -------------------------------------
2000 1999(1) 1999 1998 1997 1996
------------ ------------ ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net product sales.................. $ 2,134 $ 624 $ 2,518 $ 3,446 $ 2,428 $ 1,275
Total revenues..................... 3,594 956 2,569 3,616 2,527 1,546
Total operating cost and
expenses......................... 17,752 23,257 10,026 9,910 (8,004) 4,988
Loss from operations............... (14,158) (22,301) (7,457) (6,294) (5,477) (3,847)
Other income (expense), net........ 396 91 673 721 (1,198) 758
Net loss........................... (13,762) (22,210) (6,784) (5,573) (6,675) (3,090)
Net loss per share -- basic and
diluted.......................... (0.56) (1.22) (0.43) (0.37) (0.54) (0.27)
Shares used in computing net loss
per share -- basic and diluted... 24,722 18,240 15,712 15,187 12,303 11,518
JULY 31,
DECEMBER 31, DECEMBER 31, -----------------------------------------
2000 1999 1999 1998 1997 1996
------------ ------------ -------- -------- -------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET
DATA:
Cash, cash equivalents and
investments (includes $5
million compensating balance
at December 31, 2000 and
1999)........................ $ 8,151 $ 21,699 $ 7,263 $ 13,445 $ 14,567 $ 15,997
Working capital................ 1,201 16,943 5,261 13,379 13,076 15,384
Total assets................... 14,969 32,221 13,140 19,736 21,345 20,266
Long-term obligations.......... 548 6,078 147 217 4,176 6,624
Preferred stock................ 5,081 5,081 -- -- -- --
Common stock................... 66,152 65,423 41,497 41,328 32,345 23,421
Accumulated deficit............ (65,486) (51,724) (29,514) (22,730) (17,157) (10,482)
Total stockholders' equity..... 927 13,626 11,914 18,511 15,026 12,635
- ---------------
(1) Includes the results of operations of RiboGene, Inc. from November 17, 1999
through December 31, 1999, including a one-time charge for restructuring
costs and a non-cash charge for acquired in process research and development
costs.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties, including statements regarding the period of time during which
the Company's existing capital resources and income from various sources will be
adequate to satisfy its capital requirements. The Company's actual results could
differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in this section, as well as Item 1 "Business of Questcor," including without
limitation "Risk Factors," as well as those discussed in any documents
incorporated by reference herein or therein.
OVERVIEW
An important aspect of the Company's ability to conduct its business in the
future is the ability to secure sufficient equity capital to fund its
operations. In March of 2001, the Company entered into a letter agreement with
Sigma-Tau Finanziaria S.p.A. ("Sigma-Tau"), an Italian pharmaceutical company,
which provides for an initial investment in Questcor of $1.5 million, for
approximately 10.2% of Questcor common stock, plus $100,000 for a warrant to
invest an additional $1.5 million within a six month period. The initial
investment of $1.5 million plus the issuance of the $100,000 warrant was
consummated on April 12, 2001. If Sigma-Tau exercises the warrant in full, the
total investment of $3.0 million will represent 18.5% of Questcor's outstanding
common stock. It is anticipated that the initial Sigma-Tau investment will
provide the Company with sufficient capital to fund its operations through the
second quarter of 2001. The Company is in negotiations with Sigma-Tau and other
potential investors to provide additional financing. Should the Company be
unable to secure additional financing during the first six months of 2001, the
Company is at increasing risk of not being able to continue as a going concern
and may not be able to remain financially viable. (See Liquidity and Capital
Resources.)
Our independent auditors issued an opinion on our financial statements as
of December 31, 2000 and for the year then ended which included an explanatory
paragraph expressing substantial doubt about our ability to continue as a going
concern.
The Company was founded in 1990, commenced its research and development
activities in 1991 and completed an initial public offering (the "IPO") in
November 1992. The Company commenced clinical trials in December 1994, acquired
two FDA approved products, Glofil(TM)-125 and Inulin, in August 1995 and
acquired a third FDA approved product, Ethamolin(R), in November 1996. The
Company acquired the Dermaflo(TM) topical burn/wound care technology and two FDA
approved products, Neoflo(TM) and Sildaflo(TM), in November 1997. On November
17, 1999, the Company changed its name from Cypros Pharmaceutical Corporation to
Questcor Pharmaceuticals, Inc. after completing a merger with RiboGene, Inc. As
a result of the merger, each outstanding share of RiboGene's common stock was
converted into 1.509 shares of common stock of the Company and each outstanding
share of RiboGene Series A preferred stock was converted into 1.509 shares of
Series A preferred stock of the Company. The merger resulted in the issuance of
approximately 8,735,000 shares of the Company's common stock and 2,156,000
shares of the Company's Series A preferred stock, valued at an aggregate of
$23,643,000. The purchase price also included approximately $5,310,000 related
to outstanding RiboGene stock options and outstanding warrants assumed by the
Company and $1,065,000 of transaction costs, for an aggregate purchase price of
$30,019,000.
The merger transaction was accounted for as a purchase. A write-off of
$15,168,000 for in-process research and development acquired from RiboGene is
included in the Company's statement of operations for the five months ended
December 31, 1999. The intangible assets acquired will be amortized over their
estimated useful lives of 3 years. The Company has sustained an accumulated
deficit of $65,486,000 from inception through December 31, 2000. The Company
expects to incur significant operating losses over the next several years due
primarily to expanded clinical testing of its product candidates and
commercialization activities. Results of operations may vary significantly from
quarter to quarter depending on, among other factors, the results of the
Company's clinical testing, the timing of certain expenses, the establishment of
strategic alliances and corporate partnering and the receipt of milestone
payments.
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RESULTS OF OPERATIONS
Year ended December 31, 2000 compared to the five months ended December 31,
1999
The comparison data presented below is for information purposes. It is
difficult to analyze variances between the year ended December 31, 2000 and the
five months ended December 31, 1999 for two reasons: (1) the comparative periods
are different and (2) the five months ended December 31, 1999 includes merger
related restructuring charges. For a more meaningful comparison, please refer to
the information presented in the "Year ended December 31, 2000 compared to the
year ended July 31, 1999".
For the year ended December 31, 2000, the Company incurred a net loss of
$13,762,000 (or $0.56 per share), compared to a net loss of $22,210,000 (or
$1.22 per share) for the five months ended December 31, 1999. During the five
months ended December 31, 1999, the Company completed its merger with RiboGene,
Inc. As a result of the merger, operations for the period include a one-time
non-cash charge of $15,168,000 for acquired in-process research and development
and a $1,530,000 one-time charge for restructuring costs, primarily related to
severance of former Cypros employees.
Revenue for the year ended December 31, 2000 totaled $3,594,000 as compared
to $956,000 for the five months ended December 31, 1999. This relative increase
was primarily due to the recognition of $1,250,000 in technology revenue from
the sale of the Company's proprietary antiviral drug research technology, HCV
IRES and HCV NS5A-PKR, to Rigel Pharmaceuticals, Inc. In addition, product sales
increased to $2,134,000 for the year ended December 31, 2000 from $624,000 for
the five months ended December 31, 1999. The increase in product sales consisted
of $618,000 in Ethamolin(R) sales, $691,000 in Glofil(TM)-125 sales, and
$207,000 in Inulin sales for the year ended December 31, 2000 compared to
$319,000, $251,000 and $20,000, respectively for the five month period ended
December 31, 1999. In addition, the startup of the supplies of rolled padded
stock (Neoflo(TM)) amounted to $618,000 for the year ended December 31, 2000
compared to $35,000 for the five months ended December 31, 1999. During 2000,
the Company hired additional sales personnel and initiated a sales and marketing
plan that is expected to result in increased product sales in 2001.
In May 2000, one of the Company's major customers, NutraMax Products, Inc.
("NutraMax") filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy
Code. The Company has a multi-year marketing and joint venture agreement with
NutraMax Products, Inc. under which the Company is supplying its proprietary
triple antibiotic product using the Dermaflo(TM) technology to NutraMax for
conversion and sale in the form of adhesive strips and patches. NutraMax has the
exclusive right to sell the finished products to the retail and industrial first
aid markets. Further, the agreement calls for the Company and NutraMax to
jointly develop several new products using the Dermaflo(TM) technology and to
share the development expense and profits from future sales. The Company began
shipping the products to NutraMax in March 1999. Net sales to NutraMax totaled
$618,000 for the year ended December 31, 2000, $35,000 for the five months ended
December 31, 1999 and $167,000 for the year ended July 31, 1999, representing
17%, 4% and 7% of total revenues, respectively. As of May 2, 2000, NutraMax
filed for protection under Chapter 11 of the United States Bankruptcy Code, the
Company had a claim outstanding of $190,000 as an unsecured creditor. It is
unclear how much of this amount will be recovered. Since the filing date, the
Company has agreed on new payment terms with NutraMax and has sold $293,000 of
product for which the Company has been paid in accordance with the revised
terms. In February 2001, NutraMax's plan of reorganization was approved by the
U.S. Bankruptcy Court. Since NutraMax emerged from Chapter 11, NutraMax has
further reduced its forecast for adhesive strips to be supplied. On April 2,
2001, NutraMax filed a motion with the U.S. Bankruptcy Court to reject our
supply agreement effective that date.
Costs of product sales increased to $1,938,000 for the year ended December
31, 2000 from $500,000 in the five months ended December 31, 1999. The relative
increase in cost resulted from the increase in production of the Company's
topical triple antibiotic rolled padded stock and higher product sales for
Glofil(TM)-125 and Inulin, in addition to a $50,000 write-down to accurately
reflect the current value of inventory in stock.
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31
Gross margins for the marketed products for the year ended December 31,
2000 were 59% for Ethamolin(R), 36% for Glofil(TM)-125, 35% for Inulin, and
(80)% for the rolled padded stock, compared to the 54%, 51%, 1% and (504%),
respectively, for the five month period ended December 31, 1999. The negative
gross margin in rolled padded stock for the 1999 period resulted from the
initial production and start up costs for that product. The rolled padded stock
is made with costly raw materials, and in addition, our sales price to NutraMax
is contractually fixed by our agreement with them. The gross margins for
Glofil(TM)-125 and Inulin have been historically affected by shrinkage resulting
from short shelf lives. It is anticipated that increased sales volume will
reduce that shrinkage.
Sales and marketing expense increased to $2,539,000 for the year ended
December 31, 2000 from $946,000 in the five months ended December 31, 1999. This
relative increase is principally due to salary and recruiting costs associated
with the expansion of the sales force from seven people at December 31, 1999 to
eighteen people at December 31, 2000 and higher expenses for sales and marketing
materials.
General and administrative expense increased to $5,495,000 for the year
ended December 31, 2000 from $1,684,000 in the five month period ended December
31, 1999. This relative increase resulted from merger related expenses
associated with the consolidation of the Company's corporate offices and a
combination of administrative functions, higher expenses for audit, legal and
other professional services, a charge for the settlement of the A. R. Baron
litigation, as well as a $170,000 write-off of accounts receivable associated
with NutraMax.
Product development expense increased to $3,760,000 for the year ended
December 31, 2000 from $1,266,000 in the five months period ended December 31,
1999, due to the increased costs associated with the clinical co-development of
Emitasol(R) acquired in the RiboGene merger. Product development costs for 2001
are expected to be $4,446,000.
