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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 2002
Commission File Number 000-31191
The Medicines Company
(Exact Name of Registrant as Specified in Its Charter)
Delaware 04-3324394
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5 Sylvan Way, Parsippany, NJ 07054
(Address of Principle Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (973) 656-1616
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.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date: As of July 31, 2002, there were
39,137,510 shares of Common Stock, $0.001 par value per share, outstanding.
THE MEDICINES COMPANY
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION............................................................ 1
ITEM 1 - UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS......................... 1
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.................................................................. 9
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................... 26
PART II. OTHER INFORMATION............................................................... 27
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS..................................... 27
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................... 28
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.............................................. 29
SIGNATURES................................................................................ 30
PART I. FINANCIAL INFORMATION
ITEM 1 - UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THE MEDICINES COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
JUNE 30, DECEMBER 31,
2002 2001
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 60,047,947 $ 53,884,376
Available for sale securities 4,064,612 125,000
Accrued interest receivable 87,681 6,757
------------- -------------
64,200,240 54,016,133
------------- -------------
Accounts receivable, net of allowances of $1.1 million and $823,000
at June 30, 2002 and December 31, 2001, respectively 5,312,556 5,346,684
Inventories 18,761,792 16,610,928
Prepaid expenses and other current assets 802,777 550,564
------------- -------------
Total current assets 89,077,365 76,524,309
Fixed assets, net 989,864 1,223,528
Other assets 152,049 153,076
------------- -------------
Total assets $ 90,219,278 $ 77,900,913
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,143,279 $ 8,805,476
Accrued expenses 11,427,520 7,974,473
------------- -------------
Total current liabilities 17,570,799 16,779,949
Deferred revenue 1,458,333 --
Commitments and contingencies -- --
------------- -------------
Total liabilities 19,029,132 16,779,949
Stockholders' equity:
Common stock, $.001 par value, 75,000,000 shares
authorized at June 30, 2002 and December 31, 2001,
respectively; 39,103,303 and 34,606,582 issued and
outstanding at June 30, 2002 and December 31, 2001,
respectively 39,103 34,607
Additional paid-in capital 352,548,452 321,041,704
Deferred compensation (5,269,268) (8,593,773)
Accumulated deficit (276,226,072) (251,443,682)
Accumulated other comprehensive income (loss) 97,931 82,108
------------- -------------
Total stockholders' equity 71,190,146 61,120,964
------------- -------------
Total liabilities and stockholders' equity $ 90,219,278 $ 77,900,913
============= =============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Page 1
THE MEDICINES COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net revenue $ 7,156,130 $ 2,047,541 $ 14,871,031 $ 3,908,829
Operating expenses:
Cost of revenue 1,647,141 319,043 2,732,630 651,443
Research and development 9,392,052 8,308,956 18,701,124 20,904,153
Selling, general and administrative 9,400,052 9,567,941 18,731,889 18,626,877
------------ ------------ ------------ ------------
Total operating expenses 20,439,245 18,195,940 40,165,643 40,182,473
Loss from operations (13,283,115) (16,148,399) (25,294,612) (36,273,644)
Other income (expense):
Interest income 166,892 995,270 545,069 2,064,529
Interest expense (24,861) -- (32,847) --
Loss on sale of investments -- (850,000) -- (850,000)
------------ ------------ ------------ ------------
Net loss (13,141,084) (16,003,129) (24,782,390) (35,059,115)
============ ============ ============ ============
Basic and diluted net loss attributable
to common stockholders per
common share $ (0.37) $ (0.49) $ (0.71) $ (1.12)
============ ============ ============ ============
Shares used in computing net loss
attributable to common stockholders
per common share:
Basic and diluted 35,390,977 32,357,360 35,010,909 31,309,946
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
Page 2
THE MEDICINES COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
SIX MONTHS ENDED JUNE 30,
----------------------------
2002 2001
------------ ------------
Cash flows from operating activities:
Net loss $(24,782,389) $(35,059,115)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 265,027 217,734
Amortization of deferred stock compensation 1,800,435 2,218,605
Loss on sales of fixed assets -- 520
Changes in operating assets and liabilities:
Accrued interest receivable (80,924) 911,250
Accounts receivable 34,128 (1,587,917)
Inventory (2,162,836) (4,614,231)
Prepaid expenses and other current assets (250,113) 243,579
Other assets 1,027 (10,003)
Accounts payable (2,663,160) 608,010
Accrued expenses 3,456,262 5,132,396
Deferred revenue 1,458,333 --
------------ ------------
Net cash used in operating activities (22,924,210) (31,939,172)
Cash flows from investing activities:
Purchases of available for sale securities (3,939,612) (7,465,368)
Maturities and sales of available for sale securities 5,305 34,822,624
Purchase of fixed assets (24,665) (129,534)
------------ ------------
Net cash (used in) provided by investing activities (3,958,972) 27,227,722
Cash flows from financing activities:
Proceeds from issuances of common stock, net 33,035,856 42,208,855
Repurchases of common stock (542) (10)
------------ ------------
Net cash provided by financing activities 33,035,314 42,208,845
Effect of exchange rate changes on cash 11,439 19,343
------------ ------------
Increase in cash and cash equivalents 6,163,571 37,516,738
Cash and cash equivalents at beginning of period 53,884,376 36,802,356
------------ ------------
Cash and cash equivalents at end of period $ 60,047,947 $ 74,319,094
============ ============
See accompanying notes to condensed consolidated financial statements.
Page 3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. NATURE OF BUSINESS
The Medicines Company (the Company) was incorporated in Delaware on July 31,
1996. The Company is a pharmaceutical company engaged in the acquisition,
development and commercialization of late-stage development drugs or drugs
approved for marketing. The U.S. Food and Drug Administration approved
Angiomax(R) (bivalirudin) for use as an anticoagulant in patients with unstable
angina undergoing percutaneous transluminal coronary angioplasty in December
2000 and the Company commenced sales of Angiomax in the first quarter of 2001.
The Company was considered to be a development-stage enterprise, as defined in
Statement of Financial Accounting Standards No. 7, "Accounting and Reporting by
Development Stage Enterprises" through December 31, 2000. With the commencement
of sales in 2001, the Company is no longer considered to be a development-stage
enterprise.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all the information and footnotes required by
accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, the accompanying financial
statements include all adjustments, consisting only of normal recurring
accruals, considered necessary for a fair presentation of the Company's
financial position, results of operations, and cash flows for the periods
presented.
The results of operations for the three- and six-month periods ended June 30,
2002 are not necessarily indicative of the results that may be expected for the
entire fiscal year ending December 31, 2002. These condensed consolidated
financial statements should be read in conjunction with the audited financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001, filed with the Securities and Exchange Commission.
Cash, Cash Equivalents and Available for Sale Securities
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Cash equivalents at
June 30, 2002 and December 31, 2001 consist of investments in money market
funds. These investments are carried at cost, which approximates fair value. The
Company considers securities with original maturities of greater than three
months to be available for sale securities. Securities under this classification
are recorded at fair market value and unrealized gains and losses are recorded
as a separate component of stockholders' equity. The estimated fair value of the
available for sale securities is determined based on quoted market prices or
rates for similar instruments.
Page 4
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
At June 30, 2002, the Company held various certificates of deposit, corporate
bonds and United States government agency notes with fair value totaling $4.1
million, all with less than one-year terms. At June 30, 2002 and December 31,
2001, the Company held a certificate of deposit for $125,000 that was pledged as
a security deposit on its facility lease in Parsippany, New Jersey.
Revenue Recognition
The Company recognizes revenue from product sales in accordance with generally
accepted accounting principles in the United States, including the guidance in
Staff Accounting Bulletin 101. Revenue is recognized when there is persuasive
evidence of an arrangement, delivery has occurred, the price is fixed and
determinable, and collectibility is reasonably assured.
