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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: SEPTEMBER 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 001-16033
ESPERION THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 38-3419139
(State of incorporation) (IRS Employer Identification No.)
3621 S. STATE STREET, 695 KMS PLACE
ANN ARBOR, MI 48108
(734) 332-0506
(Address of principal executive offices, including zip
code, and telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (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.
[ X] Yes [ ] No
The number of outstanding shares of the Registrant's common stock,
as of October 31, 2002, was 29,353,416.
ESPERION THERAPEUTICS, INC.
FORM 10-Q
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2002 and
December 31, 2001................................................................. 3
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2002 and 2001, and the period from inception to 4
September 30, 2002................................................................
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30,
2002 and 2001, and the period from inception to 5
September 30, 2002................................................................
Notes to Condensed Consolidated Financial Statements................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................... 15
Item 4. Controls and Procedures.................................................................. 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 16
Item 2. Changes in Securities and Use of Proceeds................................................ 16
Item 3. Defaults Upon Senior Securities.......................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders...................................... 16
Item 5. Other Information........................................................................ 16
Item 6. Exhibits and Reports on Form 8-K......................................................... 17
SIGNATURES. 18
INDEX TO EXHIBITS.................................................................................... 21
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ESPERION THERAPEUTICS, INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
in thousands 2002 2001
- ----------------------------------------------------------------------------------------------------------------
ASSETS: (UNAUDITED)
Current assets:
Cash and cash equivalents $41,386 $70,286
Short-term investments 8,360 -
Prepaid expenses and other 753 1,000
- ----------------------------------------------------------------------------------------------------------------
Total current assets 50,499 71,286
- ----------------------------------------------------------------------------------------------------------------
Property and equipment, net 3,436 3,313
Goodwill, net 3,108 3,108
Deposits and other assets 44 633
- ----------------------------------------------------------------------------------------------------------------
Total assets $57,087 $78,340
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt $975 $863
Accounts payable 1,489 2,925
Accrued liabilities 2,341 2,572
- ----------------------------------------------------------------------------------------------------------------
Total current liabilities 4,805 6,360
- ----------------------------------------------------------------------------------------------------------------
Long-term debt, less current portion 7,221 5,482
Stockholders' equity:
Preferred stock - -
Series A, Junior Participating Preferred Stock - -
Common stock 29 29
Additional paid-in capital 133,195 133,143
Notes receivable (6) (15)
Accumulated deficit during the development stage (87,427) (65,320)
Deferred stock compensation (749) (1,476)
Accumulated other comprehensive income 19 137
- ----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 45,061 66,498
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $57,087 $78,340
- ----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
ESPERION THERAPEUTICS, INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED INCEPTION TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------------------------------
--------------------------------------------------------------------
in thousands except share and per share data 2002 2001 2002 2001 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Research and development $5,416 $4,902 $16,999 $16,303 $71,456
General and administrative 1,677 1,395 4,750 3,732 15,911
Goodwill amortization - 210 - 630 1,089
Purchased in-process research and development - - - - 4,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 7,093 6,507 21,749 20,665 92,456
- ------------------------------------------------------------------------------------------------------------------------------------
Loss from operations (7,093) (6,507) (21,749) (20,665) (92,456)
- ------------------------------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest income 258 679 862 2,351 6,989
Interest expense (289) (228) (819) (540) (2,085)
Other, net 144 (225) (401) 267 125
- ------------------------------------------------------------------------------------------------------------------------------------
Total other income (expense) 113 226 (358) 2,078 5,029
- ------------------------------------------------------------------------------------------------------------------------------------
Loss before income taxes (6,980) (6,281) (22,107) (18,587) (87,427)
Provision for income taxes - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss (6,980) (6,281) (22,107) (18,587) (87,427)
Beneficial conversion feature on preferred stock - - - - (22,870)
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss attributable to common stockholders ($6,980) ($6,281) ($22,107) ($18,587) ($110,297)
- ------------------------------------------------------------------------------------------------------------------------------------
Basic and diluted net loss per share ($0.24) ($0.22) ($0.76) ($0.70)
- ---------------------------------------------------------------------------------------------------------------------