Discovery research expense decreased to $1,461,000 for the year ended
December 31, 2000 from $1,589,000 in the five months period ended December 31,
1999. In January 2000, the Company terminated its research collaboration with
Dainippon. As a result, the Company discontinued all early stage drug discovery
programs. This decrease in expenses was partially offset by legal costs and
ongoing obligations associated with drug discovery programs including those
acquired in the RiboGene merger.
Depreciation and amortization expense increased to $2,559,000 for the year
ended December 31, 2000 from $574,000 in the five month period ended December
31, 1999, due to the additional tangible and intangible assets acquired in the
RiboGene merger as well as an additional charge of $303,000 to depreciation
expense in order to reflect a change in the estimated useful life of certain
leased laboratory and manufacturing equipment.
Net interest and other income for the year ended December 31, 2000
increased to $164,000 from $86,000 in the five month period ended December 31,
1999, principally due to the addition of debt and capital lease obligations for
leased laboratory equipment with the acquisition of RiboGene.
Net rental income increased to $261,000 for the year ended December 31,
2000 from $5,000 for the five month period ended December 31, 1999 primarily due
to the sublease of a portion of the Company's Hayward facility, commencing in
July 2000.
Year ended December 31, 2000 compared to the year ended July 31, 1999
For the year ended December 31, 2000, the Company incurred a net loss of
$13,762,000 (or $0.56 per share), compared to a net loss of $6,784,000 (or $.43
per share) for the year ended July 31, 1999.
Revenue for the year ended December 31, 2000 increased 40% to $3,594,000 as
compared to $2,569,000 for year ended July 31, 1999. This increase was primarily
due to the recognition of $1,250,000 of technology revenue from the sale of the
Company's proprietary antiviral drug research technology, HCV IRES and HCV
NS5A-PKR, to Rigel Pharmaceuticals, Inc.
Product sales decreased 15% to $2,134,000 for the year ended December 31,
2000 from $2,518,000 in year ended July 31, 1999. This decrease was primarily
due to a 63% decline in Ethamolin(R) sales versus the
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prior period. This decrease was partially offset by an increase in sales of our
rolled padded stock of Neoflo(TM). Ethamolin(R) sales declines were a result of
wholesale stocking during the 1999 period and competition from certain medical
devices in the Ethamolin(R) market. With the addition and training of the sales
force during the 3rd quarter of 2000, the promotional support behind
Ethamolin(R) and the backorder situation resolved, the Company believes the
outlook for Ethamolin(R) sales in 2001 is positive.
Costs of product sales increased 151% to $1,938,000 for the year ended
December 31, 2000 from $771,000 for year ended July 31, 1999. The increase in
cost resulted from the increase in the sales of Neoflo(TM) and therefore the
related cost of goods sold in addition to a $50,000 write-down to accurately
reflect the current value of inventory in stock.
Gross margins for the marketed products for the year ended December 31,
2000 were 59% for Ethamolin(R), 36% for Glofil(TM)-125, 35% for Inulin, and
(80)% for the rolled padded stock compared to the 82%, 46%, 55%, and 62%
respectively, for the year ended July 31, 1999.
Sales and marketing expense increased by 49% to $2,539,000 for the year
ended December 31, 2000 from $1,703,000 in the prior period ended July 31, 1999.
This increase is principally due to salary and recruiting costs associated with
the expansion of the sales force and expenses for sales and marketing materials.
General and administrative expense increased 143% to $5,495,000 for the
year ended December 31, 2000 from $2,261,000 in the year ended July 31, 1999.
This increase resulted from merger related expenses associated with the
consolidation of the Company's corporate offices and a combination of
administrative functions, higher expenses for audit, legal and other
professional services, a charge for the settlement of the A. R. Baron
litigation, as well as a write-off of $170,000 of accounts receivable associated
with NutraMax.
Product development expense increased 54% to $3,760,000 for the year ended
December 31, 2000 from $2,438,000 in year ended July 31, 1999, due to the
increased costs associated with the clinical co-development of Emitasol(R),
acquired in the RiboGene merger.
Discovery research expense decreased 10% to $1,461,000 for the year ended
December 31, 2000 from $1,614,000 in the prior period. Continued expenses in the
year ended December 31, 2000 included legal costs and ongoing obligations
associated with drug discovery programs acquired in the RiboGene merger. In
January 2000, the company terminated its research collaboration with Dainippon.
Depreciation and amortization expense increased 107% to $2,559,000 for the
year ended December 31, 2000 from $1,239,000 in the year ended July 31, 1999,
due to the additional tangible and intangible assets acquired in the RiboGene
merger as well as an additional charge of $303,000 to depreciation in order to
reflect a change in the estimated useful life of certain leased laboratory and
manufacturing equipment.
Net interest and other income for the year ended December 31, 2000
decreased 72% to $164,000 from $590,000 in the prior period, principally due to
the addition of debt and capital lease obligations for leased laboratory
equipment with the acquisition of RiboGene.
Net rental income increased to $261,000 for the year ended December 31,
2000 from $83,000 in year ended July 31, 1999 primarily due to the sublease of a
portion of the Company's Hayward facility, commencing in July 2000.
Year ended July 31, 1999 compared to year ended July 31, 1998
During the fiscal year ended July 31, 1999, the Company sustained a loss of
$6,784,000, or $0.43 per share, compared to a loss of $5,573,000 or $0.37 per
share, for the prior fiscal year. Net sales for fiscal 1999 of $2,518,000 from
Glofil(TM)-125, Inulin and Ethamolin(R), plus other income of $724,000,
resulting from interest, grant, and rental income, were offset by $10,026,000 in
costs of sales and expenses for sales and marketing, general and administrative,
product development, discovery research and depreciation and amortization.
During the prior fiscal year, the net sales of $3,446,000 from the sales of
Ethamolin(R), Glofil(TM)-125 and Inulin and other income of $1,150,000
(principally interest income) was offset by $9,910,000 in costs of sales and
expenses for sales and marketing, general and administrative, clinical testing
and regulatory, and pre-clinical
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research and development as well as depreciation and amortization and $259,000
in amortization of discounts on its mandatory convertible notes.
Net sales declined during the fiscal year ended July 31, 1999, principally
due to increasing competition in the market served by Ethamolin(R) and the
expected decline in Glofil(TM)-125 sales volume due to the termination in the
third quarter of fiscal 1998 of a customer's two clinical trials which required
Glofil(TM)-125 to be used as part of their protocols. In addition, during the
fourth quarter of fiscal 1999, the Company commenced shipments of the topical
triple antibiotic wound care product, incorporating the Dermaflo(TM) technology,
to its marketing partner, NutraMax Products, Inc., and thus, began introducing
the related costs to the cost of sales. Grant revenue declined 70% during fiscal
1999 to $51,000 from $170,000 in fiscal 1998, as there was only one grant in
process for much of fiscal 1999, versus two during the prior fiscal year. During
the last month of fiscal year ended July 31, 1999, the Company received a
two-year federal grant for its glial chloride channel blocker program.
Sales and marketing expense increased by 30% to $1,703,000 in fiscal 1999
from $1,310,000 in the prior fiscal year, principally due to the recruiting cost
of hiring additional personnel, additional costs associated with promotional
items and advertising, the cost of a clinical study of Glofil(TM)-125 to prove
the viability of a 45-minute test, and regulatory consulting expense related to
these studies.
General and administrative expenses decreased by 19% to $2,261,000 in
fiscal 1999, from $2,802,000 in the comparable 1998 period. The decrease
resulted from the fact that the 1998 period included legal and administrative
costs associated with the Dermaflo(TM) acquisition.
Discovery research expense increased by 27% to $1,614,000 in fiscal 1999
from $1,267,000 in the prior fiscal year, principally due to expenditures
associated with the development of the Dermaflo(TM) technology.
Interest and other income decreased by 27% to $590,000 in fiscal 1999 from
$809,000 in the prior fiscal year, principally because the Company had a larger
investment portfolio during the prior fiscal year.
Rental income net of related expenses decreased by 51% to $83,000 in fiscal
1999 from $171,000 in the prior fiscal year, principally due to the increases in
rent expense and amortization of tenant improvement expense in fiscal 1999.
The amortization of the discount and costs on the Company's mandatorily
convertible notes was completed in fiscal 1998, and therefore, the Company did
not have these expenses in fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company has principally funded its activities to date through various
issuances of equity securities, which, through April 12, 2001, have raised total
net proceeds of $37.3 million, and to a lesser extent through product sales.
At December 31, 2000, the Company had cash, cash equivalents and short-term
investments of $8,151,000 compared to $21,699,000 at December 31, 1999,
including a compensating balance of $5,000,000 in each period. At December 31,
2000, working capital was $1,201,000 compared to $16,943,000 at December 31,
1999. The decrease in working capital was principally due to the loss from
operations for the current and prior years and payments for accrued
restructuring costs resulting from the acquisition of RiboGene, Inc.
As a result of the merger with RiboGene, the Company assumed $5 million of
long-term debt financing with a bank. The note required monthly interest
payments, at prime plus 1% (10.5% at December 31, 2000), with the principal
payment due at the end of the three-year term (December 2001). The note was
collateralized by a perfected security interest in all unencumbered assets of
the Company and required that the Company maintain depository balances. The
Company was also required to comply with financial covenants based on certain
ratios. At June 30, 2000 the Company was not in compliance with at least one
such financial covenant. Hence, the Company reclassified the $5 million note
payable from long-term to short-term debt. In November 2000, the $5 million note
payable was converted into a $5 million cash secured facility, the financial
covenants were removed and the blanket lien on all assets were released. The
interest expense on the
32
34
$5 million note is fixed at a rate of 2% greater than the Certificate of Deposit
interest rate earned on the underlying $5 million cash investment which serves
as a compensating bank balance with its use restricted.
The Company leases four buildings with lease terms ranging from three to
fifteen years and annual rent payments for 2001 are estimated to be $1,332,000.
Additionally, the Company has equipment lease commitments with estimated 2001
payments of $96,000. The Company has subleased a substantial portion of the
unused building space and laboratory equipment under a sublease with a term of
six years, representing estimated sublease revenue of $452,000 for 2001.
Additionally, the Company has a commitment to fund Emitasol(R) co-development
costs up to $7 million, of which $4.1 million has been paid.
The Company expects that its cash needs will increase significantly in
future periods due to increased clinical testing activity, growth of sales,
marketing, administrative and clinical development and regulatory staff. Even
with the April 2001 investment by Sigma-Tau and the exercise of the warrant,
which has not and may not occur (see below), the Company's management believes
that the Company's working capital will not be sufficient to fund the operations
of the Company and will not be able to meet day-to-day operating expenses or
long-term commitments past the second quarter of 2001 without an additional
capital infusion. The Company is, at present, in negotiations with different
potential financial investors who have indicated an interest in investing in the
Company and have offered to contribute equity capital. Should the Company be
unable to secure the necessary financing, the Company is at increasing risk of
not being able to continue as a going concern and may not be able to remain
financially viable.