The Company's products are sold with limited rights of return. In accordance
with Statement of Financial Accounting Standards No. 48 (SFAS 48) "Revenue
Recognition When Right of Return Exists", revenue is recognized when the price
to the buyer is fixed, the buyer is obligated to pay the Company and the
obligation to pay is not contingent on resale of the product, the buyer has
economic substance apart from the Company, the Company has no obligations to
bring about sale of the product and the amount of returns can be reasonably
estimated. The Company reserves for estimated returns at the time of sale and
revenues are reported net of such amounts. Actual returns during the three and
six months ended June 30, 2002 and 2001 were within estimated levels.
The Company does not offer price protection to its customers. The Company's
products are primarily sold to wholesalers and distributors, who, in turn, sell
to hospitals. Hospitals that have signed contracts with the Company or that
participate in group purchasing organizations that have contracts with the
Company receive rebates based on their volume of purchases. The Company provides
for such estimated rebates at the time of sale and revenues are reported net of
such amounts.
Revenue under the arrangement with Nycomed Danmark A/S (as described in Note 6,
herein) is recognized based on the performance requirements of the agreement.
The nonrefundable up-front payment of $1.5 million was recorded as deferred
revenue and is being recognized ratably over the term of the agreement,
currently estimated to be twelve years. Revenue from future milestone payments
will be recognized ratably over the remaining term of the agreement. Product
sales under this agreement will be recognized in accordance with our established
revenue recognition policy.
3. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss per
share for the three and six months ended June 30, 2002 and 2001.
Page 5
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Basic and diluted
Net loss $(13,141,083) $(16,003,129) $(24,782,389) $(35,059,115)
Weighted average common shares outstanding 35,404,525 32,418,217 35,026,946 31,386,116
Less: unvested restricted common shares
outstanding (13,548) (60,857) (16,037) (76,170)
------------ ------------ ------------ ------------
Weighted average common shares used to
compute net loss per share 35,390,977 32,357,360 35,010,909 31,309,946
============ ============ ============ ============
Basic and diluted net loss per share $ (0.37) $ (0.49) $ (0.71) $ (1.12)
============ ============ ============ ============
Options to purchase 4,545,498 and 3,841,866 shares of common stock outstanding
as of June 30, 2002 and 2001, respectively, have not been included in the
computation of diluted net loss per share, as their effect would have been
antidilutive. Outstanding warrants to purchase 2,873,688 and 3,156,073 shares of
common stock as of June 30, 2002 and 2001, respectively, were also excluded from
the computation of diluted net loss per share as their effect would have been
antidilutive.
During the period January 1, 2000 to September 30, 2000, the Company issued
2,273,624 options at exercise prices below the estimated fair value of the
Company's common stock as of the date of grant of such options based on the
price of the Company's common stock sold in the Company's initial public
offering. The total deferred stock compensation associated with these options is
approximately $17.3 million. The Company amortizes deferred stock compensation
over the respective vesting periods of the individual stock options. Included in
the results of operations is compensation expense of $815,000 and $1.8 million
for the three and six months ended June 30, 2002, respectively, and $1.1 million
and $2.2 million for the three and six months ended June 30, 2001, respectively,
associated with such options.
4. COMPREHENSIVE LOSS
Comprehensive losses are primarily comprised of net losses, unrealized losses on
available for sales securities and currency translation adjustments.
Comprehensive losses for the three and six months ended June 30, 2002 were $13.2
million and $24.8 million, respectively, and for the three and six months ended
June 30, 2001 were $15.5 million and $34.9 million, respectively.
5. SALE OF COMMON STOCK
On June 20, 2002, the Company announced the sale through a public offering of
4.0 million shares of its common stock at a price to the public of $8.20 per
share. The Company expects to use the $30.9 million net proceeds of the sale of
common stock to fund working capital and other general corporate purposes,
including additional clinical trials of Angiomax and clevidipine and
Page 6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
other product development activities, further commercialization activities of
Angiomax for use in patients undergoing angioplasty, and the acquisition of
additional product candidates and approved products.
6. LOAN AND SECURITY AGREEMENT WITH COMERICA BANK
On March 26, 2002, the Company signed a loan and security agreement with
Comerica Bank-California providing for borrowings of up to $10.0 million. At
June 30, 2002, there were no borrowings under this agrement. Subsequent to
June 30, 2002 this loan and security agreement were cancelled.
7. SALES, MARKETING AND DISTRIBUTION AGREEMENT WITH NYCOMED DANMARK A/S
On March 25, 2002, the Company entered into a collaboration with Nycomed Danmark
A/S, a European pharmaceutical company, under which Nycomed will serve as the
exclusive distributor of Angiomax in 35 countries, including 12 countries in the
European Union. Nycomed paid an initial fee of $1.5 million and agreed to pay up
to $2.5 million in additional milestones based on regulatory approval in Europe.
In addition, Nycomed purchased 79,428 shares of the Company's common stock for a
total purchase price of approximately $1.0 million. The Company and Nycomed will
work together to achieve regulatory approval in the countries covered by the
agreement and share costs of clinical trials used to extend indications in
Europe beyond coronary angioplasty.
8. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 supersedes APB No.
16, Business Combinations, and SFAS No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises", and requires that all business
combinations be accounted for by a single method - the purchase method. SFAS No.
141 also provides guidance on the recognition of intangible assets identified in
a business combination and requires enhanced financial statement disclosures.
SFAS No. 142 adopts a more aggregate view of goodwill and bases the accounting
for goodwill on the units of the combined entity into which an acquired entity
is integrated. In addition, SFAS No. 142 concludes that goodwill and intangible
assets that have indefinite useful lives will not be amortized but rather will
be tested at least annually for impairment. Intangible assets that have finite
lives will continue to be amortized over their useful lives. SFAS No. 141 is
effective for all business combinations initiated after June 30, 2001. The
adoption of SFAS No. 142 is required for fiscal years beginning after December
15, 2001, except for the nonamortization and amortization provision, which are
required for goodwill and intangible assets acquired after June 30, 2001. The
Company adopted this new standard and it did not have a material impact on the
Company's financial condition or results of operations.
In August 2001, the FASB issued SFAS No.143, "Accounting for Asset Retirement
Obligations". The standard requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. The standard is
effective for fiscal years beginning after June 15, 2002, with earlier
application
Page 7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
encouraged. The Company adopted this new standard and it did not have a material
impact on the Company's financial condition or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets." SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
be Disposed of", and certain provisions of Accounting Principles Board (APB)
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, Extraordinary, Unusual and Infrequent
Occurring Events and Transactions." SFAS No. 144 requires that one accounting
model be used for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired, and it broadens the presentation of
discontinued operations to include more disposal transactions. The standard is
effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years, with early
adoption permitted. The Company adopted this new standard and it did not have a
material impact on the Company's financial condition or results of operations.
Page 8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Our management's discussion and analysis of financial condition and results of
operations contains forward-looking statements and is subject to important
factors that could cause our future results to differ materially from those
indicated. See "Factors that May Affect Future Results" beginning on page 16.
GENERAL
We operate as a pharmaceutical company selling and developing products for the
treatment of hospital patients. We acquire, develop and commercialize
biopharmaceutical products that are in late stages of development or have been
approved for marketing. We began selling Angiomax(R), our lead product, in U.S.
hospitals in January 2001 as an anticoagulant replacement for heparin. In
December 2000, we received marketing approval from U.S. Food and Drug
Administration for Angiomax for use as an anticoagulant in combination with
aspirin in patients with unstable angina undergoing coronary balloon
angioplasty. Coronary balloon angioplasty is a procedure used to restore normal
blood flow in an obstructed artery in the heart.
In March 2002, we entered into a study and exclusive option agreement with
AstraZeneca AB for the licensing, development and commercialization of
clevidipine, an intravenous, short-acting calcium channel blocker, for which
Phase 3 clinical trials are planned. Prior to our signing this agreement,
AstraZeneca conducted Phase I and Phase 2 clinical trials of clevidipine. These
clinical trials demonstrated that clevidipine acts to reduce blood pressure
almost immediately after intravenous infusion. We have initiated a clinical
trial to compare clevidipine to nitroglycerine for blood pressure control and
renal function in patients undergoing coronary artery bypass graph surgery.