Shares used in computing basic and
diluted net loss per share 29,268,023 28,177,102 29,234,243 26,675,598
- ---------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
ESPERION THERAPEUTICS, INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED INCEPTION TO
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------
--------------------------------
in thousands 2002 2001 2002
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss ($22,107) ($18,587) ($87,427)
Adjustments to reconcile net loss to net cash
used in operating activities:
Purchased in-process research and development - - 4,000
Depreciation and amortization 1,021 2,209 4,543
Stock-based compensation expense 611 - 3,490
Decrease in notes receivable 9 49 120
Loss on sale of property and equipment 170 22 192
Non-cash interest included in long-term debt 277 171 680
Changes in operating assets and liabilities:
Prepaid expenses and other 724 (320) (1,110)
Other assets (15) (7) (94)
Accounts payable (1,431) (1,130) 1,767
Accrued liabilities (208) 860 2,392
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (20,949) (16,733) (71,447)
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (715) (1,641) (7,063)
Acquisition of Talaria Therapeutics, Inc. - - (233)
Proceeds from sale of property and equipment 29 2 31
Purchases of short-term investments (34,221) - (34,221)
Maturities of short-term investments 25,861 - 25,861
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (9,046) (1,639) (15,625)
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from issuance of convertible preferred stock - - 42,200
Proceeds from the issuance of common stock 168 22,481 78,895
Proceeds from long-term debt 1,834 3,409 9,873
Repayments of long-term debt (885) (689) (2,607)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,117 25,201 128,361
- ----------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (22) (72) 97
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (28,900) 6,757 41,386
Cash and cash equivalents at beginning of period 70,286 70,228 -
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $41,386 $76,985 $41,386
- ----------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $524 $362
-----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
ESPERION THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of Esperion Therapeutics, Inc. ("Esperion" or the
"Company") and its subsidiaries, and have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and with Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. The Company believes that all adjustments, consisting of
normal recurring adjustments, considered necessary for a fair presentation,
have been included. The information included in this Form 10-Q should be read
in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and the consolidated financial statements
and footnotes thereto included in the Company's Form 10-K for the year ended
December 31, 2001.
Operating results for the three- and nine-month periods ended
September 30, 2002 and 2001 are not necessarily indicative of the results
for the full year or any future periods.
(2) COMPREHENSIVE LOSS
Comprehensive loss is the total of net loss and all other non-owner
changes in equity. Total comprehensive loss was $6,950,000 and $6,277,000
for the three-month periods ended September 30, 2002 and 2001, respectively,
and $22,225,000 and $18,673,000, for the nine-month periods ended
September 30, 2002 and 2001, respectively. The difference between net loss,
as reported in the accompanying condensed consolidated statements of
operations, and comprehensive loss is the foreign currency translation
adjustment and an unrealized gain on short-term investments for the period
ended September 30, 2002, and the foreign currency translation adjustment
for the period ended September 30, 2001.
(3) BASIC AND DILUTED LOSS PER SHARE
Basic and diluted net loss per share amounts have been calculated using the
weighted average number of shares of common stock outstanding during the
respective periods. Options for the purchase of 448,460 and 764,938 shares of
common stock for the three-month periods ended September 30, 2002 and 2001,
respectively, and 474,732 and 760,994 for the nine-month periods ended September
30, 2002 and 2001, respectively, were not included in the calculation of diluted
net loss per share, as doing so would have been anti-dilutive.
(4) COMMITMENTS AND CONTINGENCIES
The Company has entered into various license and other agreements with third
parties related to some of its products in development. The Company may be
obligated to make milestone and license maintenance payments, as defined in the
respective license and other agreements relating to the Company's proprietary
rights, up to an aggregate remaining amount of $30.2 million. Some of these
payments may be fulfilled through the issuance of the Company's common stock, at
the Company's option. Upon reaching certain milestones, the payments are charged
to research and development expenses in the accompanying consolidated statements
of operations. There were no such milestones achieved or payments made during
the first nine months of 2002. At the present time, the Company can give no
assurances that any such milestones will be achieved. In addition to the
milestone and license maintenance payments, the Company may be obligated to make
royalty payments on future sales pursuant to formulas in the agreements.
6
(5) ADOPTION OF NEW ACCOUNTING STANDARD
The Company adopted Statement of Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142"), effective January 1,
2002. Under SFAS No. 142, goodwill and certain indefinite lived intangible
assets are no longer amortized but are reviewed annually for impairment. In
connection with the adoption of SFAS No. 142, the Company has completed the
transitional goodwill impairment test, which requires the Company to compare its
fair value to the carrying value of its net assets. Based on this analysis, the
Company has concluded that no impairment existed at the time of adoption, and
accordingly, the Company has not recognized any transitional impairment loss.