The Company's future funding requirements will depend on many factors,
including; any expansion or acceleration of the Company's development programs;
the results of preclinical studies and clinical trials conducted by the Company
or its collaborative partners or licensees, if any; the acquisition and
licensing of products, technologies or compounds, if any; the Company's ability
to manage growth; competing technological and market developments; costs
involved in filing, prosecuting, defending and enforcing patent and intellectual
property claims; the receipt of licensing or milestone fees from current or
future collaborative and license agreements, if established; the timing of
regulatory approvals and other factors.
The Company is funding a portion of its operating expenses through its cash
flow from product sales, but expects to seek additional funds through public or
private equity financing or from other sources. There can be no assurance that
additional funds can be obtained on desirable terms or at all. The Company may
seek to raise additional capital whenever conditions in the financial markets
are favorable, even if the Company does not have an immediate need for
additional cash at that time.
Sigma-Tau Investment
On March 29, 2001 the Company entered into a binding letter agreement with
Sigma-Tau Finanziaria S.p.A. ("Sigma-Tau") relating to the purchase by Sigma-Tau
of Company common stock and the purchase by Sigma-Tau of a warrant to acquire
additional Company common stock. Pursuant to the Letter Agreement in April 2001,
the Company issued and sold to Sigma-Tau an aggregate of 2,873,563 shares of
Company common stock. The purchase price was $0.522 per share, for an aggregate
purchase price of $1.5 million.
The Company also sold a warrant to Sigma-Tau to purchase an additional
2,873,563 shares of the Company's common stock. The purchase price of such
warrant was $100,000. The shares of common stock issuable upon the exercise of
the warrant will have an exercise price equal to $0.522 per share and will be
exercisable from the date of issuance until the close of business on September
29, 2001. The $100,000 to be paid by Sigma-Tau for the warrant will be
non-refundable, and in the event that Sigma-Tau elects not to exercise the
warrant in full on or before the close of business on September 29, 2001 (the
"Expiration Date"), the Company will have no obligation to return any such
portion of the $100,000 paid for the warrant. In the event that Sigma-Tau
exercises the warrant in full, on or before the Expiration Date, the $100,000
paid for the warrant will be credited toward the purchase of the aggregate of
2,873,563 shares of Company common stock under the warrant. Pursuant to the
rules of the American Stock Exchange, however, the warrant is exercisable for a
maximum of 2,161,752 shares unless approval is obtained from the Company's
shareholders.
33
35
The letter agreement also contemplates that the Company and Sigma-Tau may
engage in a near-term strategic or collaboration transaction. To further this
objective, the Company and Sigma-Tau have agreed to a so-called "Exclusivity
Period" for a period of twenty business days from the date of the Letter
Agreement, whereby in order to facilitate Sigma-Tau's review of the affairs of
the Company, the Company has agreed to refrain from engaging in certain
activities, including: entering into any sale or disposition of any significant
portion of its assets or stock with any other pharmaceutical, biotechnology or
health care company; merging or consolidating with any other pharmaceutical,
biotechnology or health care company; issuing or transferring any securities to
any other pharmaceutical, biotechnology or health care company except in the
ordinary course of business; entering into any transaction with any other
pharmaceutical, biotechnology or health care company except in the ordinary
course of business; and, encouraging, soliciting or negotiating any transaction
with any other pharmaceutical, biotechnology or health care company.
Acquisition of RiboGene, Inc. Development Program
Emitasol(R) is the primary RiboGene development program acquired in
November 1999. This program was assigned a value of $15,168,000 which was
charged to acquired in-process research and development. The Company's
management is primarily responsible for estimating the fair value of the
purchased in-process research and development. The program has been valued based
on a discounted probable future cash flow analysis using discount rates and
probability of technical success factors which management believes adequately
reflects the substantial risk of drug development. In the valuation model, it is
assumed that clinical trials are successfully completed, regulatory approval to
market the product is obtained and the Company is able to manufacture the
products in commercial quantities. Future cash flows, if any, will result
primarily from milestone and royalty payments from Shire and other licenses of
Emitasol(R). Each of these activities is subject to significant risks and
uncertainties.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") Issued
Statement of Financial Accounts Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires companies to recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value. In
June 1999, the FASB issued Financial Accounting Standards No. 137, "Accounting
for Derivative Instruments and Hedging Activities -- Deferral of the Effective
Date of FASB Statement No. 133" ("SFAS 137"), which amends SFAS 133 to be
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. The Company has determined that the adoption of SFAS 133, will not have a
material impact on its financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition", which
provides guidance on the recognition, presentation and disclosure in the
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. Management believes that the Company's
revenue recognition policy is in compliance with the provisions of SAB 101 and
the adoption of SAB 101, effective January 1, 2000, had no material affect on
its financial position or results of operations.
ITEM 7. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RATE RISK
The Company's exposure to market rate risk for changes in interest rates
relates primarily to the Company's investment portfolio. The Company does not
use derivative financial instruments in its investment portfolio. The Company
places its investment with high quality issuers and follows internally developed
guidelines to limit the amount of credit exposure to any one issuer.
Additionally, in an attempt to limit interest rate risk, the Company follows
guidelines to limit the average and longest single maturity dates. The Company
34
36
is adverse to principal loss and ensures the safety and preservation of its
invested funds by limiting default, market and reinvestment risk. The Company's
investments include money market accounts, commercial paper and corporate notes,
and all such investments held in the Company's portfolio as of December 31,
2000, mature in 2001. The table below presents the amounts and related interest
rates of the Company's investment portfolio as of December 31, 2000.
FAIR VALUE
2001 TOTAL 12/31/00
------ ------ ----------
(IN THOUSANDS, EXCEPT
INTEREST RATES)
ASSETS
Cash and cash equivalents (includes a compensating
balance of $5,000)..................................... $6,818 $6,818 $6,818
Average interest rate.................................... 6.00% -- --
Short-term investments................................... 499 499 499
Average interest rate.................................... 7.61% -- --
LIABILITIES
Notes payable -- Short term.............................. $5,382 $5,382 $5,382
Average interest rate.................................... 10.63% -- --
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
QUESTCOR PHARMACEUTICALS, INC.
CONTENTS
PAGE
----
Report of Ernst & Young LLP, Independent Auditors........... 38
Audited Financial Statements
Consolidated Balance Sheets............................... 39
Consolidated Statements of Operations..................... 40
Consolidated Statement of Preferred Stock and
Stockholders' Equity................................... 41
Consolidated Statements of Cash Flows..................... 42
Notes to Consolidated Financial Statements.................. 44
Financial Statement Schedules............................... 60
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required is hereby incorporated by reference from the
information contained in the Company's definitive Proxy Statement with respect
to the Company's annual Meeting of Shareholders, filed with the Commission
pursuant to Regulation 14A (the "Proxy Statement") under the headings "Nominees"
and "Executive Officers".
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is hereby incorporated by reference
from information contained in the Proxy Statement under the heading "Executive
Compensation".
35
37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is hereby incorporated by reference
from information contained in the Proxy Statement under the heading of "Security
Ownership of Certain Beneficial Owners and Management".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is hereby incorporated by reference
from information contained in the Proxy Statement under the heading "Certain
Transactions" and "Executive Compensation".
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) The following financial statements are included in Item 8.
Report of Ernst & Young LLP Balance Sheet as of December 31, 2000 and 1999
Statement of Operation for years ended December 31, 2000 and five months
ended December 31, 1999 and 1998 and the years ended July 31, 1999 and 1998
Statements of Changes in Preferred Stock and Stockholders' Equity for 2000,
1999 and 1998
Statements of Cash Flows for years ended December 31, 2000 and five months
ended December 31, 1999 and 1998 and the years ended July 31, 1999 and 1998
note to Financial Statement
(a)(2) The following financial statement schedule is included in Item 14(a)(2)
Valuation and Qualifying Accounts.
36
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
QUESTCOR PHARMACEUTICALS, INC.
By /s/ CHARLES J. CASAMENTO
------------------------------------
Charles J. Casamento
Chairman of the Board, President and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Charles J. Casamento and Hans P. Schmid, and each
of them, his attorney-in-fact, each with the power of substitution, for him in
any and all capacities, to sign any amendments to this report, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ CHARLES J. CASAMENTO Chairman of the Board, President and April 17, 2001
- ------------------------------------------------ Chief Executive Officer and
Charles J. Casamento Director (Principal Executive
Officer)
/s/ HANS P. SCHMID Vice President, Finance & April 17, 2001
- ------------------------------------------------ Administration and Chief Financial
Hans P. Schmid Officer (Principal Financial and
Accounting Officer)
/s/ ROBERT F. ALLNUTT Director April 17, 2001
- ------------------------------------------------
Robert F. Allnutt
/s/ FRANK SASINOWSKI Director April 17, 2001
- ------------------------------------------------
Frank Sasinowski
/s/ JON SAXE Director April 17, 2001
- ------------------------------------------------
Jon Saxe
/s/ JOHN SPITZNAGEL Director April 17, 2001
- ------------------------------------------------
John Spitznagel
/s/ ROGER G. STOLL, PH.D. Director April 17, 2001
- ------------------------------------------------
Roger G. Stoll
/s/ VIRGIL THOMPSON Director April 17, 2001
- ------------------------------------------------
Virgil Thompson
37
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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Questcor Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Questcor
Pharmaceuticals, Inc. as of December 31, 2000 and 1999, and the related
consolidated statements of operations, preferred stock and stockholders' equity,
and cash flows for the year ended December 31, 2000, the five months ended
December 31, 1999 and for each of the two years in the period ended July 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Questcor
Pharmaceuticals, Inc. as of December 31, 2000 and 1999, and the results of its
operations and its cash flows for the year ended December 31, 2000, the five
months ended December 31, 1999 and for each of the two years in the period ended
July 31, 1999, in conformity with accounting principles generally accepted in
the United States.
The accompanying financial statements have been prepared assuming that
Questcor Pharmaceuticals, Inc. will continue as a going concern. As more fully
described in Note 1, the Company has incurred recurring operating losses and has
insufficient working capital to fund operations through December 31, 2001. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
Palo Alto, California
February 16, 2001
(Except for Note 1, paragraphs 3 and 5, and Note 13, as to which the date is
April 12, 2001)
38
40
QUESTCOR PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND AMOUNTS)
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents (includes a compensating balance
of $5,000, see Note 8)................................. $ 6,818 $ 10,912
Short-term investments.................................... 1,333 10,787
Accounts receivable, net of allowance for doubtful
accounts of $56 and $30 at December 31, 2000 and 1999,
respectively........................................... 172 1,889
Inventories............................................... 56 176
Prepaid expenses and other current assets................. 499 412
-------- --------
Total current assets................................... 8,878 24,176
Property and equipment...................................... 1,427 2,852
Goodwill and other intangibles, net......................... 3,357 5,029
Deposits and other assets................................... 1,307 164
-------- --------
Total assets........................................... $ 14,969 $ 32,221
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 476 $ 2,444
Accrued compensation...................................... 392 1,682
Deferred revenue.......................................... -- 167
Accrued development costs................................. 541 1,579
Other accrued liabilities................................. 798 773
Short-term debt and current portion of long-term debt..... 5,382 348
Current portion of capital lease obligations.............. 88 240
-------- --------
Total current liabilities.............................. 7,677 7,233
Long-term debt.............................................. 489 5,893
Capital lease obligations................................... 59 185
Other non-current liabilities............................... 736 203
Commitments
Preferred stock, no par value, 7,500,000 shares authorized;
2,155,715 Series A shares issued and outstanding at
December 31, 2000, and 1999 (aggregate liquidation of
$10,000 at December 31, 2000 and 1999).................... 5,081 5,081
Stockholders' equity:
Common stock, no par value, 75,000,000 shares authorized;
25,303,091 and 4,470,068 shares issued and outstanding
at December 31, 2000, and 1999, respectively........... 66,152 65,423
Deferred compensation..................................... (71) (53)
Accumulated deficit....................................... (65,486) (51,724)
Accumulated other comprehensive gain (loss)............... 332 (20)
-------- --------
Total stockholders' equity........................ 927 13,626
-------- --------
Total liabilities and stockholders' equity........ $ 14,969 $ 32,221
======== ========
See accompanying notes.