In the first quarter of 2002, we also entered into an agreement with Nycomed
Danmark A/S under which Nycomed will serve as the exclusive distributor of
Angiomax in 35 countries, including 12 countries in the European Union. In
addition, in March 2002, we received an approvable letter from the U.S. Food and
Drug Administration for a second-generation process for the manufacture of
Angiomax bulk drug material, known as the Chemilog process.
Since our inception, we have incurred significant losses, including a net loss
of $13.1 million and $ 24.8 million for the three and six months ended June 30,
2002, respectively. Most of our expenditures to date have been for research and
development activities and selling, general and administrative expenses.
Research and development expenses represent costs incurred for product
acquisition, clinical trials, and activities relating to regulatory filings and
manufacturing development efforts. We generally outsource our clinical trials
and manufacturing development activities to independent organizations to
maximize efficiency and minimize our internal overhead. We expense our research
and development costs as they are incurred. Selling, general and administrative
expenses consist primarily of salaries and related expenses, general corporate
activities and costs associated with product sales and marketing activities.
Interest expense consists of costs associated with the use of our revolving line
of credit.
Page 9
We expect to continue to incur operating losses for the foreseeable future as a
result of research and development activities attributable to new and existing
products and costs associated with the sales and marketing of our products. We
will need to generate significant revenues to achieve and maintain
profitability.
During the year ended December 31, 2000, we recorded deferred stock compensation
on the grant of stock options of approximately $17.3 million, representing the
difference between the exercise price of such options and the fair market value
of our common stock at the date of grant of such options. The exercise prices of
these options were below the estimated fair market value of our common stock as
of the date of grant based on the estimated price of our common stock in our
initial public offering. No additional deferred stock compensation was recorded
during the six months ended June 30, 2002 or during the full year 2001 because
all grants of stock options during these periods were issued at the fair market
value on the date of grant.
We amortize deferred stock compensation over the respective vesting periods of
the individual stock options. We recorded amortization expense for deferred
stock compensation of approximately $815,000 and $1.8 million for the three and
six months ended June 30, 2002, respectively, and $1.1 million and $2.2 million
for the three and six months ended June 30, 2001, respectively. We expect to
record amortization expense for the deferred stock compensation as follows:
approximately $1.5 million for the remainder of 2002, approximately $2.8 million
in 2003 and approximately $1.0 million in 2004.
We have not generated taxable income to date. At December 31, 2001, net
operating losses available to offset future taxable income for federal income
tax purposes were approximately $173 million. If not utilized, federal net
operating loss carryforwards will expire at various dates beginning in 2011 and
ending in 2021. We have not recognized the potential tax benefit of our net
operating losses in our statements of operations. The future utilization of our
net operating loss carryforwards may be limited pursuant to regulations
promulgated under the Internal Revenue Code of 1986, as amended.
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
The discussion and analysis of our financial condition and results of operations
is based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported assets and liabilities, revenues and
expenses, and other financial information. Actual results may differ
significantly from these estimates under different assumptions and conditions.
The SEC has indicated that critical accounting estimates and judgments are those
which are both important to the portrayal of the company's financial condition
and results and require management's most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain.
Our significant accounting policies are more fully described in Note 2 in the
Notes To Condensed Consolidated Financial Statements section of this Quarterly
Report on Form 10-Q and in Note 2 of the Company's Annual Report on Form 10-K
for the year ended December 31,
Page 10
2001. Not all of these significant accounting policies, however, require
management to make difficult, complex or subjective judgments or estimates. We
believe that our accounting policies relating to inventory, as described under
the caption "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Critical Accounting Policies" in our Form 10-K as of
December 31, 2001, fit the definition of "critical accounting estimates and
judgments." In addition, we believe our accounting policies relating to revenue
recognition, as described below, fit the definition.
Revenue Recognition
Revenue on product sales is recognized when persuasive evidence of an
arrangement exists, the price is fixed and determinable, delivery has occurred,
and collectibility is reasonably assured. Revenue is net of allowances for
returns rebates and other discounts. In accordance with Statement of Financial
Accounting Standards No. 48 "Revenue Recognition When Right of Return Exists,"
revenue is recognized when the price to the buyer is fixed, the buyer is
obligated to pay us and the obligation to pay is not contingent on resale of the
product, the buyer has economic substance apart from us, we have no obligations
to bring about the sale of the product and the amount of returns can be
reasonably estimated. The buyers' limited right to return product includes the
right to return any unopened product with less than six months to the labeled
expiration date. Therefore, we must estimate the likelihood that product sold to
wholesalers might remain in their inventory to within six months of expiration,
and at what point within that six month period the wholesaler might decide to
return the product, if at all. We base our estimate on information from our
customers, historic patterns of returns and on the expiration dates of product
currently being shipped. Our estimate of returns has been consistent since we
began selling Angiomax, and the reserve thus established has been adequate to
provide for product actually returned.
Revenue under our collaborative arrangement with Nycomed is recognized based on
the terms of the agreement. The terms of the collaborative arrangement include
nonrefundable licensing fees and payments based on the achievement of certain
milestones and on product sales. Nonrefundable up-front license fees or
milestone payments are recorded as deferred revenue and are recognized ratably
over the term of the agreement, estimated to be twelve years.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2002 and 2001
Net Revenue. Net revenue increased 249% to $7.2 million for the three months
ended June 30, 2002 from $2.0 million for the three months ended June 30, 2001.
Virtually all the revenue for the three-month periods ended June 30, 2002 and
2001 came from U.S. sales of Angiomax, which we commercially launched during the
first quarter of 2001. The increase in 2002 was due primarily to increased use
of Angiomax at an increasing number of hospitals.
Cost of Revenue. Cost of revenue for the three months ended June 30, 2002 was
$1.6 million, or 23% of net revenue, compared to $319,000, or 16% of net
revenue, for the three months ended June 30, 2001. Cost of revenue consists of
expenses in connection with the manufacture of the Angiomax sold, the logistics
costs of selling Angiomax and royalty expenses under our agreements with Biogen,
Inc. The cost of manufacturing as a percentage of net revenue was approximately
10% for the three months ended June 30, 2002 and approximately 2% for the three
months ended June 30, 2001. In the second quarter of 2002, we began selling
Angiomax
Page 11
product manufactured both before and after the date of FDA approval of Angiomax
in December 2000. The costs associated with the manufacture of Angiomax prior to
the date of FDA approval of Angiomax were expensed as research and development
in the accounting periods prior to December 2000 and have not been included in
our cost of manufacturing. As a result, our cost of manufacturing, as a
percentage of product revenue increased substantially in the three months ended
June 30, 2002 compared to the three months ended June 30, 2001, reflecting the
increase in the manufacturing costs of Angiomax in the three months ended June
30, 2002. In the second half of 2002, we expect to sell a greater percentage of
Angiomax manufactured after the date of FDA approval, and as a result, we expect
the cost of manufacturing as a percentage of net revenue to continue to
increase.
Research and Development Expenses. Research and development expenses increased
13% to $9.4 million for the three months ended June 30, 2002, from $8.3 million
for the three months ended June 30, 2001. The increase in research and
development expenses of $1.1 million was primarily due to higher clinical
development costs mostly related to our trial in angioplasty called REPLACE-2.