Goodwill reflects the excess of the purchase price over net assets in the
Company's September 2000 acquisition of Talaria Therapeutics, Inc. ("Talaria")
and the milestone payments made to date under the related merger agreement. The
gross carrying amount of goodwill is approximately $4.2 million, and accumulated
amortization is approximately $1.1 million as of September 30, 2002 and December
31, 2001.
As required by SFAS No. 142, the results of operations for periods prior to
its adoption have not been restated. Had SFAS No. 142 been adopted at January 1,
2001, the pro forma loss for the three- and nine-month periods ended September
30, 2001 and for the period from inception to September 30, 2001 would have been
as follows:
Three Months Nine Months
Ended Ended Inception to
September 30, September 30, September 30,
in thousands except share and per share data 2001 2001 2001
- ---------------------------------------------------------------------------------------------------------------------------
Net loss:
Reported net loss ($6,281) ($18,587) ($58,976)
Goodwill amortization 210 630 880
- ---------------------------------------------------------------------------------------------------------------------------
Adjusted net loss (6,071) (17,957) (58,096)
Beneficial conversion feature upon issuance of preferred stock - - (22,870)
- ---------------------------------------------------------------------------------------------------------------------------
Adjusted net loss attributable to common stockholders ($6,071) ($17,957) ($80,966)
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Basic and diluted net loss per share:
Reported basic and diluted net loss per share ($0.22) ($0.70)
Goodwill amortization 0.01 0.03
- ---------------------------------------------------------------------------------------------------------
Adjusted basic and diluted net loss per share ($0.21) ($0.67)
- ---------------------------------------------------------------------------------------------------------
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion provides an analysis of the Company's condensed
financial condition and results of operations, and should be read in conjunction
with the Company's consolidated financial statements and the notes included in
Item 1 of this Form 10-Q.
FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
The information contained in this report includes "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements are often identified by words such as
"hope," "may," "believe," "anticipate," "plan," "expect," "intend," "assume" and
similar expressions. The Company cautions readers that the forward-looking
statements, which speak only as of the date of this report, reflect management's
current expectations, estimations and projections and involve certain factors,
such as risks and uncertainties, which may cause our actual results to be far
different from those suggested by our forward-looking statements. These factors
include, but are not limited to, risks associated with: management's ability to
successfully execute its business strategies; the progress and cost of
development of our product candidates; the extent and timing of market
acceptance of new products developed by the Company or our competitors;
dependence on third parties to conduct clinical trials for our product
candidates; the extent and timing of regulatory approval, as desired or
required, for our product candidates; dependence on licensing arrangements and
strategic relationships with third parties; clinical trials; manufacturing;
dependence on patents and proprietary rights; procurement, maintenance,
enforcement and defense of the Company's patents and proprietary rights;
competitive conditions in the industry; business cycles affecting the markets in
which the Company's products may be sold; extraordinary events and transactions;
the timing and extent of the Company's financing needs; fluctuations in foreign
exchange rates; economic conditions generally or in various geographic areas;
and other factors. All of the foregoing factors are difficult to forecast. More
detailed information about these and other factors is set forth in the Company's
Form 10-K for the year ended December 31, 2001 and other filings with the
Securities and Exchange Commission. We do not intend to update any of these
factors or to publicly announce the results of any revisions to any of these
forward-looking statements other than as required under the federal securities
law.
OVERVIEW
Background
We have devoted substantially all of our resources since we began our
operations in May 1998 to the research and development of pharmaceutical product
candidates for cardiovascular and metabolic disease. We are a development stage
biopharmaceutical company and have not generated any revenues from any source,
including from product sales. We have incurred a cumulative net loss of
approximately $87.4 million from inception (May 18, 1998) through September 30,
2002 excluding the beneficial conversion feature of preferred stock. These
losses have resulted principally from costs incurred in research and development
activities and general and administrative expenses. We expect to incur
significant additional operating losses for at least the next several years and
until we generate sufficient revenue to offset expenses. Research and
development costs relating to product candidates will continue to increase.
Manufacturing, sales and marketing costs will be incurred and will increase in
preparation for the commercialization of our product candidates. Until we
generate positive cash flow, we will rely on financing our operations with our
existing cash balance, additional equity or debt offerings and/or payments from
potential strategic relationships with development partners that we may enter
into in the future.