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QUESTCOR PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FIVE MONTHS ENDED YEARS ENDED
YEAR ENDED DECEMBER 31, JULY 31,
DECEMBER 31, ----------------------- ------------------
2000 1999 1998 1999 1998
------------ -------- ----------- ------- -------
(UNAUDITED)
Revenue:
Net product sales.................. $ 2,134 $ 624 $ 897 $ 2,518 $ 3,446
Contract research revenue.......... 207 257 -- -- --
Technology revenue................. 1,250 -- -- -- --
Royalty and grant revenue.......... 3 75 11 51 170
-------- -------- ------- ------- -------
Total revenues....................... 3,594 956 908 2,569 3,616
Operating costs and expenses:
Cost of product sales.............. 1,938 500 271 771 771
Sales and marketing................ 2,539 946 733 1,703 1,310
General and administrative......... 5,495 1,684 837 2,261 2,802
Product development................ 3,760 1,266 1,053 2,438 2,521
Discovery research................. 1,461 1,589 581 1,614 1,267
Restructuring costs................ -- 1,530 -- -- --
Depreciation and amortization...... 2,559 574 507 1,239 1,239
Acquired in process research and
development..................... -- 15,168 -- -- --
-------- -------- ------- ------- -------
Total operating costs and expenses... 17,752 23,257 3,982 10,026 9,910
-------- -------- ------- ------- -------
Loss from operations................. (14,158) (22,301) (3,074) (7,457) (6,294)
Interest and other income, net....... 135 86 300 590 809
Rental income, net................... 261 5 35 83 171
Amortization of discount and costs on
mandatorily convertible notes...... -- -- -- -- (259)
-------- -------- ------- ------- -------
Net loss............................. $(13,762) $(22,210) $(2,739) $(6,784) $(5,573)
======== ======== ======= ======= =======
Net loss per common share:
Basic and diluted.................... $ (0.56) $ (1.22) $ (0.17) $ (0.43) $ (0.37)
======== ======== ======= ======= =======
Weighted average shares of common
stock outstanding.................. 24,722 18,240 15,712 15,712 15,187
======== ======== ======= ======= =======
See accompanying notes.
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QUESTCOR PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF PREFERRED STOCK AND STOCKHOLDER'S EQUITY
YEAR ENDED DECEMBER 31, 2000, FIVE MONTHS ENDED DECEMBER 31, 1999 AND
YEARS ENDED JULY 31, 1999, AND 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ACCUMULATED
PREFERRED STOCK COMMON STOCK OTHER
------------------ -------------------- DEFERRED ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT COMPENSATION DEFICIT GAIN/(LOSS)
--------- ------ ---------- ------- ------------ ----------- -------------
Balances at July 31, 1997.............. -- $ -- 13,650,405 $32,345 $(161) $(17,157) $ --
Conversion of mandatorily convertible
notes.............................. -- -- 1,205,446 4,025 -- -- --
Issuance of redeemable class B
Warrants............................. -- -- 856,026 4,707 -- -- --
Deferred compensation................ -- -- -- 251 (251) -- --
Amortization of deferred
Compensation....................... -- -- -- -- 325 -- --
Net loss............................. -- -- -- -- -- (5,573) --
--------- ------ ---------- ------- ----- -------- ----
Balances at July 31, 1998.............. -- -- 15,711,877 41,328 (87) (22,730) --
Deferred compensation................ -- -- -- 169 (169) -- --
Amortization of deferred
compensation....................... -- -- -- -- 187 -- --
Net loss............................. -- -- -- -- -- (6,784) --
--------- ------ ---------- ------- ----- -------- ----
Balances at July 31, 1999.............. -- -- 15,711,877 41,497 (69) (29,514) --
Issuance of preferred stock in
business acquisition............... 2,155,715 5,081 -- -- -- -- --
Issuance of common stock in business
acquisition........................ -- -- 8,735,061 18,562 -- -- --
Issuance of stock options in business
acquisition........................ -- -- -- 5,310 -- -- --
Issuance of common stock to board
members............................ -- -- 23,130 54 -- -- --
Amortization of deferred
compensation....................... -- -- -- -- 16 -- --
Comprehensive income (loss):
Net unrealized loss on Investments... -- -- -- -- -- -- (20)
Net loss............................. -- -- -- -- -- (22,210) --
Total comprehensive
income/(loss).................... -- -- -- -- -- -- --
--------- ------ ---------- ------- ----- -------- ----
Balances at December 31, 1999.......... 2,155,715 5,081 24,470,068 65,423 (53) (51,724) (20)
Stock compensation for options and
warrant granted to consultants....... -- -- -- 15 -- -- --
Deferred compensation................ -- -- -- -- (46) -- --
Amortization of deferred
compensation....................... -- -- -- -- 28 -- --
Issuance of common stock upon
exercise of stock options.......... -- -- 298,665 648 -- -- --
Issuance of common stock to board
members............................ -- -- 60,000 16 -- -- --
Issuance of shares pursuant to employee
stock purchase plan.................. -- -- 93,666 50 -- -- --
Other issuance of common stock......... -- -- 380,692 -- -- -- --
Comprehensive income (loss)
Net unrealized gain on investments... -- -- -- -- -- -- 352
Net loss............................. -- -- -- -- -- (13,762) --
Total comprehensive loss........... -- -- -- -- -- -- --
--------- ------ ---------- ------- ----- -------- ----
Balances at December 31, 2000.......... 2,155,715 $5,081 25,303,091 $66,152 $ (71) $(65,486) $332
========= ====== ========== ======= ===== ======== ====
TOTAL
STOCKHOLDERS'
EQUITY
-------------
Balances at July 31, 1997.............. $ 15,027
Conversion of mandatorily convertible
notes.............................. 4,025
Issuance of redeemable class B
Warrants............................. 4,707
Deferred compensation................ --
Amortization of deferred
Compensation....................... 325
Net loss............................. (5,573)
--------
Balances at July 31, 1998.............. 18,511
Deferred compensation................ --
Amortization of deferred
compensation....................... 187
Net loss............................. (6,784)
--------
Balances at July 31, 1999.............. 11,914
Issuance of preferred stock in
business acquisition............... --
Issuance of common stock in business
acquisition........................ 18,562
Issuance of stock options in business
acquisition........................ 5,310
Issuance of common stock to board
members............................ 54
Amortization of deferred
compensation....................... 16
Comprehensive income (loss):
Net unrealized loss on Investments... (20)
Net loss............................. (22,210)
--------
Total comprehensive
income/(loss).................... (22,230)
--------
Balances at December 31, 1999.......... 13,626
Stock compensation for options and
warrant granted to consultants....... 15
Deferred compensation................ (46)
Amortization of deferred
compensation....................... 28
Issuance of common stock upon
exercise of stock options.......... 648
Issuance of common stock to board
members............................ 16
Issuance of shares pursuant to employee
stock purchase plan.................. 50
Other issuance of common stock......... --
Comprehensive income (loss)
Net unrealized gain on investments... 352
Net loss............................. (13,762)
--------
Total comprehensive loss........... (13,410)
--------
Balances at December 31, 2000.......... $ 927
========
See accompanying notes.
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QUESTCOR PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
FIVE MONTHS ENDED YEARS ENDED
YEAR ENDED DECEMBER 31, JULY 31,
DECEMBER 31, ---------------------- -------------------
2000 1999 1998 1999 1998
------------ -------- ----------- -------- --------
(UNAUDITED)
OPERATING ACTIVITIES
Net loss................................. $(13,762) $(22,210) $(2,739) $ (6,784) $ (5,573)
Adjustments to reconcile net loss to net
cash used in operating activities:
Amortization of deferred
compensation........................ 28 16 123 187 325
Depreciation and amortization.......... 2,559 661 520 1,273 1,239
Charge for in process research and
development......................... -- 15,168 -- -- --
Issuance of common stock to board
members............................. 31 54 -- -- --
Amortization of discount and costs on
mandatorily convertible notes....... -- -- -- -- 259
Deferred rent expense.................. -- -- (6) 30 (3)
Loss (gain) on the sale of equipment... 21 30 (6) (6) --
Other.................................. (46) -- -- 41
Changes in operating assets and
liabilities, net of effects from
acquisitions:
Accounts receivable.................... 1,717 303 306 125 (161)
Inventories............................ 120 29 (70) (122) 10
Prepaid expenses and other current
assets.............................. (87) (183) 15 102 (140)
Accounts payable....................... (1,968) (134) (246) (53) 186
Accrued compensation................... (1,290) 1,217 -- -- --
Deferred revenue....................... (167) (239) -- -- --
Accrued development costs.............. (1,038) (36) -- -- --
Other accrued liabilities.............. 25 380 23 (87)
Other non-current liabilities.......... 532 124
-------- -------- ------- -------- --------
Net cash flows used in operating
activities............................. (13,325) (4,944) (2,080) (5,124) (3,904)
INVESTING ACTIVITIES
Purchase of short-term investments....... -- (909) (2,308) (1,148) (12,481)
Proceeds from the maturity of short-term
investments............................ -- 2,292 5,140 6,821 11,518
Proceeds from the sale of short-term
investments............................ 9,806 2,667 -- -- --
Net cash from RiboGene acquisition....... -- 9,258 -- -- --
Investment in purchased technology....... -- -- -- -- --
Installment payment for purchased
technology............................. -- -- -- -- (1,272)
Purchase of property, equipment and
leasehold Improvements................. (85) (100) (139) (651) (587)
Proceeds from the sale of equipment...... 10 -- 11 11 --
Increase in licenses and patents......... -- -- (10) (14) (97)
Increase (decrease) in deposits and other
assets................................. (550) 269 21 (198) 23
-------- -------- ------- -------- --------
Net cash flows provided by (used in)
investing activities................... 9,181 13,477 2,715 4,820 (2,896)
42
44
QUESTCOR PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
FIVE MONTHS ENDED YEARS ENDED
YEAR ENDED DECEMBER 31, JULY 31,
DECEMBER 31, ---------------------- -------------------
2000 1999 1998 1999 1998
------------ -------- ----------- -------- --------
(UNAUDITED)
FINANCING ACTIVITIES
Issuance of common stock, net............ 698 -- -- -- 4,708
Cash paid for repurchase of mandatorily
convertible notes...................... -- -- -- -- (2)
Issuance of long-term debt............... -- -- 4 209
Issuance of capital leases............... -- -- 100 --
Repayment of long-term debt.............. (370) (71) (52) (95) (94)
Repayments of capital
leases/obligations..................... (278) (59) (39) (108) (106)
-------- -------- ------- -------- --------
Net cash flows (used in) provided by
financing activities................... 50 (130) 13 (203) 4,715
-------- -------- ------- -------- --------
Increase (decrease) in cash and cash
equivalents............................ (4,094) 8,403 648 (507) (2,085)
Cash and cash equivalents at beginning of
period................................. 10,912 2,509 3,016 3,016 5,101
-------- -------- ------- -------- --------
Cash and cash equivalents at end of
period................................. $ 6,818 $ 10,912 $ 3,664 $ 2,509 $ 3,016
======== ======== ======= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest................... $ 667 $ 11 $ 23 $ 47 $ 132
======== ======== ======= ======== ========
NONCASH INVESTING AND FINANCING
ACTIVITIES:
Mandatorily convertible notes............ $ -- $ -- $ -- $ -- $ 4,026
======== ======== ======= ======== ========
Equipment subleased under direct finance
lease.................................. $ 591 $ -- $ -- $ 104 $ 101
======== ======== ======= ======== ========
Purchased asset obligation............... $ -- $ -- $ -- $ -- $ --
======== ======== ======= ======== ========
CASH FLOW FOR ACQUISITION OF RIBOGENE
Tangible assets acquired (net of $10,324
cash received)......................... $ 2,417
Acquired in process research and
development............................ 15,168
Goodwill and other intangibles........... 2,110
Common stock issued...................... (18,562)
Preferred stock issued................... (5,081)
Stock issued............................. (5,310)
--------
Cash received for acquisition (net of
$1,066 acquisition costs).............. $ (9,258)
========
See accompanying notes.