We have a number of clinical trial programs currently underway, or about to
commence, for expanding the applications of Angiomax in the treatment of
ischemic heart disease and for use as a procedural anticoagulant. The funding
for Angiomax, our main product, has represented and will continue to represent a
significant portion of research and development spending. For the three-month
periods ended June 30, 2002 and 2001, research and development expenses related
to Angiomax included the costs of clinical trials, development manufacturing
costs for the bulk drug product and the cost associated with preparation of U.S.
and worldwide marketing applications. We expect our current primary clinical
trial of Angiomax, REPLACE-2, to complete enrollment during the third quarter of
2002. We are currently working on a second generation manufacturing process for
Angiomax bulk drug substance, called Chemilog, for which we have received an
approvable letter from the FDA, and will continue to incur research and
development expenses until we receive FDA approval of this process. In the
fourth quarter of 2002 we anticipate receipt of Angiomax bulk material from our
supplier, UCB Bioproducts, produced using the Chemilog process. The approximate
$4 million manufacturing cost of this material will be charged to development
expense if FDA approval of this process has not been received. The amount of
future research and development expenses associated with Angiomax are not
reasonably certain as these costs are dependent upon the regulatory process and
the timing for obtaining marketing approval for other applications of the
product in the United States and other countries. However, we expect them to be
substantial.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 2% to $9.4 million for the three months ended
June 30, 2002, from $9.6 million for the three months ended June 30, 2001. The
decrease in selling, general and administrative expenses of $168,000 was
primarily due to a decrease in certain marketing promotion expenses, partly
offset by increased headcount and medical education expenses relating to the
sales and marketing of Angiomax.
Other Income and Expense. Interest income decreased 83% to $167,000 for the
three months ended June 30, 2002, from $1.0 million for the three months ended
June 30, 2001. The decrease in interest income of $828,000 was primarily due to
lower cash and available for sale securities
Page 12
balances as a result of to operating expenses and working capital requirements
and to lower available interest rates on securities. Interest income for the
three months ended June 30, 2002 and June 30, 2001 was primarily attributable to
the investment of the remaining proceeds from our sale of 4.0 million shares of
our common stock in a private placement in May 2001. A portion of our interest
income for the three months ended June 30, 2002 was attributable to the
investment of the proceeds from our sale of 4.0 million shares of our common
stock in a public offering in June 2002.
We had interest expense of $25,000 during the three months ended June 30, 2002
associated with the draw down of our revolving line of credit, which we repaid
during the period. We had no interest expense for the three months ended June
30, 2001. In the three months ended June 30, 2001, we liquidated our $3.0
million principal investment in Southern California Edison 5 7/8 % bonds, which
were originally due on January 15, 2001, recognizing a loss of $850,000 on the
sale.
Six Months Ended June 30, 2002 and 2001
Net Revenue. Net revenue increased 280% to $14.9 million for the six months
ended June 30, 2002, from $3.9 million for the six months ended June 30, 2001.
Virtually all the revenue for the six-month periods ended June 30, 2002 and 2001
came from U.S. sales of Angiomax, which we commercially launched during the
first quarter of 2001. The increase in 2002 was due primarily to increased use
of Angiomax in an increasing number of hospitals.
Cost of Revenue. Cost of revenue for the six months ended June 30, 2002 was $2.7
million, or 18% of net revenue, compared to $651,000, or 17% of net revenue, for
the six months ended June 30, 2001. The cost of manufacturing as a percentage of
revenue was at approximately 7% for the six months ended June 30, 2002 and
approximately 2% for the six months ended June 30, 2001. In the six months ended
June 30,2002, we began selling Angiomax product manufactured both before and
after the date of FDA approval of Angiomax in December 2000. The costs
associated with the manufacture of Angiomax prior to the date of FDA approval of
Angiomax were expensed as research and development in the accounting periods
prior to December 2000. As a result, our cost of manufacturing, as a percentage
of product revenue increased substantially in the six months ended June 30, 2002
compared to the six months ended June 30, 2001, reflecting the increase in the
manufacturing costs of Angiomax in the six months ended June 30, 2002. In the
second half of 2002, we expect to sell a greater percentage of Angiomax
manufactured after the date of FDA approval, and as a result, we expect the cost
of manufacturing as a percentage of revenue to continue to increase.
Research and Development Expenses. Research and development expenses decreased
11% to $18.7 million for the six months ended June 30, 2002, from $20.9 million
for the six months ended June 30, 2001. The decrease in research and development
expenses of $2.2 million was primarily due to lower clinical development costs
reflecting the inclusion in the 2001 period of costs relating to the HERO-2
trial program, our Phase 3 trial in acute myocardial infarction, that was
completed in 2001. Partly offsetting the decrease in clinical development costs
associated with HERO-2 were the higher clinical development costs related to our
trials in angioplasty called REPLACE-2 and the manufacturing development cost
incurred in connection with our
Page 13
receipt of the final Chemilog validation batch of $2.5 million in the six months
ended June 30, 2002.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 1% to $18.7 million for the six months ended
June 30, 2002, from $18.6 million for the six months ended June 30, 2001. The
increase in selling, general and administrative expenses of $105,000 was
primarily due to an increase in marketing and selling expenses and corporate
infrastructure costs relating to the sales and marketing of Angiomax.
Other Income and Expense. Interest income decreased 74% to $545,000 for the six
months ended June 30, 2002, from $2.1 million for the six months ended June 30,
2001. The decrease in interest income of $1,519,000 was primarily due to lower
cash and available for sale securities balances attributable to operating
expenses and working capital requirements and to lower available interest rates
on securities. For the six months ended June 30, 2002, the primary source of
interest income was primarily attributable to the investment of the proceeds
from our sale of 4.0 million shares of our common stock in a private placement
in May 2001. For the six months ended June 30, 2001, the primary source of
interest income is from the investment of the remaining proceeds of our initial
public offering in August and September 2000.
We had interest expense of $33,000 during the six months ended June 30, 2002
associated with the draw down of our revolving line of credit at the end of
March 2002. We had no interest expense for the six months ended June 30, 2001.
In the six months ended June 30, 2001, we liquidated our $3.0 million principal
investment in Southern California Edison 5 7/8 % bonds, which were originally
due on January 15, 2001, recognizing a loss of $850,000 on the sale.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations through the sale of common
and preferred stock, sales of convertible promissory notes and warrants,
interest income, draw downs of our revolving line of credit and revenues from
sales of Angiomax.
In August and September 2000, we received $101.4 million in net proceeds from
the sale of common stock in our initial public offering. We received an
additional $41.8 million in net proceeds in May 2001 from the sale of 4.0
million shares of our common stock in a private placement, and we received an
additional $30.9 million in net proceeds in June 2002 from the sale of 4.0
million shares of our common stock in a public offering. Prior to the initial
public offering, we had received net proceeds of $79.4 million from the private
placement of equity securities, primarily redeemable convertible preferred
stock, and $19.4 million from the issuance of convertible notes and warrants.
In March 2002, we entered into a collaboration agreement with Nycomed Danmark
A/S. Under the agreement, Nycomed paid us an initial non-refundable fee of $1.5
million and agreed to pay up to $2.5 million in additional milestones based on
regulatory approval in Europe. In addition, Nycomed purchased 79,428 shares of
our common stock for a total purchase price of approximately $1.0 million.
Page 14
In March 2002, we entered into a loan and security agreement with Comerica
Bank-California. Under the agreement, we may borrow up to $10.0 million. At June
30, 2002, we had no borrowings under this agreement. Subsequent to June 30,
2002, we terminated this loan and security agreement. Amounts outstanding under
the agreement were collateralized by all of the Company's personal property. The
agreement had a term of one year and provided for interest on amounts
outstanding at a rate of one percent above the prime rate.
On April 23, 2002, we filed a registration statement on Form S-3 with the
Securities and Exchange Commission registering 4.0 million shares of our common
stock. The registration statement was declared effective by the SEC on May 1,
2002, and the Company sold all 4.0 million shares of the common stock on June
20, 2002 at a price to the public of $8.20 per share. Net proceeds from the sale
totaled $30.9 million.
As of June 30, 2002, we had $64.1 million in cash, cash equivalents, available
for sale securities and accrued interest receivable, as compared to $54.0
million as of December 31, 2001. The increase in cash, cash equivalents,
available for sale securities and accrued interest receivable of $10.1 million
was primarily attributable to the proceeds from our public offering in June
2002, the $2.5 million received from Nycomed Danmark A/S, consisting of a
non-refundable upfront license fee of $1.5 million and $1.0 million in proceeds
from the sale of shares of our common stock to Nycomed, and from collections on
sales of Angiomax. This increase was partly offset by operating expenses and
working capital requirements during the six-month period ended June 30, 2002.