8
RESULTS OF OPERATIONS
OPERATING EXPENSES
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------
dollars in thousands 2002 2001 % CHANGE 2002 2001 % Change
- --------------------------------------------------------------------------------------------------------------
Research and development $5,416 $4,902 10.5% $16,999 $16,303 4.3%
% of total 76.4% 75.4% 78.2% 78.9%
General and administrative $1,677 $1,395 20.2% $4,750 $3,732 27.3%
% of total 23.6% 21.4% 21.8% 18.1%
Goodwill amortization - $210 -100.0% - $630 -100.0%
% of total - 3.2% - 3.0%
Three Months Ended September 30, 2002 and 2001
Research and Development Expenses. Research and development expenses include
both external and internal costs related to the research and development
activities on our existing product candidates as well as discovery efforts on
potential new product candidates. External costs include costs related to
manufacturing, clinical trials, toxicology and pharmacology studies performed by
third parties, milestone payments under certain license and other agreements and
other related expenses. Internal costs include all payroll and related costs
attributable to research and development activities, as well as an allocation of
overhead expenses incurred by the Company. Research and development expenses
increased to approximately $5.4 million for the three months ended September 30,
2002 compared to approximately $4.9 million for the three months ended September
30, 2001. This 10.5% increase is primarily due to the following:
- Higher clinical trial costs on our product candidates. During the
third quarter of 2002, the Company had three ongoing clinical trials.
Patients were being enrolled in Phase II trials of the Company's
ETC-216 (AIM) and ETC-588 (LUV) product candidates and a Phase I trial
of the Company's ETC-642 (RLT Peptide) product candidate. The
ETC-216-002 trial began in November 2001 and represents the first
Phase II clinical trial for this product candidate. The study is
expected to evaluate up to 50 patients with acute coronary syndrome
and evaluate the changes in plaque volume in each patient's coronary
arteries between pre- and post-treatment with ETC-216. The ETC-588-004
trial began in June 2002 and represents the second Phase II clinical
trial for this product candidate. This trial is expected to evaluate
up to 32 patients with carotid atherosclerosis and evaluate changes in
plaque volume in each patient's carotid arteries using magnetic
resonance imaging after administration of ETC-588. The ETC-642-002
trial began in September 2002 and represents the second Phase I
clinical trial for this product candidate, extending the previous
trial to higher doses. This trial is examining an escalating,
single-dose of ETC-642 to examine safety and tolerability of the
product candidate in patients with stable arteriosclerosis. This trial
is expected to evaluate up to 20 patients. In addition to these
studies, the Company incurred additional costs related to the
completion of the ETC-642-001 clinical trial, which was reported on in
July 2002. During the third quarter of 2001, the Company had one
ongoing clinical trial: a Phase II trial of ETC-588 looking at
patients with stable atherosclerosis. This trial, known as
ETC-588-003, examined the safety and tolerability of various dose
levels and dose frequencies in 34 patients. The preliminary results
from this study were reported in November 2001.
- Higher preclinical costs on development of oral small molecule lead
candidate. During the third quarter of 2002, the Company continued
to prepare for an Investigational New Drug Application (IND)
9
for its lead oral small molecule product candidate, ESP 31015. This
resulted in higher costs related to pharmacology and toxicology
studies for this product candidate during 2002 as compared to 2001.
- Product candidate supply costs. In preparation for current and
future pre-clinical and clinical studies, the Company incurs costs
related to process development, scale-up and production of each
product candidate. During 2002, the costs related to these
activities were higher than 2001 due to the increased amount of
drug supply needed to support the greater number of clinical
trials, as well as increased patient numbers and dosage regimens
being tested, offset in part by costs incurred during 2001 for
production of ETC-276 not incurred in 2002.
The magnitude of the Company's operating expenses, particularly research and
development expenses, are largely dependent upon the progress, number, timing,
nature and size of clinical trials. As clinical trials continue to progress, the
Company anticipates that research and development costs will fluctuate as
compared to current quarter levels based on the timing and size of the trials.
As our product candidates progress through development, clinical trial costs
will continue to increase due to the size and cost of more advanced clinical
trials.
General and Administrative Expenses. General and administrative expenses
include the cost of salaries, employee benefits, and other costs associated with
the Company's finance, accounting, human resources, legal, administrative,
business development and executive management functions. General and
administrative expenses increased to approximately $1.7 million for the three
months ended September 30, 2002 compared to approximately $1.4 million for the
three months ended September 30, 2001. This 20.2% increase resulted from a
charge of approximately $338,000 primarily related to the write-down of assets
that are no longer being used in the Company's development programs.
Goodwill Amortization. Goodwill amortization reflects the amortization of
the amount of the excess of the purchase price over net assets in the Company's
September 2000 acquisition of Talaria and the milestone payments made to date
under the related merger agreement. Net goodwill included in the Company's
Consolidated Balance Sheets was $3.1 million at September 30, 2002 and December
31, 2001. Goodwill amortization expense was $0 and $210,000 for the three months
ended September 30, 2002 and 2001, respectively.