43
45
QUESTCOR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Activity
Questcor Pharmaceuticals, Inc., formerly Cypros Pharmaceutical Corporation,
(the "Company") was incorporated in California in 1990. The Company develops and
markets acute-care, hospital-based products. The Company sells three products,
Glofil(TM)-125 and Inulin, both injectable drugs that assess kidney function by
measuring glomerular filtration rate, and Ethamolin(R), an injectable drug that
treats bleeding esophageal varices. The Company is manufacturing its proprietary
topical triple antibiotic wound care product for its over-the-counter marketing
partner, NutraMax Products, Inc. ("NutraMax"), utilizing Questcor's patented
Dermaflo(TM) drug delivery technology.
In conjunction with the acquisition of RiboGene, Inc. ("RiboGene"), the
Company changed its fiscal year end from July 31 to December 31. RiboGene had
operated using a fiscal year ending December 31. The consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
Matters Affecting Ongoing Operations
Under an agreement entered into in November 1998, NutraMax is converting
the Neoflo(TM) product into finished adhesive strips and patches for
distribution to the mass merchandise market. In May 2000, NutraMax Products,
Inc. filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code. In
February 2001, NutraMax's Plan of Reorganization was approved by the bankruptcy
court. The NutraMax bankruptcy filing has had a negative impact on the Company's
sales and cash flow during calendar year 2000 and first quarter of 2001. In
February 2001, NutraMax's plan of reorganization was approved by the U.S.
Bankruptcy Court. Since NutraMax emerged from Chapter 11, NutraMax has further
reduced its forecast for adhesive strips to be supplied. On April 2, 2001,
NutraMax filed a motion with the U.S. Bankruptcy Court to reject our supply
agreement effective that date.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has experienced recurring
operating losses since inception and expects such losses to continue as it
furthers its product development programs and builds its sales and marketing
capabilities. From inception to December 31, 2000, the Company incurred
cumulative net losses of approximately $65.5 million. The Company has cash, cash
equivalents and short-term investments at December 31, 2000 of $8.1 million
(including a compensating balance of $5 million, see Note 8), which is not
sufficient to enable the Company to pay existing liabilities and commitments,
and fund its operations through December 31, 2001. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
On March 29, 2001, the Company entered into a letter agreement with
Sigma-Tau Finanziaria S.p.A. ("Sigma-Tau"), a leading research-based Italian
pharmaceutical company, that provides for an investment in the Company's common
stock of $1.5 million, plus $100,000 for a warrant to invest another $1.5
million within the next six months. The initial investment of $1.6 million was
consummated on April 12, 2001.
The Company will need to obtain additional funds from outside sources to
fund operating expenses and pursue regulatory approvals for its products under
development. The Company is, at present, in negotiations with potential
financial investors who have indicated an interest in investing in the Company.
Should the Company be unable to secure additional financing by the end of the
second quarter of 2001, the Company is at increasing risk of not being able to
continue as a going concern and may not be able to remain financially viable.
While the Company is aggressively pursuing these negotiations, as discussed
above, there can be no assurance that the Company will be successful in its
efforts to obtain additional funding sources. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
44
46
QUESTCOR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
disclosures made in the accompanying notes to the financial statements. Actual
results could differ from those estimates.
Cash Equivalents and Investments
The Company considers highly liquid investments with maturities from the
date of purchase of three months or less to be cash equivalents.
The Company determines the appropriate classification of investment
securities at the time of purchase and reaffirms such designation as of each
balance sheet date. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, if any, reported in a separate component
of stockholders' equity. The cost of securities sold is based on the specific
identification method. Realized gains and losses, if any, are included in the
statement of operations, in interest and other income, net.
Concentration of Credit Risk
Financial instruments which subject the Company to potential credit risk
consist of cash, cash equivalents, short-term investments and accounts
receivable. The company invests its cash in high credit quality government and
corporate debt instruments and believes the financial risks associated with
these instruments are minimal. The Company extends credit to its customers,
primarily hospitals and large pharmaceutical companies conducting clinical
research, in connection with its product sales. The Company has not experienced
significant credit losses on its customer accounts, with the exception of the
product sales to NutraMax on which the Company has recorded a bad debt allowance
of $170,000. NutraMax individually accounted for 29% of product sales for the
year ended December 31, 2000. Three customers individually accounted for 24%,
17% and 14% of sales for the five months ended December 31, 1999. Two customers
individually accounted for 23% and 21% of sales, and 23% and 12% of sales for
the years ended July 31, 1999 and 1998, respectively. The percentages above
represent different customers for each year.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market value.
Depreciation and Amortization
Property and equipment are stated at cost and depreciated over the
estimated useful lives of the assets (generally five years) using the
straight-line method. Leasehold improvements are amortized over the lesser of
the estimated useful lives (five years) or the remaining term of the lease.
Goodwill and Other Intangible Assets
Goodwill was generated from the merger with RiboGene and is being amortized
on a straight-line basis over three years. Other intangible assets consist of
the assembled workforce, purchased technology and license and patent costs.
Purchased technology associated with the acquisitions of Glofil(TM)-125, Inulin
and Ethamolin(R) is stated at cost and amortized over the estimated sales life
of the product (seven years). The assembled workforce and purchased technology
acquired from the merger with RiboGene are amortized on a straight-line basis
over the period estimated to be benefited (three years). License and patent
costs are amortized over the estimated economic lives (generally six years)
commencing at the time the license rights are granted or the patents are issued.
See Note 7.
45
47
QUESTCOR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accounting Standard on Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, the Company regularly evaluates its long-lived assets
for indicators of possible impairment. To date, no impairment has been recorded.
Revenue Recognition
Revenues from product sales of Ethamolin(R) and whole vials of
Glofil(TM)-125 and Inulin are recognized upon shipment, net of allowances.
Revenues from Glofil(TM)-125 unit dose sales are recognized upon receipt by the
Company of monthly sales reports from its third-party distributor. The Company
is not obligated to accept returns of products sold that have reached their
expiration date. Revenues from NutraMax products are recorded upon customer
acceptance.
Revenue earned under collaborative research agreements is recognized as the
related services are performed and research expenses are incurred. Amounts
received in advance of services to be performed are recorded as deferred revenue
until the related expenses are incurred.
The Company has received government grants which support the Company's
research effort in specific research projects. These grants generally provide
for reimbursement of approved costs incurred as defined in the various awards.
Net Loss Per Share
Under SFAS No. 128, Earnings Per Share, basic and diluted loss per share is
based on net loss for the relevant period, divided by the weighted average
number of common shares outstanding during the period. Diluted earnings per
share gives effect to all potential dilutive common shares outstanding during
the period such as options, warrants, convertible preferred stock, and
contingently issuable shares. Diluted net loss per share has not been presented
separately as, due to the Company's net loss position, it is anti-dilutive. Had
the Company been in a net income position at December 31, 2000, shares used in
calculating diluted earnings per share would have included the dilutive effect
of an additional 5,580,068 stock options, 2,155,715 convertible preferred
shares, placement unit options for 986,898 shares and 989,664 warrants. For the
five months ended December 31, 1999, an aggregate of 9,308,734 stock options,
preferred shares, placement unit options and warrants would have been included
in the diluted net loss per share calculation. For the years ended July 31, 1999
and 1998, an aggregate of 2,268,686, and 1,892,489 stock options and warrants
would have been included in the diluted net loss per share calculation.
Stock Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25") and related
interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under SFAS No. 123, Accounting
for Stock-Based Compensation requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, when the
exercise price of the Company's employee stock options equals or exceeds the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
For equity awards to non-employees, including lenders and lessors and
consultants, the Company applies the Black-Scholes method to determine the fair
value of such instruments. The options and warrants granted to non employees are
re-measured as they vest and the resulting value is recognized as expense over
the period of services received or the term of the related financing.
46
48
QUESTCOR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income" established standards for
the reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. The Company provides the required disclosure in the Statements of
Changes in Stockholders' Equity.
Segment Information
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" redefines segments and requires companies to report financial and
descriptive information about their operating segments. The Company has
determined that it operates in one business segment and therefore of SFAS 131
does not affect the Company's financial statements.
Product sales revenue consists of the following (in thousands):
FIVE MONTHS
YEAR ENDED ENDED YEARS ENDED JULY 31
DECEMBER 31, DECEMBER 31, -------------------
2000 1999 1999 1998
------------ ------------ -------- -------
Ethamolin............................... $ 618 $319 $1,522 $2,162
Inulin.................................. 207 19 208 237
Glofil.................................. 691 251 621 1,047
Neoflo.................................. 618 35 167 --
------ ---- ------ ------
$2,134 $624 $2,518 $3,446
====== ==== ====== ======
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board Issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
companies to recognize all derivatives as either assets or liabilities on the
balance sheet and measure those instruments at fair value. In June 1999, the
FASB issued Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133 " ("SFAS 137"), which amends SFAS 133 to be effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000. The Company
has determined that the adoption of SFAS 133 will not have a material impact on
its financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition", which
provides guidance on the recognition, presentation and disclosure in the
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. Management believes that the Company's
revenue recognition policy is in compliance with the provisions of SAB 101 and
the adoption of SAB 101, effective January 1, 2000 had no material affect on its
financial position or results of operations.
Reclassifications
Certain amounts in the prior years' financial statements have been
reclassified to conform with the presentation for the year ended December 31,
2000 and the five months ended December 31, 1999.
47
49
QUESTCOR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITION OF RIBOGENE, INC.