We used net cash of $22.9 million in operating activities during the six months
ended June 30, 2002. This consisted of a net loss of $24.8 million, combined
with increases in inventory of $2.2 million and a decrease in accounts payable
of $2.7 million, partly offset by an increase in accrued expenses of $3.5
million, deferred revenue of $1.5 million associated with the Nycomed agreement
and from non-cash amortization of deferred stock compensation of $1.8 million
and depreciation of $265,000. The increase in inventory of $2.2 million was
primarily attributable to the scheduled receipt of bulk Angiomax from our
supplier, UCB Bioproducts, during the six months ended June 30, 2002. The
increase in accrued expenses was largely the result of higher clinical
development costs associated with the REPLACE-2 trial. We do not expect to
receive any additional Angiomax bulk material until the fourth quarter of 2002.
During the six months ended June 30, 2002, we used approximately $4.0 million of
cash in net investing activities, which consisted principally of the purchase of
available for sale securities. During the six months ended June 30, 2002, we
received $33.0 million from financing activities, primarily the $30.9 million in
proceeds from the sale of 4.0 million shares of our common stock in a public
offering in June, $1.0 million in proceeds from the sale of shares of our common
stock to Nycomed, and from employees purchasing stock under our stock plans.
We expect to continue to devote substantial resources to our research and
development efforts and to our sales, marketing and manufacturing programs
associated with the commercialization of our products. Our funding requirements
will depend on numerous factors including:
Page 15
- whether Angiomax is commercially successful;
- the progress, level and timing of our research and development
activities;
- the cost and outcomes of regulatory reviews;
- the continuation or termination of third party manufacturing or
sales and marketing arrangements;
- the cost and effectiveness of our sales and marketing programs;
- the status of competitive products;
- our ability to defend and enforce our intellectual property rights;
and
- the establishment of additional strategic or licensing arrangements
with other companies or acquisitions.
We believe, based on our current operating plan, plus anticipated revenues from
Angiomax and interest income, that our current cash, cash equivalents and
available for sale securities will be sufficient to fund our operations for at
least 18 months. If our existing resources are insufficient to satisfy our
liquidity requirements due to slower than anticipated revenues from Angiomax or
otherwise, or if we acquire additional product candidates, we may need to sell
additional equity or debt securities or seek additional financing through other
arrangements.
The sale of additional equity or debt securities may result in additional
dilution to our stockholders, and we cannot be certain that additional public or
private financing will be available in amounts or on terms acceptable to us, if
at all. If we are unable to obtain this additional financing, we may be required
to delay, reduce the scope of, or eliminate one or more of our planned research,
development and commercialization activities, which could harm our financial
condition and operating results. In addition, in order to obtain additional
financing, we may be required to relinquish rights to products, product
candidates or technologies that we would not otherwise relinquish.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Our contractual obligations and commercial commitments include:
- operating leases for our facilities in Cambridge, Massachusetts and
Parsippany, New Jersey, which expire in August 2003 and January
2006, respectively. Future annual minimum payments under these
operating leases are $314,000 for the remainder of 2002, and
$519,000, $305,000, and $183,000 in 2003, 2004, and 2005,
respectively.
- a purchase order that was placed in March 2002 to UCB Bioproducts
for the purchase of approximately $5.3 million of Angiomax bulk drug
product. We expect to take delivery under this purchase order in the
fourth quarter of 2002 and 2003.
- a revolving line of credit with Comerica Bank under which we may
borrow up to $10.0 million. As of June 30, 2002, we had no
outstanding borrowings under the agreement. Subsequent to June 30,
2002, we terminated this loan and security agreement.
FACTORS THAT MAY AFFECT FUTURE RESULTS
This Quarterly Report includes forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of
Page 16
1933, as amended. For this purpose, any statements contained herein regarding
our strategy, future operations, financial position, future revenues, projected
costs, prospects, plans and objectives of management, other than statements of
historical facts, are forward-looking statements. The words "anticipates,"
"believes," "estimates," "expects," "intends," "may," "plans," "projects,"
"will," "would" and similar expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain these
identifying words. We cannot guarantee that we actually will achieve the plans,
intentions or expectations disclosed in our forward-looking statements. There
are a number of important factors that may cause actual results or events to
differ materially from those disclosed in the forward-looking statements we
make. These important factors include the risk factors set forth below. Although
we may elect to update forward-looking statements in the future, we specifically
disclaim any obligation to do so, even if our estimates change, and readers
should not rely on those forward-looking statements as representing our views as
of any date subsequent to the date of filing this Quarterly Report.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF NET LOSSES, AND WE EXPECT TO CONTINUE TO INCUR NET LOSSES
AND MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY
We have incurred net losses since our inception, including net losses of
approximately $13.1 million and $24.8 million for the three and six months ended
June 30, 2002, respectively. As of June 30, 2002, we had an accumulated deficit
of approximately $276.2 million. We expect to make substantial expenditures to
further develop and commercialize our products, including costs and expenses
associated with clinical trials, regulatory approval and commercialization of
products. As a result, we are unsure when we will become profitable, if at all,
and if we do become profitable, we may not remain profitable for any substantial
period of time. If we fail to achieve profitability within the time frame
expected by investors or securities analysts, the market price of our common
stock may decline.
OUR BUSINESS IS VERY DEPENDENT ON THE COMMERCIAL SUCCESS OF ANGIOMAX
Other than Angiomax, our products are in clinical phases of development and,
even if approved by the FDA, are a number of years away from entering the
market. As a result, Angiomax will account for almost all of our revenues for
the foreseeable future. The commercial success of Angiomax will depend upon its
acceptance by physicians, patients and other key decision-makers as a safe,
therapeutic and cost-effective alternative to heparin and other products used in
current practice. If Angiomax is not commercially successful, we will have to
find additional sources of revenues or curtail or cease operations.
FAILURE TO RAISE ADDITIONAL FUNDS IN THE FUTURE MAY AFFECT THE DEVELOPMENT,
MANUFACTURE AND SALE OF OUR PRODUCTS
Our operations to date have generated substantial and increasing needs for cash.
Our negative cash flow from operations is expected to continue into the
foreseeable future. The clinical development and regulatory approval of Angiomax
for additional indications, the development and regulatory approval of our other
product candidates and the acquisition and development of additional product
candidates by us will require a commitment of substantial funds. Our future
capital requirements are dependent upon many factors and may be significantly
greater than we expect.
Page 17
As of the date of this Quarterly Report, we believe, based on our current
operating plan, plus anticipated sales of Angiomax and interest income, that our
current cash, cash equivalents and available for sale securities will be
sufficient to fund our operations for at least 18 months. If our existing
resources are insufficient to satisfy our liquidity requirements due to slower
than anticipated sales of Angiomax or otherwise, or if we acquire additional
product candidates, we may need to sell additional equity or debt securities or
seek additional financing through other arrangements. The sale of additional
equity or debt securities may result in additional dilution to our stockholders,
and we cannot be certain that additional public or private financing will be
available in amounts or on terms acceptable to us, if at all. If we are unable
to obtain this additional financing, we may be required to delay, reduce the
scope of, or eliminate one or more of our planned research, development and
commercialization activities, which could harm our financial condition and
operating results. In addition, in order to obtain additional financing, we may
be required to relinquish rights to products, product candidates or technologies
that we would not otherwise relinquish.
WE CANNOT EXPAND THE INDICATIONS FOR ANGIOMAX UNLESS WE RECEIVE FDA APPROVAL FOR
EACH ADDITIONAL INDICATION. FAILURE TO EXPAND THESE INDICATIONS WILL LIMIT THE
SIZE OF THE COMMERCIAL MARKET FOR ANGIOMAX
In December 2000, we received approval from the FDA for the use of Angiomax as
an anticoagulant in combination with aspirin in patients with unstable angina
undergoing coronary balloon angioplasty. One of our key objectives is to expand
the indications for which the FDA will approve Angiomax. In order to do this, we
will need to conduct additional clinical trials and obtain FDA approval for each
proposed indication. If we are unsuccessful in expanding the approved
indications for the use of Angiomax, the size of the commercial market for
Angiomax will be limited.