The Company adopted SFAS No. 142, effective January 1, 2002, under which
goodwill and certain indefinite lived intangible assets are no longer amortized
but are reviewed annually for impairment. In connection with the adoption of
SFAS No. 142, the Company has completed the transitional goodwill impairment
test, which requires the Company to compare its fair value to the carrying value
of its net assets. Based on this analysis, the Company has concluded that no
impairment existed at the time of adoption, and, accordingly, the Company has
not recognized any transitional impairment loss.
Other Income (Expense). Other income (expense) consists of interest income,
interest expense, foreign currency transaction gain (loss), and other
non-operating income and expenses. Interest income decreased to approximately
$258,000 for the three months ended September 30, 2002 compared to approximately
$679,000 for the three months ended September 30, 2001. The decrease is
primarily attributable to lower cash levels combined with lower interest rates
in 2002 compared to the same period last year, as well as the use of more
conservative investment instruments in 2002 as compared to 2001. Interest
expense for the three months ended September 30, 2002 and 2001 was approximately
$289,000 and $228,000, respectively, and represents interest incurred on
equipment financing facilities and a special project loan. The increase in
interest expense resulted from higher outstanding borrowings in 2002 as compared
to the same period in 2001.
During the three months ended September 30, 2002, we recorded approximately
$34,000 of unrealized foreign currency transaction gains compared to
approximately $179,000 of unrealized foreign currency transaction losses for the
three months ended September 30, 2001, on transactions that primarily related to
manufacturing activities in Europe for our ongoing clinical trials. These
transaction gains/(losses) result from liabilities denominated in foreign
currencies, primarily the Swedish Kronor and the Euro. As the exchange rate
between the US Dollar and these currencies fluctuates, the Company records a
gain (loss) on these transactions. During the third quarter of 2002, the US
Dollar has generally strengthened against these foreign currencies, whereas the
reverse was true in the third quarter of 2001.
10
Net Loss. Net loss was approximately $7.0 million for the three months ended
September 30, 2002 compared to approximately $6.3 million for the three months
ended September 30, 2001. The increase in net loss resulted from the increases
in general and administrative and research and development expenses, and the
decrease in interest income, offset in part by the decrease in goodwill
amortization.
Nine Months Ended September 30, 2002 and 2001
Research and Development Expenses. Research and development expenses
increased to approximately $17.0 million for the nine months ended September 30,
2002 compared to approximately $16.3 million for the nine months ended September
30, 2001. This 4.3% increase is primarily due to the following:
- Higher clinical trial costs on our product candidates. During the
nine-months ended September 30, 2002, patients were being enrolled
in four clinical trials: Phase II trials of the Company's ETC-216
(AIM) and ETC-588 (LUV) product candidates and Phase I trials of
the Company's ETC-642 (RLT Peptide) product candidate. The
ETC-216-002 trial began in November 2001 and represents the first
Phase II clinical trial for this product candidate. The ETC-588-004
trial began in June 2002 and represents the second Phase II
clinical trial for this product candidate. Also during 2002, the
ETC-642-001 trial began and ended while the ETC-642-002 trial began
in September 2002. These two studies examine an escalating,
single-dose of ETC-642 to examine the safety and tolerability of
the product candidate in patients with stable atherosclerosis. In
the nine-months ended September 30, 2001, the Company incurred
costs related to two clinical trials: the completion of the
ETC-216-001 Phase I trial and ongoing enrollment in the ETC-588-003
Phase IIa trial.
- Higher preclinical costs on development of oral small molecule lead
candidate. During the nine months ended September 30, 2002, the
Company prepared for an Investigational New Drug Application (IND)
for its lead oral small molecule product candidate, ESP 31015. This
resulted in higher costs related to pharmacology and toxicology
studies for this product candidate during 2002 as compared to 2001.
- Product candidate supply costs. In preparation for current and
future pre-clinical and clinical studies, the Company incurs costs
related to process development, scale-up and production of each
product candidate. During 2002, the costs related to these
activities were higher than 2001 due to the increased amount of
drug supply needed to support the greater number of clinical
trials, as well as increased patient numbers and dosage regimens
being tested.
The magnitude of the Company's operating expenses, particularly research and
development expense, are largely dependent upon the progress, number, timing,
nature and size of clinical trials. As clinical trials progress this year, the
Company anticipates that research and development costs will fluctuate as
compared to current quarter levels based on the number, timing, nature, and size
of the trials. As our product candidates progress through development, clinical
trial costs will continue to increase due to the size and cost of more advanced
clinical trials.