On November 17, 1999 the Company completed its merger with RiboGene. The
Company issued 8,735,061 shares of its common stock and 2,155,715 shares of its
preferred stock, valued at $18.6 million and $5.1 million, respectively, for all
the outstanding common and preferred stock of RiboGene. In addition, the Company
assumed RiboGene's outstanding stock options and warrants, valued at $5.3
million, and incurred transaction and other costs of approximately $1.0 million.
The transaction was accounted for under the purchase method of accounting.
Accordingly, the results of operations of RiboGene are included in the
consolidated statement of operations from the acquisition date.
The purchase price was allocated based upon the estimated fair value of the
assets acquired as follows (in thousands):
In process research and development......................... $15,168
Net tangible assets acquired................................ 12,742
Goodwill.................................................... 1,023
Developed technology........................................ 470
Assembled workforce......................................... 616
-------
$30,019
=======
The Company calculated amounts allocated to in-process research and
development using established valuation techniques in the pharmaceutical
industry, and expensed such amounts in the quarter the acquisition was
consummated because technological feasibility of the in-process technologies
acquired had not been achieved and no alternative future uses had been
established. The Company computed its valuation of purchased in-process research
and development using a discounted cash flow analysis on the anticipated income
stream to be generated by the purchased technologies. In process research and
development represents the estimated value of Emitasol(R) which was being tested
in a Phase II clinical trial.
In addition to in-process research and development, the excess purchase
price over the estimated value of the net tangible assets acquired was allocated
to developed technology, assembled work force and goodwill. The value assigned
to developed technology was based upon future discounted cash flows related to
the projected income streams from sales of Emitasol(R) in a particular country
where the drug has received regulatory approval. The value of the assembled
workforces was based upon the cost to replace those work forces. Amounts
allocated to goodwill and other intangibles are amortized on a straight-line
basis over a three-year period.
The following summary unaudited proforma information shows the proforma
combined results of Questcor and RiboGene for the five months ended December 31,
1999 and for the years ended July 31, 1999 and 1998, as if the RiboGene
acquisition had occurred on August 1, 1997 at the purchase price established in
December 1999. Accordingly, the results are not necessarily indicative of those
which would have occurred had the acquisition actually been made on August 1,
1997 or of future operations of the combined companies. The following net loss
and loss per share amounts have been adjusted to exclude the write-off of
acquired in process research and development of $15.2 million and include the
goodwill and other intangible amortization
48
50
QUESTCOR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of $293,000 for the five months ended December 31, 1999 and $703,000 for each of
the years ended July 31, 1999 and July 31, 1998, respectively.
FIVE MONTHS ENDED YEAR ENDED JULY 31,
DECEMBER 31 --------------------
1999 1999 1998
----------------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Net revenue.................................. $ 1,698 $ 4,948 $ 6,797
Net loss..................................... (12,746) (18,366) (18,979)
Basic and diluted net loss per share......... (0.52) (0.75) (0.79)
As a result of the RiboGene acquisition, the Company incurred restructuring
costs of $1.5 million that consisted primarily of employee severance costs, of
which $594,000 was accrued at December 31, 1999 and paid in the first quarter of
2000. Employee severance costs relate to the termination of approximately 20
former Cypros Pharmaceutical's employees in the general and administrative,
research and development, clinical and regulatory, and sales and marketing
departments following the merger with RiboGene.
During 2000, the Company issued common stock to certain former stockholders
to replace their shares of Questcor common stock which should have been issued
in the RiboGene acquisition but which apparently had been lost. The Company
decided to not establish a bond required by the transfer agent to cancel the
original shares. Accordingly, the 380,692 shares are considered to be
outstanding as of December 31, 2000.
3. DEVELOPMENT AND COLLABORATION AGREEMENTS
In January 1998, RiboGene entered into a collaboration with Dainippon for
two of its targets in the antibacterial program. As part of the collaboration,
Dainippon agreed to provide research support payments over three years, and fund
additional research and development at Dainippon. Following the merger with
RiboGene, the Company recognized approximately $240,000 of research revenue
related to this agreement. Collaborative research payments from Dainippon are
non-refundable.
In January 2000, the Company modified its existing agreement with
Dainippon. In exchange for a $2.0 million cash payment and potential future
milestone and royalty payments, the Company has granted an exclusive, worldwide
license to Dainippon to use the Company's ppGpp Degradase and Peptide
Deformylase technology for the research, development and commercialization of
pharmaceutical products. The Company has retained the right to co-promote, in
Europe and the United States, certain products resulting from the arrangement.
The Company will be entitled to receive milestone payments upon the achievement
of clinical and regulatory milestones in the amount of $5.0 million in Japan and
$5.0 million in one other major market. Additionally, the Company will receive a
royalty on net sales that will range from 5% to 10%, depending on sales volume
and territory. Both companies have agreed to terminate the antibacterial
research collaboration that was established in January 1998 between the two
companies. The original agreement anticipated a third year of research
collaboration between the two firms. Hence, all drug discovery efforts at the
Company have ceased and have been transferred to Dainippon in Osaka, Japan.
On September 27, 2000 Questcor entered into an agreement with Rigel
Pharmaceuticals, Inc. to sell exclusive rights to certain proprietary antiviral
drug research technology. In exchange for a cash payment of $750,000, 83,333
shares of Rigel's preferred stock valued at $500,000 (or $6 per share) and
potential future milestone and royalty payments, Questcor has assigned to Rigel
certain antiviral technology, including its Hepatitis C drug discovery
technology for the research, development and commercialization of pharmaceutical
products. As part of this agreement the Company assigned to Rigel the exclusive
worldwide license to certain patent rights and technology relating to the
interaction of the hepatitis C virus NS5A protein and PKR which the Company
received from the University of Washington pursuant to an agreement entered into
with the University of Washington in 1997. As a result, the Company has no
further interest in any patent or technology rights under any agreement with the
University of Washington.
49
51
QUESTCOR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a result of the merger with RiboGene, the Company assumed an option and
license agreement entered into with Roberts Pharmaceutical Corporation, a
subsidiary of Shire Pharmaceuticals Ltd, ("Shire") in July 1998 for the
development of Emitasol(R), an intranasally administered drug being developed
for the treatment of diabetic gastroparesis and for the prevention of delayed
onset emesis.
Under the terms of the option and license agreement, Shire will conduct
clinical trials using Emitasol(R) and, if those are successful, submit a New
Drug Application ("NDA") for Emitasol(R). If FDA regulatory approval is
obtained, Shire will have 60 days to exercise an exclusive option for a license
to market Emitasol(R) in North America. Shire has agreed to make a payment to
the Company of up to $10.0 million upon the exercise of the option and to pay a
royalty on product sales. The Company will provide up to $7.0 million in funding
for the development of Emitasol(R) through completion of Phase III trials and
the submission of an NDA, with the balance, if any, provided by Shire.
Accumulated payments made to Shire amounted to $4.1 million through December 31,
2000. Shire also holds all 2,155,715 outstanding shares of the Company's Series
A preferred stock which it originally acquired from RiboGene for a payment of
$10 million. In view of the slower than expected progress of Emitasol(R) to the
pivotal Phase III clinical trial, the Company and Shire are currently in
discussion about the extent of a future collaboration and are exploring the
possibility that the Company would take back the full development and all of the
associated rights of the compound.
The Company has licenses to various patents for Cordox(TM) and
Ceresine(TM), two clinical development programs, for the remaining term of the
patents. The license agreements require payments of cash, warrants or the
issuance of stock options to the licensors upon accomplishment of various
milestones and the payment of royalties to the licensors upon the commercial
sale of products incorporating the licensed compound. The only remaining
development milestone under these agreements is the requirement that the Company
pay the licensor of Cordox(TM) $250,000 upon the filing of a New Drug
Application with the Food and Drug Administration for the approval to market
that compound. In the event milestone or royalty payments to the licensor of
Cordox(TM) are not made by the Company within specified time periods, that
licensor may elect to terminate the license agreement and all rights thereunder.
Such a termination could have a significant adverse impact upon the Company.
4. INVESTMENTS
Following is a summary of investments, at fair value, based on quoted
market prices for these investments (in thousands):
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Money market funds................................. $ 130 $ 4,364
Certificates of deposit (compensating balance, see
Note 8).......................................... 5,000 5,226
Corporate debt securities.......................... 499 10,787
Corporate equity investments....................... 834 --
------- -------
6,463 20,377
Less amounts classified as cash equivalents........ (5,130) (9,590)
------- -------
Short-term investments............................. $ 1,333 $10,787
======= =======
At December 31, 2000, the equity investment had an amortized cost of
$500,000 and an unrealized gain of $334,000. At December 31, 2000 and 1999, the
differences between the fair value and the amortized cost of all other
investments were insignificant. The Company has not experienced any significant
realized gains or losses on its investments.
Of the above-referenced December 31, 2000 investments, $499,000 will mature
on August 6, 2001.
50
52
QUESTCOR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INVENTORIES
Inventories consist of the following (in thousands):
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Raw materials...................................... $41 $ 91
Finished goods..................................... 15 85
--- ----
$56 $176
=== ====
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Laboratory equipment............................... $ 1,014 $ 1,708
Office equipment, furniture and fixtures........... 887 1,440
Leasehold improvements............................. 806 882
------- -------
2,707 4,030
Less accumulated depreciation and amortization..... (1,280) (1,178)
------- -------
$ 1,427 $ 2,852
======= =======
Depreciation and amortization expense totaled $886,000 for year ended
December 31, 2000, $156,000 for the five months ended December 31, 1999 and
$325,000 and $300,000 for the years ended July 31, 1999 and 1998, respectively.
7. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles consist of the following (in thousands):
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Goodwill........................................... $ 1,023 $ 1,023
Purchased technology............................... 6,752 6,751
Assembled workforce................................ 616 616
Licenses and patents............................... 351 352
------- -------
8,742 8,742
Less accumulated amortization...................... (5,385) (3,713)
------- -------
$ 3,357 $ 5,029
======= =======
51
53
QUESTCOR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Note payable to a bank due December 2001,
collateralized by a cash secured facility,
bearing interest at CD Rate plus 2%.............. $ 5,000 $5,000
Notes payable for equipment financing due August
2002, November 2002, February 2003, and April
2003 collateralized by the underlying equipment,
bearing interest at 12.24%....................... 871 1,037
Other.............................................. -- 204
------- ------
5,871 6,241
Less current portion............................... (5,382) (348)
------- ------
Total.................................... $ 489 $5,893
======= ======
The cost of equipment specifically pledged under these agreements totals
$1.7 million at December 31, 2000 and 1999.
In December 1998, RiboGene borrowed $5.0 million pursuant to a long-term
note payable to a bank. The note requires monthly interest only payments at
prime plus 1.0%. The rate at December 31, 2000 was 10.5%. The principal is due
on December 24, 2001. The loan was collateralized by a perfected security
interest in all the unencumbered assets of the Company and required that the
Company maintain a minimum of $5.0 million of depository accounts with the bank.
The Company was also required to comply with financial covenants based on
certain ratios. In June 2000, the Company was not in compliance with at least
one such financial covenant. Hence, the Company reclassified the $5.0 million
note payable from long-term to short-term debt. In November 2000, the $5.0
million long-term note payable was converted into $5.0 million cash secured
facility. The financial covenants were removed and the blanket lien on all
assets was released. The minimum $5.0 million compensatory balance, which is
invested in certificates of deposit, is included in cash and cash equivalents.