FAILURE TO OBTAIN REGULATORY APPROVAL IN FOREIGN JURISDICTIONS WILL PREVENT US
FROM MARKETING ANGIOMAX ABROAD
We intend to market our products in international markets, including Europe. In
order to market our products in the European Union and many other foreign
jurisdictions, we or our distribution agents must obtain separate regulatory
approvals. In February 1998, we submitted a Marketing Authorization Application
("MAA") to the European Agency for the Evaluations of Medicinal Products, or the
EMEA, for use of Angiomax in unstable angina patients undergoing angioplasty.
Following extended interaction with European regulatory authorities, the
Committee of Proprietary Medicinal Products of the EMEA voted in October 1999
not to recommend Angiomax for approval in angioplasty. The United Kingdom and
Ireland dissented from this decision. We have withdrawn our application to the
EMEA and, as of the date of this Quarterly Report, plan to resubmit an MAA with
the results of the REPLACE-2 program, if positive. We may not be able to obtain
approval from any or all of the jurisdictions in which we seek approval to
market Angiomax. Obtaining foreign approvals may require additional trials and
additional expense.
THE DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCTS MAY BE TERMINATED OR
DELAYED, AND THE COSTS OF DEVELOPMENT AND COMMERCIALIZATION MAY INCREASE, IF
THIRD PARTIES WHO WE RELY ON TO MANUFACTURE AND SUPPORT THE DEVELOPMENT AND
COMMERCIALIZATION OF OUR PRODUCTS DO NOT FULFILL THEIR OBLIGATIONS
Our development and commercialization strategy entails entering into
arrangements with corporate and academic collaborators, contract research
organizations, distributors, third-party manufacturers, licensors, licensees and
others to conduct development work, manage our clinical trials, manufacture our
products and market and sell our products outside of the United States.
Page 18
Although we manage these services, we do not have the expertise or the resources
to conduct such activities on our own and, as a result, are particularly
dependent on third parties in most areas.
We may not be able to maintain our existing arrangements with respect to the
commercialization of Angiomax or establish and maintain arrangements to develop
and commercialize clevidipine or any additional product candidates or products
on terms that are acceptable to us. Any current or future arrangements for the
development and commercialization of our products may not be successful. If we
are not able to establish or maintain agreements relating to Angiomax,
clevidipine or any additional products on terms which we deem favorable, our
financial condition would be materially adversely affected.
Third parties may not perform their obligations as expected. The amount and
timing of resources that third parties devote to developing, manufacturing and
commercializing our products may not be within our control. Furthermore, our
interests may differ from those of third parties that manufacture or
commercialize our products. Disagreements that may arise with these third
parties could delay or lead to the termination of the development or
commercialization of our product candidates, or result in litigation or
arbitration, which would be time consuming and expensive.
If any third party that manufactures or supports the development or
commercialization of our products breaches or terminates its agreement with us,
or fails to conduct its activities in a timely manner, such breach, termination
or failure could:
- delay or otherwise adversely impact the development or
commercialization of Angiomax, clevidipine, our other product
candidates or any additional product candidates that we may acquire
or develop;
- require us to undertake unforeseen additional responsibilities or
devote unforeseen additional resources to the development or
commercialization of our products; or
- result in the termination of the development or commercialization of
our products.
WE ARE DEPENDENT ON A SINGLE SUPPLIER FOR THE PRODUCTION OF ANGIOMAX BULK DRUG
SUBSTANCE AND A DIFFERENT SINGLE SUPPLIER TO CARRY OUT ALL FILL-FINISH
ACTIVITIES FOR ANGIOMAX
We have no experience in manufacturing, and we lack the facilities and personnel
to manufacture products in accordance with FDA regulations. As of the date of
this Quarterly Report, we obtain all of our Angiomax bulk drug substance from
one manufacturer, UCB Bioproducts S.A., and rely on another manufacturer, Ben
Venue Laboratories, Inc., to carry out all fill-finish activities for Angiomax,
which includes final formulation and transfer of the drug into vials where it is
then freeze-dried and sealed.
The FDA requires that all manufacturers of pharmaceuticals for sale in or from
the United States achieve and maintain compliance with the FDA's current Good
Manufacturing Practice, or cGMP, regulations and guidelines. There are a limited
number of manufacturers that operate under cGMP regulations capable of
manufacturing Angiomax. As of the date of this Quarterly Report, we do not have
alternative sources for production of Angiomax bulk drug substance or to carry
out fill-finish activities. In the event that either of our current
manufacturers is unable to carry out its respective manufacturing obligations to
our satisfaction, we may be unable to obtain
Page 19
alternative manufacturing, or obtain such manufacturing on commercially
reasonable terms or on a timely basis. If we were required to transfer
manufacturing processes to other third party manufacturers, we would be required
to satisfy various regulatory requirements, which could cause us to experience
significant delays in receiving an adequate supply of Angiomax. Any delays in
the manufacturing process may adversely impact our ability to meet commercial
demands for Angiomax on a timely basis and supply product for clinical trials of
Angiomax.
IF WE DO NOT SUCCEED IN DEVELOPING A SECOND-GENERATION PROCESS FOR THE
PRODUCTION OF BULK ANGIOMAX DRUG SUBSTANCE, OUR GROSS MARGINS MAY BE BELOW
INDUSTRY AVERAGES
As of the date of this Quarterly Report, we are developing with UCB Bioproducts
a second-generation process for the production of bulk Angiomax drug substance.
This process, for which we have received an approvable letter from the FDA,
involves changes to the early manufacturing steps of our current process and, we
expect, will improve our gross margins on the future sales of Angiomax. If
regulatory approval of the process is not obtained or is delayed, then our
ability to improve our gross margins on future sales of Angiomax may be limited.
CLINICAL TRIALS OF OUR PRODUCT CANDIDATES ARE EXPENSIVE AND TIME-CONSUMING, AND
THE RESULTS OF THESE TRIALS ARE UNCERTAIN
Before we can obtain regulatory approvals for the commercial sale of any product
that we wish to develop, we will be required to complete pre-clinical studies
and extensive clinical trials in humans to demonstrate the safety and efficacy
of such product. As of the date of this Quarterly Report, we are conducting
clinical trials of Angiomax for use in the treatment of ischemic heart disease
and for additional potential hospital applications as a procedural
anticoagulant. There are numerous factors that could delay our clinical trials
or prevent us from completing our trials successfully. We, or the FDA, may
suspend a clinical trial at any time on various grounds, including a finding
that patients are being exposed to unacceptable health risks.
The rate of completion of clinical trials depends in part upon the rate of
enrollment of patients. Patient enrollment is a function of many factors,
including the size of the patient population, the proximity of patients to
clinical sites, the eligibility criteria for the trial, the existence of
competing clinical trials and the availability of alternative or new treatments.
In particular, the patient population targeted by some of our clinical trials
may be small. Delays in future planned patient enrollment may result in
increased costs and program delays.
In addition, clinical trials, if completed, may not show any potential product
to be safe or effective. Results obtained in pre-clinical studies or early
clinical trials are not always indicative of results that will be obtained in
later clinical trials. Moreover, data obtained from pre-clinical studies and
clinical trials may be subject to varying interpretations. As a result, the FDA
or other applicable regulatory authorities may not approve a product in a timely
fashion, or at all. Even if regulatory approval to market a product is granted,
the regulatory approval may impose limitations on the indicated use for which
the drug may be marketed.
OUR FAILURE TO ACQUIRE AND DEVELOP ADDITIONAL PRODUCT CANDIDATES OR APPROVED
PRODUCTS WILL IMPAIR OUR ABILITY TO GROW
As part of our growth strategy, we intend to acquire and develop additional
pharmaceutical product candidates or approved products. The success of this
strategy depends upon our ability to identify, select and acquire pharmaceutical
products in late-stage development or that have
Page 20
been approved and that meet the criteria we have established. Because we neither
have, nor intend to establish, internal scientific research capabilities, we are
dependent upon pharmaceutical and biotechnology companies and other researchers
to sell or license product candidates to us.