General and Administrative Expenses. General and administrative expenses
increased to approximately $4.8 million for the nine months ended September 30,
2002 compared to approximately $3.7 million for the nine months ended September
30, 2001. This 27.3% increase primarily relates to $605,000 of restructuring and
related charges during the nine-months ended September 30, 2002 that were
classified as general and administrative expenses in the accompanying statements
of operations including the following:
1. The write-down of assets no longer being used in the Company's
development programs totaling approximately $410,000;
2. Employee severance and benefits of approximately $168,000 resulting
from actions announced in March 2002 to curtail or significantly
reduce spending on certain pre-clinical research and other activities
that lie outside of the Company's primary areas of focus in
cardiovascular and metabolic disease; and
3. The remaining obligations of $27,000 under an operating lease for a
laboratory facility in Sweden that is no longer being used.
11
In addition, the increase resulted from a greater number of general and
administrative personnel, as well as increased overhead and related costs.
Goodwill Amortization. Goodwill amortization expense was $0 and $630,000 for
the nine months ended September 30, 2002 and 2001, respectively. The decrease in
goodwill amortization expense resulted from the Company's adoption of SFAS No.
142 effective January 1, 2002 as discussed above in Management's Discussion and
Analysis of Financial Condition and Results of Operations.
Other Income (Expense). Interest income decreased to approximately $862,000
for the nine months ended September 30, 2002 compared to approximately $2.4
million for the nine months ended September 30, 2001. The decrease is primarily
attributable to lower cash levels combined with lower interest rates in 2002
compared to the same period last year, as well as the use of more conservative
investment instruments in 2002 as compared to 2001. Interest expense for the
nine months ended September 30, 2002 and 2001 was approximately $819,000 and
$540,000, respectively, and represents interest incurred on equipment financing
facilities and a special project loan. The increase in interest expense resulted
from higher outstanding borrowings in 2002 as compared to the same period in
2001.
During the nine months ended September 30, 2002, we recorded approximately
$401,000 of unrealized foreign currency transaction losses compared to
approximately $340,000 of unrealized foreign currency transaction gains for the
nine months ended September 30, 2001, on transactions that primarily related to
manufacturing activities in Europe for clinical trials. These transaction
gains/(losses) result from liabilities denominated in foreign currencies,
primarily the Swedish Kronor and the Euro. As the exchange rate between the US
Dollar and these currencies fluctuates, the Company records a gain (loss) on
these transactions. During the nine months ended September 30, 2002, the US
Dollar has generally weakened against these foreign currencies whereas the
opposite was true during the nine months ended September 30, 2001.
Net Loss. Net loss was approximately $22.1 million for the nine months ended
September 30, 2002 compared to approximately $18.6 million for the nine months
ended September 30, 2001. The increase in net loss resulted from the increases
in general and administrative and research and development expenses, the
increase in unrealized foreign currency transaction losses, and the decrease in
interest income, offset in part by the decrease in goodwill amortization.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2002 and 2001, the Company had cash, cash equivalents
and short-term investments of approximately $49.7 million and $77.0 million,
respectively. Our investment policy emphasizes liquidity and preservation of
principal over other portfolio considerations. We select investments that
maximize interest income to the extent possible by investing cash in short-term,
investment-grade, interest-bearing securities. During the third quarter of 2002,
the Company invested its cash in more conservative securities than in prior
periods to fully preserve the principal investment balance. This was primarily
achieved by more heavily weighting our investments in government securities,
such as treasury bonds, treasury notes and notes of other government agencies
rather than in securities issued by corporations, including commercial paper. We
believe that our current cash position, along with available borrowings under
our credit facilities will be sufficient to fund our operations, capital
expenditures and debt service as currently planned until early 2004.
During the nine months ended September 30, 2002 and 2001, net cash used in
operating activities was approximately $20.9 million and $16.7 million,
respectively. This cash was used to fund our net losses for those periods, as
adjusted for non-cash expenses and changes in operating assets and liabilities.
Net cash used in investing activities for the nine months ended September
30, 2002 and 2001, respectively, was approximately $9.0 million and $1.6
million, respectively. The net cash used in investing activities for the nine
months ended September 30, 2002 resulted primarily from the purchases of
short-term investments and capital expenditures offset, in part, by the
maturities of short-term investments. The net cash used in investing activities
for
12
the nine months ended September 30, 2001 resulted primarily from the acquisition
of laboratory equipment, furniture and fixtures and other office equipment.