The amounts due for notes payable for equipment financing in 2001, 2002,
and 2003 are $268,000, $468,000 and $135,000, respectively.
The fair value of notes payable is estimated based on current interest
rates available to the Company for debt instruments of similar terms, degrees of
risk and remaining maturities. The carrying value of these obligations
approximate their respective fair values as of December 31, 2000 and 1999.
52
54
QUESTCOR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS
Leases
The Company leases its office and research facilities under operating lease
agreements and certain equipment under capital lease agreements, the terms of
which range from 3 years to 15 years. Minimum future obligations under both
operating and capital leases as of December 31, 2000 are as follows (in
thousands):
OPERATING CAPITAL
LEASES LEASES
--------- -------
2001...................................................... $ 1,332 $ 96
2002...................................................... 1,451 60
2003...................................................... 1,500 2
2004...................................................... 1,552 --
2005...................................................... 1,470 --
Thereafter................................................ 8,773 --
------- ----
$16,078 158
======= ====
Less amounts representing interest........................ (11)
====
Present value of minimum lease payments................... 147
Current portion of capital lease obligations.............. (88)
----
Long-term capital lease obligations....................... $ 59
====
The net book value of the equipment acquired under capital leases totaled
$319,000 (net of accumulated amortization of $191,000) at December 31, 2000,
$193,000 at December 31, 1999 (net of accumulated amortization of $445,000).
In July 2000, the Company entered into an agreement to sublease 15,000
square feet of laboratory and office space including sub-leasing its laboratory
equipment for its Hayward, California facility. Due to the termination of the
Company's drug discovery programs, the space and equipment were no longer
needed.
On October 26, 2000, the Company entered into an agreement to lease a new
facility in Union City, California. The initial lease term is for 120 months,
with an option for an additional five years. As a condition of this agreement,
the Company provided an irrevocable Letter of Credit in the amount of $659,200
for a period of 24 months, with the face value of the Letter of Credit, subject
to certain conditions, declining thereafter. The Company entered into this new
lease agreement in order to take advantage of lower rent costs as laboratory
space is no longer necessary. The current sub-lessee of the Hayward facility
will sublease and fully occupy the 30,000 square feet facility upon the
Company's relocation scheduled for April 2001.
Rent expense totaled $328,000 for year ended December 31, 2000, $313,000
for the five months ended December 31, 1999 and $509,000 and $445,000 for the
years ended, July 31, 1999 and July 31, 1998, respectively. Rent expense
comprises the cost associated with four buildings leased by the Company
including its current headquarters located in Hayward, California, its former
headquarters in Carlsbad, California, and a production facility in Lee's Summit,
Missouri. In April 1996, the Company subleased its original headquarters for the
remainder of the original lease term plus an additional 36-month option. Net
sublease income, is not included in the table above, but totaled $261,000 for
year ended December 31, 2000, $5,000 for the five months ended December 31, 1999
and $83,000, $171,000, for the years ended July 31, 1999 and July 31, 1998,
respectively. In the above table, minimum lease payments have not been reduced
by minimum sublease income of approximately $452,000, $474,000 and $499,000 in
the years ended December 31, 2001, 2002, and 2003, respectively.
53
55
QUESTCOR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Preferred Stock
Pursuant to its Articles of Incorporation, the Company is authorized to
issue up to 7,500,000 shares of Preferred Stock in one or more series and has
issued 2,155,715 shares of its Series A Preferred Stock, as of December 31,
2000. The holders of outstanding shares of Series A Preferred Stock are entitled
to receive dividends concurrently with the Common Stock, if any, as may be
declared from time to time by the Board of Directors out of assets legally
available thereof. The holders of Series A Preferred Stock are entitled to the
number of votes equal to the number of shares of Common Stock into which each
share of Series A Preferred Stock could be converted on the record date. Each
share of Series A Preferred Stock is convertible, at the option of the holder of
such share, into one share of Common Stock, subject to adjustments for stock
splits, stock dividends or combinations of outstanding shares of Common Stock.
The Articles of Incorporation authorizes the issuance of Preferred Stock in
classes, and the Board of Directors may designate and determine the voting
rights, redemption rights, conversion rights and other rights relating to such
class of Preferred Stock, and to issue such stock in either public or private
transactions.
The Series A Preferred Stock has a liquidation preference equal to $4.64
per share plus all declared and unpaid dividends which is payable upon the
occurrence of a liquidation, consolidation, merger or the sale of substantially
all of the Company's stock or assets. The Company excluded the Series A
Preferred Stock from total stockholders' equity due to the nature of the
liquidation preference of the preferred stock.
Common Stock
The holders of outstanding shares of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared from time to time by the
Board of Directors out of assets legally available therefore, subject to the
payment of preferential dividends with respect to any Preferred Stock that may
be outstanding. In the event of a liquidation, dissolution and winding-up of the
Company, the holders of outstanding Common Stock are entitled to share ratably
in all assets available for distribution to the Common Stock shareholders after
payment of all liabilities of the Company, subject to rights of the Preferred
Stock. The holders of the Common Stock are entitled to one vote per share.
PLACEMENT AGENT UNIT OPTIONS
As part of the acquisition of RiboGene, the Company assumed placement agent
options from a 1997 offering of preferred stock by RiboGene. At December 31,
2000, options to purchase 986,898 shares of common stock and 61,475 Class A
warrants were outstanding at an aggregate exercise price of approximately
$788,000. The Class A warrants have an exercise price of $4.64 per share.
WARRANTS
The Company has 928,189 warrants outstanding at December 31, 2000
(excluding 61,475 Class A warrants underlying Placement Agent Unit Options),
entitling the holders thereof to purchase a total of 1,976,562 shares of Common
Stock.
WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICE REMAINING
PER SHARE OF CONTRACTUAL LIFE
SHARES COMMON STOCK (IN YEARS)
------- ---------------- ----------------
Class A common stock.............. 245,917 $4.64 3.5
Other common stock warrants....... 682,272 $3.06 2.6
-------
Total........................... 928,189 $3.48 2.8
=======
54
56
QUESTCOR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTION PLANS
For certain options granted in the year ended December 31, 2000, and the
years ended July 31, 1999 and 1998, the Company recorded deferred stock
compensation of $46,000, $169,000 and $251,000, respectively. For the year ended
December 31, 2000, the five months ended December 31, 1999 and the years ended
July 31, 1999, and 1998, the Company recorded amortization of deferred stock
compensation of $28,000, $16,000, $187,000 and $325,000, respectively. As of
December 31, 2000 the Company had $71,000 of remaining unamortized deferred
compensation. This amount is included as a deduction of stockholders' equity and
is being amortized over the vesting period of the underlying options.
Pro forma information regarding net loss and loss per share is required by
SFAS 123, and has been determined as if the Company has accounted for its
employee stock options under the fair value method set forth in SFAS 123. The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a single reliable
measure of the fair value of its employee stock options. For purposes of pro
forma disclosures, the estimated fair value of the options is amortized to
expense over the options' vesting period.
The weighted-average fair value of granted options was $2.19, $2.70, $2.14,
and $3.74 for the year ended December 31, 2000, the five months ended December
31, 1999 and the years ended July 31, 1999, and 1998, respectively. The fair
value of these options was estimated at the date of grant using the
Black-Scholes option pricing model and a graded-vesting approach using the
following weighted-average assumptions for year ended December 31, 2000, the
five months ended December 31, 1999 and the years ended July 31, 1999, and 1998,
respectively: risk-free interest rate of 5%, 6%, 6% and 6%, respectively;
weighted-average expected option life of 7.6 years; volatility of 72%, 85%, 85%,
and 79% and no dividends.
The Company's pro forma net loss was $14.0 million, $22.9 million, $10.5
million, and $6.8 million for the year ended December 31, 2000, the five months
ended December 31, 1999 and the years ended July 31, 1999, and 1998,
respectively. The Company's pro forma net loss per share was $0.56, $1.26,
$0.67, and $0.45, for the year ended December 31, 2000, for the five months
ended December 31, 1999 and the years ended July 31, 1999, and 1998,
respectively. Future pro forma results of operations may be materially different
from amounts reported as future years will include the effects of additional
stock option grants.
On September 28, 2000, the Company adopted the Employee Stock Purchase Plan
("ESPP"). As of December 31, 2000, 600,000 shares of common stock were reserved
for issuance under the ESPP. The ESPP provides for payroll deductions for
eligible employees to purchase common stock at the lesser of (i) 85% of the fair
market value of the common stock on the offering date and (ii) 85% of the fair
market value of the common stock on the purchase date. The first purchase date
was December 31, 2000. On this date, 93,666 shares were purchased under this
plan at $0.5313 per share.
As of December 31, 2000, 7,500,000 shares of common stock were reserved for
issuance under the 1992 Stock Option Plan (the "1992 Plan"). The 1992 Plan
provides for the grant of incentive and nonstatutory stock options with various
vesting periods, generally four years, to employees, directors and consultants.
The exercise price of incentive stock options must equal at least the fair
market value on the date of grant, and the exercise price of nonstatutory stock
options may be no less than 85% of the fair market value on the date of grant.
The maximum term of options granted under the 1992 Plan is ten years.
As of December 31, 2000, 750,000 shares of common stock were reserved for
issuance under the 1993 Non Employee Directors Stock Option Plan (the
"Director's Plan"). The Director's Plan provides for the granting of 25,000
options to purchase common stock upon appointment as a non-employee director, an
55
57
QUESTCOR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
additional 10,000 options each January thereafter upon reappointment, and a
payment of $2,000 for each board meeting attended. Options vest over four years.
The exercise price of the options is 85% of the fair market value on the date of
grant. The maximum term of options granted under the 1993 Directors Plan is ten
years.
For the calendar year 2000, the Company began paying members of the Board
of Directors in cash ($2,000) for attending the Board of Directors meetings, and
terminated the stock bonus program, which was in effect for the five month
period ended December 31, 1999, during which the Company paid directors in
shares of common stock ("stock bonus"). The number of shares of common stock
issued with each stock bonus is equal to $2,000 divided by the ten-day average
of the closing sales price for the common stock as quoted on the American Stock
Exchange for the ten trading days immediately preceding the date of the board
meeting at which the Stock Bonus is earned. Stock bonuses are 100% vested on the
date of the grant. The Company recognized $16,000 of expense related to stock
bonuses for the year ended December 31, 2000 and $54,000 for the five months
ended December 31, 1999.
The following table summarizes stock option activity under the 1992 and
1993 Plans:
OPTIONS WEIGHTED AVERAGE
OUTSTANDING EXERCISE PRICE
----------- ----------------
Balance at July 31, 1998........................ 1,892,489 $4.36
Granted....................................... 570,550 $2.78
Canceled...................................... (194,353) $3.44
----------
Balance at July 31, 1999........................ 2,268,686 $3.94
Granted....................................... 3,003,791 $1.27
Canceled...................................... (83,563) $2.48
----------
Balance at December 31, 1999.................... 5,188,914 $2.70
----------
Granted....................................... 1,732,015 $1.34
Exercised..................................... (298,665) $2.14
Canceled...................................... (1,042,196) $3.44
----------
Balance at December 31, 2000.................... 5,580,068 $2.19
----------
Options granted in 1999 include options granted at the close of the merger
to former employees of RiboGene in exchange for their RiboGene options.