Any product candidate we acquire will require additional research and
development efforts prior to commercial sale, including extensive pre-clinical
and/or clinical testing and approval by the FDA and corresponding foreign
regulatory authorities. All of our product candidates are prone to the risks of
failure inherent in pharmaceutical product development, including the
possibility that the product candidate will not be safe, non-toxic and effective
or approved by regulatory authorities. In addition, we cannot assure you that
any approved products that we develop or acquire will be:
- manufactured or produced economically;
- successfully commercialized; or
- widely accepted in the marketplace.
In addition, proposing, negotiating and implementing an economically viable
product acquisition is a lengthy and complex process. Other companies, including
those with substantially greater financial, marketing and sales resources, may
compete with us for the acquisition of product candidates and approved products.
We may not be able to acquire the rights to additional product candidates and
approved products on terms that we find acceptable, or at all.
IF WE BREACH ANY OF THE AGREEMENTS UNDER WHICH WE LICENSE COMMERCIALIZATION
RIGHTS TO PRODUCTS OR TECHNOLOGY FROM OTHERS, WE COULD LOSE LICENSE RIGHTS THAT
ARE IMPORTANT TO OUR BUSINESS
We license commercialization rights to products and technology that are
important to our business, and we expect to enter into additional licenses in
the future. For instance, we acquired our first four products through exclusive
licensing arrangements. Under these licenses we are subject to commercialization
and development, sublicensing, royalty, insurance and other obligations. If we
fail to comply with any of these requirements, or otherwise breach these license
agreements, the licensor may have the right to terminate the license in whole or
to terminate the exclusive nature of the license. In addition, upon the
termination of the license we may be required to license to the licensor the
intellectual property that we developed.
OUR ABILITY TO MANAGE OUR BUSINESS EFFECTIVELY COULD BE HAMPERED IF WE ARE
UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL AND CONSULTANTS
The biopharmaceutical industry has experienced a high rate of turnover of
management personnel in recent years. We are highly dependent on our ability to
attract and retain qualified personnel for the acquisition, development and
commercialization activities we conduct or sponsor. If we lose one or more of
the members of our senior management, including our executive chairman, Dr.
Clive A. Meanwell, or our chief executive officer, David M. Stack, or other key
employees or consultants, our ability to implement successfully our business
strategy could be seriously harmed. Our ability to replace these key employees
may be difficult and may take an extended period of time because of the limited
number of individuals in the biotechnology industry with the breadth of skills
and experience required to develop and commercialize products successfully.
Competition to hire from this limited pool is intense, and we may be unable to
hire, train, retain or motivate such additional personnel.
Page 21
WE FACE SUBSTANTIAL COMPETITION, WHICH MAY RESULT IN OTHERS DISCOVERING,
DEVELOPING OR COMMERCIALIZING COMPETING PRODUCTS BEFORE OR MORE SUCCESSFULLY
THAN WE DO
The biopharmaceutical industry is highly competitive. Our success will depend on
our ability to acquire and develop products and apply technology, and our
ability to establish and maintain a market for our products. Potential
competitors in the United States and other countries include major
pharmaceutical and chemical companies, specialized biotechnology firms,
universities and other research institutions. Many of our competitors have
substantially greater research and development capabilities and experience, and
greater manufacturing, marketing and financial resources, than we do.
Accordingly, our competitors may develop or license products or other novel
technologies that are more effective, safer or less costly than existing
products or technologies or products or technologies that are being developed by
us or may obtain FDA approval for products more rapidly than we are able.
Technological development by others may render our products or product
candidates noncompetitive. We may not be successful in establishing or
maintaining technological competitiveness.
BECAUSE THE MARKET FOR THROMBIN INHIBITORS IS COMPETITIVE, OUR PRODUCT MAY NOT
OBTAIN WIDESPREAD USE
We have positioned Angiomax as a replacement for heparin, which is widely used
and inexpensive, for use in patients with ischemic heart disease. Because
heparin is inexpensive and has been widely used for many years, medical
decision-makers may be hesitant to adopt our alternative treatment. In addition,
due to the high incidence and severity of cardiovascular diseases, competition
in the market for thrombin inhibitors is intense and growing. There are a number
of thrombin inhibitors currently on the market, awaiting regulatory approval and
in development, including orally administered agents.
THE LIMITED RESOURCES OF THIRD-PARTY PAYERS MAY LIMIT THE USE OF OUR PRODUCTS
In general, anticoagulant drugs may be classified in three groups: drugs that
directly or indirectly target and inhibit thrombin, drugs that target and
inhibit platelets and drugs that break down fibrin. Because each group of
anticoagulants acts on different components of the clotting process, we believe
that there will be continued clinical work to determine the best combination of
drugs for clinical use. We expect Angiomax to be used with aspirin alone or in
conjunction with other therapies. Although we are not positioning Angiomax as a
direct competitor to platelet inhibitors or fibrinolytic drugs, platelet
inhibitors and fibrinolytic drugs may compete with Angiomax for the use of
hospital financial resources. Many U.S. hospitals receive a fixed reimbursement
amount per procedure for the angioplasties and other treatment therapies they
perform. Because this amount is not based on the actual expenses the hospital
incurs, U.S. hospitals may have to choose among Angiomax, platelet inhibitors
and fibrinolytic drugs.
FLUCTUATIONS IN OUR OPERATING RESULTS COULD AFFECT THE PRICE OF OUR COMMON STOCK
Our operating results may vary from period to period based on the amount and
timing of sales of Angiomax, the availability and timely delivery of a
sufficient supply of Angiomax, the timing and expenses of clinical trials,
announcements regarding clinical trial results and product introductions by our
competitors, the availability and timing of third-party reimbursement and the
timing of approval for our product candidates. If our operating results do not
match the expectations of securities analysts and investors as a result of these
and other factors, the trading price of our common stock will likely decrease.
Page 22
WE MAY UNDERTAKE STRATEGIC ACQUISITIONS IN THE FUTURE AND ANY DIFFICULTIES FROM
INTEGRATING SUCH ACQUISITIONS COULD DAMAGE OUR ABILITY TO ATTAIN OR MAINTAIN
PROFITABILITY
We may acquire additional businesses and products that complement or augment our
existing business. Integrating any newly acquired businesses or product could be
expensive and time-consuming. We may not be able to integrate any acquired
business or product successfully or operate any acquired business profitably.
Moreover, we may need to raise additional funds through public or private debt
or equity financing to acquire any businesses, which may result in dilution for
stockholders and the incurrence of indebtedness.
OUR REVENUES ARE SUBSTANTIALLY DEPENDENT ON A LIMITED NUMBER OF WHOLESALERS TO
WHICH WE SELL ANGIOMAX, AND SUCH REVENUES MAY FLUCTUATE FROM QUARTER TO QUARTER
BASED ON THE BUYING PATTERNS OF THESE WHOLESALERS
We sell Angiomax primarily to a limited number of national medical and
pharmaceutical distributors and wholesalers with distribution centers located
throughout the United States. During the three and six months ended June 30,
2002, revenues from the sale of Angiomax to four wholesalers totaled
approximately 96% of our net revenues. Our reliance on this small number of
wholesalers could cause our revenues to fluctuate from quarter to quarter based
on the buying patterns of these wholesalers. In addition, if any of these
wholesalers fail to pay us on a timely basis or at all, our financial position
and results of operations could be materially adversely affected.