Net cash proceeds from financing activities were $1.1 million and $25.2
million for the nine months ended September 30, 2002 and 2001, respectively. The
net cash proceeds from financing activities for the nine months ended September
30, 2002 resulted primarily from $1.8 million of additional borrowings on a
special project loan and equipment term loans, and $168,000 received from the
issuance of common stock to employees under the Company's equity compensation
plans. The proceeds were partially offset by $885,000 of cash used to repay
borrowings under equipment loans. The net cash proceeds from financing
activities for the nine months ended September 30, 2001 resulted primarily from
$22.3 million raised in a private placement, $3.4 million of additional
borrowings on a special project loan and equipment term loans, and $139,000
raised from the issuance of common stock to employees under the Company's equity
compensation plans. The proceeds were partially offset by $689,000 of cash used
to repay borrowings under equipment loans.
We frequently evaluate opportunities to sell additional equity, obtain
credit from lenders, enter into strategic relationships, or further strengthen
our financial position in other ways. The sale of additional equity, whether
publicly or privately, could result in dilution to our stockholders. In
addition, from time to time, we may consider the acquisition of or investment in
complementary businesses, products or technologies that might affect our
liquidity requirements or position or cause us to issue additional securities.
There can be no assurance that financing will be available to us in amounts or
on terms acceptable to us, if at all.
As of September 30, 2002, the Company had the following credit facilities
and outstanding borrowings:
- A $2.0 million credit facility with a U.S. bank that may be used to
finance purchases of equipment. Borrowings under this facility bear
interest at the bank's prime rate (4.5% at September 30, 2002).
Borrowings outstanding under this facility as of September 30, 2002
amounted to approximately $901,000 and must be repaid by September 2005.
The facility expires in December 2002.
- An additional credit facility with a U.S. lending institution to finance
purchases of equipment. This facility allowed for borrowings of up to
$2.5 million. Approximately $1.4 million was outstanding under this
facility at a weighted average interest rate of 12% as of September 30,
2002. Outstanding amounts under this facility must be repaid by November
2004, and no additional borrowings are allowed.
- A credit facility with a Swedish entity totaling 50 million Swedish
Kronor ($5.4 million as of September 30, 2002). The proceeds from this
facility may only be used to fund the development of our ETC-216 (AIM)
product candidate. If results achieved by the AIM project are not
capable of being used commercially, our obligation to repay the loan may
be forgiven. Borrowings under the loan facility bear interest at 17.0%
of which 9.5% is payable quarterly. The remaining 7.5% of interest
together with principal is payable in five equal annual installments
starting in December 2004. The outstanding borrowings, including accrued
interest of 6.5 million Swedish kronor ($700,000), amounted to 51.5
million Swedish Kronor ($5.6 million) as of September 30, 2002. The
Company is in discussions with the Swedish entity regarding the 5
million Swedish Kronor remaining under the agreement, disbursement of
which is related to completion of a final milestone under the agreement.
The milestone may be achieved in the future, however, the funds may be
unavailable to the Company due to the ramp down of operations in Sweden
during 2002. A condition under the agreement is that the project be
principally carried out in Sweden.
- An agreement with a Michigan non-profit corporation whereby we can
borrow up to $447,000 for equipment purchases at an interest rate of 4%.
As of September 30, 2002, outstanding borrowings under this arrangement
totaled $382,000 and must be repaid by October 2006.
We anticipate that our capital expenditures for the next twelve months will
be approximately $1.0 million. We expect that these expenditures will primarily
include lab and computer equipment.
We lease our corporate and research and development facilities under
operating leases expiring at various times through June 2004. Under certain of
these arrangements, including the lease for our headquarters facility, we may
13
extend these leases for one or more additional periods. Total minimum future
payments under these leases for the next twelve months are approximately
$582,000 as of September 30, 2002.
We have entered into license and other agreements with certain third parties
that require us to make payments upon achievement of the milestones set forth in
such agreements. The remaining payments that we could be obligated to make under
those agreements could over time amount to up to $30.2 million. Some of these
payments may be fulfilled through the issuance of common stock, at our option.
If we sell products using technology licensed or owned under the agreements, we
would be obligated to make royalty payments to the third parties pursuant to
formulas in the agreements. There can be no assurance that we will meet any or
all of the milestones in, or sell any products requiring royalty payments under,
our license agreements.