At December 31, 2000, options to purchase 2,734,517 shares of common stock
were exercisable and there were 2,323,138 shares available for future grant
under both plans.
56
58
QUESTCOR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Exercise prices and weighted average remaining contractual life for the
options outstanding as of December 31, 2000 are as follows:
OPTIONS OUTSTANDING
- ------------------------------------------------------------------ OPTIONS EXERCISABLE
WEIGHTED AVERAGE ------------------------------
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- ----------------
$ 0.56 -- $ 1.17 536,568 9.68 $ 0.78 77,430 $ 0.95
$ 1.24 -- $ 1.25 1,613,236 8.91 $ 1.25 440,344 $ 1.25
$ 1.29 -- $ 1.57 622,428 7.32 $ 1.45 363,745 $ 1.49
$ 1.63 -- $ 1.69 781,250 8.83 $ 1.67 195,291 $ 1.66
$ 1.69 -- $ 3.06 573,247 6.05 $ 2.35 435,008 $ 2.42
$ 3.08 -- $ 3.73 630,969 6.25 $ 3.59 463,925 $ 3.56
$ 3.81 -- $ 5.13 651,637 5.50 $ 4.52 588,041 $ 4.47
$ 5.25 -- $ 6.00 162,500 1.80 $ 5.50 162,500 $ 5.50
$ 6.80 -- $ 6.80 5,000 4.72 $ 6.80 5,000 $ 6.80
$20.88 -- $20.88 3,233 5.72 $20.88 3,233 $20.88
--------- ---------
5,580,068 7.59 $ 2.19 2,734,517 $ 2.86
========= =========
Reserved Shares
The Company has reserved shares of common stock for future issuance as
follows:
DECEMBER 31,
2000
------------
Outstanding options......................................... 5,580,068
Convertible preferred stock issued and outstanding.......... 2,155,715
Placement agent unit options................................ 986,898
Class A warrants (including Class A warrants underlying
Placement Agent Unit Options)............................. 307,392
Common stock warrants....................................... 682,272
Reserved for future grant or sale under option plans........ 2,323,138
----------
12,035,483
==========
11. INCOME TAXES
As of December 31, 2000, the Company had federal and state net operating
loss carryforwards of approximately $88.3 million and $10.9 million,
respectively. The Company also had federal and California research and
development tax credit carryforwards of approximately $1.9 million and $700,000.
The federal and state net operating loss and credit carryforwards expire at
various dates beginning in the year 2005 through 2020, if not utilized.
Utilization of the federal and state net operating loss and credit
carryforwards will be subject to a substantial annual limitation due to the
"change in ownership" provisions of the Internal Revenue Code of 1986. The
annual limitation may result in the expiration of net operating losses and
credits before utilization. The amount of the limitation has not yet been
determined.
57
59
QUESTCOR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets for financial reporting and the amount
used for income tax purposes. Significant components of the Company's deferred
tax assets for federal and state income taxes are as follows (in thousands):
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Deferred tax liabilities:
Goodwill and purchased intangibles............... $ 600 $ 800
-------- --------
Deferred tax assets:
Net operating loss carryforwards................. $ 30,700 $ 27,000
Research and development credits................. 2,400 2,200
Capitalized research and development expenses.... 3,200 2,400
Acquired research and development................ 1,100 1,100
Other, net....................................... 500 700
-------- --------
Total deferred tax assets.......................... 37,900 33,400
Valuation allowance................................ (37,300) (32,600)
-------- --------
Net deferred taxes................................. $ -- $ --
======== ========
Due to the Company's lack of earnings history, the net deferred tax assets
have been fully offset by a valuation allowance. The valuation allowance
increased by $22.3 million, $2.6 million, and $1.2 million during the periods
ended December 31, 1999, July 31, 1999 and July 31, 1998, respectively.
12. LEGAL PROCEEDINGS
In July 1998, the Company was served with a complaint in the United States
Bankruptcy Court for the Southern District of New York by the Trustee for the
liquidation of the business of A.R. Baron & Co., Inc. ("A.R. Baron") and the
Trustee of The Baron Group, Inc. (the "Baron Group"), the parent of A.R. Baron.
The complaint alleged that A.R. Baron and the Baron Group made certain
preferential or fraudulent transfers of funds to the Company prior to the
commencement of bankruptcy proceedings involving A.R. Baron and the Baron Group.
The Trustee sought return of the funds totaling $3.2 million.
During the quarter ended June 30, 2000, the Company reached an agreement to
settle the Baron litigation and pay a total amount of $525,000 to the bankruptcy
estates of the Baron entities. Additionally, the Company also reached a
settlement agreement with a former insurer in connection with the Baron
litigation in which the insurer would pay the Company $150,000 in exchange for
policy releases. The Company believes that settling this claim for a new payment
of $375,000, which was charged to operations in 2000, was an acceptable outcome
to avoid incurring further legal fees and management diversion. On September 26,
2000, the courts formally approved the settlement and the case is now closed.
13. SUBSEQUENT EVENTS
In February 2001 the Company announced that it has exclusively licensed
certain antifungal drug research technology to Tularik, Inc. In exchange, the
Company received a $90,000 cash payment, $30,000 for reimbursement of patent
expenses, and is entitled to receive future potential milestone and royalty
payments. In addition, the Company has transferred to Tularik certain biological
and chemical reagents to be used in the discovery and development of novel
antifungal agents.
At March 26, 2001, the Company's net unrealized gain (loss) on investments
has decreased to a loss of $221,000 from a gain of $332,000 at December 31,
2000. This decrease is due to the decline in share price and total value of the
Rigel Pharmaceuticals, Inc. equity investment.
58
60
QUESTCOR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On March 29, 2001 the Company entered into a binding letter agreement with
Sigma-Tau Finanziaria S.p.A. ("Sigma-Tau") relating to the purchase by Sigma-Tau
of Company common stock and the purchase by Sigma-Tau of a warrant to acquire
additional Company common stock. Pursuant to the letter agreement, the Company
issued and sold to Sigma-Tau an aggregate of 2,873,563 shares of Company common
stock. The purchase price was $0.522 per share, for an aggregate purchase price
of $1.5 million.
The Company also sold a warrant to Sigma-Tau to purchase an additional
2,873,563 shares of the Company's common stock. The purchase price of such
warrant was $100,000. The shares of common stock issuable upon the exercise of
the warrant will have an exercise price equal to $0.522 per share and will be
exercisable from the date of issuance until the close of business on September
29, 2001. The $100,000 paid by Sigma-Tau for the warrant is non-refundable, and
in the event that Sigma-Tau elects not to exercise the warrant in full on or
before the close of business on September 29, 2001 (the "Expiration Date"), the
Company will have no obligation to return any such portion of the $100,000 paid
for the warrant. In the event that Sigma-Tau exercises the warrant in full, on
or before the Expiration Date, the $100,000 paid for the warrant will be
credited toward the purchase of the aggregate of 2,873,563 shares of Company
common stock under the warrant. Pursuant to the rules of the American Stock
Exchange, however, the warrant is exercisable for a maximum of 2,161,752 shares
unless approval is obtained from the Company's shareholders.
The Letter Agreement also contemplates that the Company and Sigma-Tau may
engage in a near-term strategic or collaboration transaction. To further this
objective, the Company and Sigma-Tau have agreed to a so-called "Exclusivity
Period" for a period of twenty business days from the date of the Letter
Agreement, whereby in order to facilitate Sigma-Tau's review of the affairs of
the Company, the Company has agreed to refrain from engaging in certain
activities, including: entering into any sale or disposition of any significant
portion of its assets or stock with any other pharmaceutical, biotechnology or
health care company; merging or consolidating with any other pharmaceutical,
biotechnology or health care company; issuing or transferring any securities to
any other pharmaceutical, biotechnology or health care company except in the
ordinary course of business; entering into any transaction with any other
pharmaceutical, biotechnology or health care company except in the ordinary
course of business; and, encouraging, soliciting or negotiating any transaction
with any other pharmaceutical, biotechnology or health care company.
59
61
FINANCIAL STATEMENT SCHEDULES (ITEM 14(a)(2))
SCHEDULE II
QUESTCOR PHARMACEUTICALS, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 2000, FIVE MONTHS ENDED DECEMBER 31, 1999 AND
YEARS ENDED JULY 31, 1999, AND JULY 31, 1998
BALANCE AT ADDITIONS DEDUCTIONS
BEGINNING CHARGED TO AND BALANCE AT
PERIOD INCOME WRITE-OFFS PERIOD
---------- ---------- ---------- ----------
(IN THOUSANDS)
Reserves for uncollectible and sales returns and
allowances
December 31, 2000............................... $30 $170 $144 $56
December 31, 1999............................... $15 $ 15 -- $30
July 31, 1999................................... -- $ 16 $ 1 $15
July 31, 1998................................... -- -- -- --
All other financial statement schedules are omitted because the information
described therein is not applicable, not required or is furnished in the
financial statements or notes thereto.
60
62
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1* Merger agreement entered into August 4, 1999, by and among:
Cypros Pharmaceutical Corporation, a California corporation
("Parent"); Cypros Acquisition Corporation, a Delaware
corporation and a wholly owned subsidiary of Parent ("Merger
Sub"), and RiboGene, Inc., a Delaware corporation (the
"Company")
3.1***** By-laws of the Registrant
3.2** Restated Certificate of Incorporation of Cypros
Pharmaceutical Corporation, a California corporation, dated
November 5, 1999
10.1*** Forms of Incentive Stock Option and Non-statutory Stock
Option
10.2**** Amended 1992 Stock Option Plan
10.3***** 1993 Non-employee Directors Equity Incentive Plan, as
amended, and related form of Nonstatutory Stock Option
10.4***** Employment Agreement dated as of August 4, 1999 between the
Registrant and Charles C. Casamento
10.5****** 2000 Employee Stock Purchase Plan
10.6* Memorandum of Understanding entered into January 26, 2000 by
and between Questcor Pharmaceuticals, Inc., a California
corporation, and Dainippon Pharmaceuticals Co., Ltd., a
corporation organized under the laws of Japan
23.1 Consent of Ernst & Young LLP, Independent Auditors
Financial Statements and Schedules.
- ---------------
* Filed as an exhibit to the Registrant's Form 10-K for the fiscal year
ended December 31, 1999
** Filed as an exhibit to the Registrant's Registration Statement on Form
S-8, Registration Statement No. 333-30558, and incorporated herein by
reference.
*** Filed as an exhibit to the Registrant's Registration Statement on Form
S-1, Registration No. 33-51682, and incorporated herein by reference
**** Filed as an exhibit to the Registrant's Form 8-K dated November 4, 1996
and incorporated herein by reference
***** Filed as an exhibit to the Registrant's Registration Statement Form S-4,
Registration Statement No. 333-87611, and incorporated herein by
reference
****** Filed as an exhibit to the Registrant's Registration Statement on Form
S-8, Registration Statement No. 333-46990, and incorporated herein by
reference
61