INCOME TAXES
As of September 30, 2002, we had operating loss carryforwards of
approximately $58.0 million. These carryforwards do not include tax credits for
start-up costs of approximately $19.0 million, which may be utilized upon the
realization of profits. These net operating loss carryforwards begin to expire
in 2013. Additionally, utilization of net operating loss carryforwards may be
limited under Section 382 of the Internal Revenue Code. These and other deferred
income tax assets are fully reserved by a valuation allowance due to historical
losses.
EMPLOYEES
As of September 30, 2002, we had 65 full-time employees. Of these employees,
41 were engaged in research, preclinical and clinical development, regulatory
affairs and/or manufacturing activities and 24 were engaged in general and
administrative activities.
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of the Company's financial condition
and results of operations are based upon the Company's Consolidated Financial
Statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of any
contingent assets and liabilities as of the date of the financial statements and
reported amounts of revenues and expenses during the reporting period.
Management regularly reviews its estimates and assumptions, which are based on
historical experience and on various other factors and judgments about the
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates and assumptions.
Management believes that the following critical accounting policy is
affected by significant judgments and estimates used in the preparation of its
consolidated financial statements:
The Company records estimated expenses under the contracts with third
parties on a percentage of completion basis. These contracts cover ongoing
clinical trials, manufacturing and supply agreements, and third party toxicology
or pharmacology studies. The expenses are recorded as the work under the
contract is completed and the Company may record an accrued liability or prepaid
expense on its Consolidated Balance Sheet, depending on the payment terms under
each contract. As of September 30, 2002, the Company had total potential
obligations of approximately $12.0 million under contracts accounted for on the
percentage of completion basis. Management estimates that approximately $11.1
million of the contract obligations had been incurred through September 30, 2002
and approximately $1.2 million is included in accrued liabilities in the
accompanying balance sheet, for expenses under contracts on the percentage of
completion basis.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income that we can earn on
our investment portfolio and on the increase or decrease in the amount of
interest expense that we must pay with respect to our various outstanding debt
instruments. Under our current policies, we do not use interest rate derivative
instruments to manage our exposure to interest rate changes. We ensure the
safety and preservation of our invested funds by limiting default risks, market
risk and reinvestment risk. We mitigate default risk by investing in investment
grade securities. A hypothetical 100 basis point adverse move in interest rates
along the entire interest rate yield curve would not materially affect the fair
value of our interest sensitive financial instruments at September 30, 2002.
Declines in interest rates over time will, however, reduce our interest income
as described on page 12 in Management's Discussion and Analysis, under the
subcaption "Nine Months Ended September 30, 2002 and 2001, Other Income
(Expense)", while increases in interest rates over time will increase our
interest expense.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures as of November 14, 2002 was conducted under
the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer. Based on that evaluation,
our management, including our Chief Executive Officer and Chief Financial
Officer, concluded that our disclosure controls and procedures were effective as
of November 14, 2002. There have been no significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to the most recent evaluation.
15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
NUMBER EXHIBIT
- --------------- ----------------------------------------------------------------------------------------------
10.45 Employment arrangement between Ellen Brady and Esperion Therapeutics, Inc. dated
August 12, 2002.
10.46 Master Lease Agreement between Southwest Michigan Innovation Center, Inc. and Esperion
Therapeutics, Inc. effective as of July 12, 2001.
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(B) REPORTS ON FORM 8-K
Not Applicable.
17
SIGNATURES
Pursuant to the requirements 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.
Dated: November 14, 2002 ESPERION THERAPEUTICS, INC.
(Registrant)
By: /s/ Roger S. Newton
-------------------------------------
Roger S. Newton
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Timothy M. Mayleben
------------------------------------
Timothy M. Mayleben
Chief Operating Officer
and Chief Financial Officer
(Principal Financial Officer)
18
I, Roger S. Newton, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Esperion Therapeutics,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Roger S. Newton
Roger S. Newton
Chief Executive Officer
Date: November 14, 2002
19
I, Timothy M. Mayleben, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Esperion Therapeutics,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Timothy M. Mayleben
- -----------------------
Timothy M. Mayleben
Chief Financial Officer
Date: November 14, 2002
20
INDEX TO EXHIBITS
NUMBER EXHIBIT
- --------------- -----------------------------------------------------------------------------------------------------
10.45 Employment arrangement between Ellen Brady and Esperion Therapeutics, Inc. dated
August 12, 2002.
10.46 Master Lease Agreement between Southwest Michigan Innovation Center, Inc. and Esperion
Therapeutics, Inc. effective as of July 12, 2001.
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
21