RISKS RELATED TO OUR INDUSTRY
IF WE DO NOT OBTAIN FDA APPROVALS FOR OUR PRODUCTS OR COMPLY WITH GOVERNMENT
REGULATIONS, WE MAY NOT BE ABLE TO MARKET OUR PRODUCTS AND MAY BE SUBJECT TO
STRINGENT PENALTIES
Except for Angiomax, which has been approved for sale in the United States and
New Zealand, we do not have a product approved for sale in the United States or
any foreign market. We must obtain approval from the FDA in order to sell our
product candidates in the United States and from foreign regulatory authorities
in order to sell our product candidates in other countries. We must successfully
complete our clinical trials and demonstrate manufacturing capability before we
can file with the FDA for approval to sell our products. The FDA could require
us to repeat clinical trials as part of the regulatory review process. Delays in
obtaining or failure to obtain regulatory approvals may:
- delay or prevent the successful commercialization of any of our
product candidates;
- diminish our competitive advantage; and
- defer or decrease our receipt of revenues or royalties.
The regulatory review and approval process is lengthy, expensive and uncertain.
Extensive pre-clinical data, clinical data and supporting information must be
submitted to the FDA for each additional indication to obtain such approvals,
and we cannot be certain when we will receive these regulatory approvals, if
ever.
In addition to initial regulatory approval, our products and product candidates
will be subject to extensive and rigorous ongoing domestic and foreign
government regulation. Any approvals, once obtained, may be withdrawn if
compliance with regulatory requirements is not maintained or safety problems are
identified. Failure to comply with these requirements may also subject us to
stringent penalties.
Page 23
WE MAY NOT BE ABLE TO OBTAIN OR MAINTAIN PATENT PROTECTION FOR OUR PRODUCTS, AND
WE MAY INFRINGE THE PATENT RIGHTS OF OTHERS
The patent positions of pharmaceutical and biotechnology companies like us are
generally uncertain and involve complex legal, scientific and factual issues.
Our success depends significantly on our ability to:
- obtain U.S. and foreign patents;
- protect trade secrets;
- operate without infringing the proprietary rights of others; and
- prevent others from infringing our proprietary rights.
We may not have any patents issued from any patent applications that we own or
license. If patents are granted, the claims allowed may not be sufficiently
broad to protect our technology. In addition, issued patents that we own or
license may be challenged, invalidated or circumvented. Our patents also may not
afford us protection against competitors with similar technology. Because patent
applications in the United States and many foreign jurisdictions are typically
not published until eighteen months after filing and because publications of
discoveries in the scientific literature often lag behind actual discoveries, we
cannot be certain that others have not filed or maintained patent applications
for technology used by us or covered by our pending patent applications without
our being aware of these applications.
We exclusively license U.S. patents and patent applications and corresponding
foreign patents and patent applications relating to Angiomax, IS-159 and CTV-05.
In all, as of the date of this Quarterly Report, we exclusively license nine
issued U.S. patents. The principal U.S. patent that covers Angiomax expires in
2010. The U.S. Patent and Trademark Office has rejected our application for an
extension of the term of the patent beyond 2010 because the application was not
filed on time. We filed the application in connection with FDA approval of
Angiomax. We are exploring an alternative to extend the term of the patent, but
we can provide no assurance that we will be successful. We have not yet filed
any independent patent applications.
We may not hold proprietary rights to some patents related to our product
candidates. In some cases, others may own or control these patents. As a result,
we may be required to obtain licenses under third-party patents to market some
of our product candidates. If licenses are not available to us on acceptable
terms, we will not be able to market these products.
We may become a party to patent litigation or other proceedings regarding
intellectual property rights. The cost to us of any patent litigation or other
proceeding, even if resolved in our favor, could be substantial. If any patent
litigation or other intellectual property proceeding in which we are involved is
resolved unfavorably to us, we may be enjoined from manufacturing or selling our
products without a license from the other party, and we may be held liable for
significant damages. We may not be able to obtain any required license on
commercially acceptable terms, or at all.
IF WE ARE NOT ABLE TO KEEP OUR TRADE SECRETS CONFIDENTIAL, OUR TECHNOLOGY AND
INFORMATION MAY BE USED BY OTHERS TO COMPETE AGAINST US
We rely significantly upon unpatented proprietary technology, information,
processes and know-
Page 24
how. We seek to protect this information by confidentiality agreements with our
employees, consultants and other third-party contractors, as well as through
other security measures. We may not have adequate remedies for any breach by a
party to these confidentiality agreements. In addition, our competitors may
learn or independently develop our trade secrets.
WE COULD BE EXPOSED TO SIGNIFICANT LIABILITY CLAIMS IF WE ARE UNABLE TO OBTAIN
INSURANCE AT ACCEPTABLE COSTS AND ADEQUATE LEVELS OR OTHERWISE PROTECT OURSELVES
AGAINST POTENTIAL PRODUCT LIABILITY CLAIMS
Our business exposes us to potential product liability risks, which are inherent
in the testing, manufacturing, marketing and sale of human healthcare products.
Product liability claims might be made by patients in clinical trials,
consumers, health care providers or pharmaceutical companies or others that sell
our products. These claims may be made even with respect to those products that
are manufactured in licensed and regulated facilities or otherwise possess
regulatory approval for commercial sale.
These claims could expose us to significant liabilities that could prevent or
interfere with the development or commercialization of our products. Product
liability claims could require us to spend significant time and money in
litigation or pay significant damages. As of the date of this Quarterly Report,
we are covered, with respect to our commercial sales in the United States and
New Zealand and our clinical trials, by primary product liability insurance in
the amount of $20.0 million per occurrence and $20.0 million annually in the
aggregate on a claims-made basis. This coverage may not be adequate to cover any
product liability claims.
As we commercialize our products, we may wish to increase our product liability
insurance. Product liability coverage is expensive. In the future, we may not be
able to maintain or obtain such product liability insurance on reasonable terms,
at a reasonable cost or in sufficient amounts to protect us against losses due
to product liability claims.
OUR ABILITY TO GENERATE FUTURE REVENUE FROM PRODUCTS WILL DEPEND ON
REIMBURSEMENT AND DRUG PRICING
Acceptable levels of reimbursement of the cost of developing and manufacturing
drugs and treatments related to those drugs by government authorities, private
health insurers and other organizations will have an effect on the successful
commercialization of, and attracting collaborative partners to invest in the
development of, our product candidates. We cannot be sure that reimbursement in
the United States or elsewhere will be available for any products we may develop
or, if already available, will not be decreased in the future. If reimbursement
is not available or is available only to limited levels, we may not be able to
commercialize our products, and may not be able to obtain a satisfactory
financial return on our products.
Third-party payers increasingly are challenging prices charged for medical
products and services. Also, the trend toward managed health care in the United
States and the changes in health insurance programs, as well as legislative
proposals to reform health care or reduce government insurance programs, may
result in lower prices for pharmaceutical products, including any products that
may be offered by us. Cost-cutting measures that health care providers are
instituting, and the effect of any health care reform, could materially
adversely affect our ability to sell any products that are successfully
developed by us and approved by regulators. Moreover, we are unable to predict
what additional legislation or regulation, if any, relating to the health care
industry or third-party coverage and reimbursement may be enacted in the future
or what effect such legislation or regulation would have on our business.
Page 25
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is confined to our cash, cash equivalents and
available for sale securities. We place our investments in high-quality
financial instruments, primarily money market funds, United States government
agency notes, and corporate debt securities with maturities or auction dates of
less than one year, which we believe are subject to limited credit risk. We
currently do not hedge interest rate exposure. At June 30, 2002, we held $64.1
million in cash, cash equivalents, and available for sale securities, all due
within one year, which had an average interest rate of approximately 2.0%. We do
not believe that a 10% increase or decrease in interest rates in effect at June
30, 2002 would have a material impact on our results of operations or cash
flows.
Most of our transactions are conducted in U.S. dollars. We do have certain
development and commercialization agreements with vendors located outside the
United States. Transactions under certain of these agreements are conducted in
U.S. dollars, subject to adjustment based on significant fluctuations in
currency exchange rates. Transactions under certain other of these agreements
are conducted in the local foreign currency. We do not believe that a 10%
increase or decrease in foreign currency exchange rates would have a material
impact on our results of operations or cash flows.
Page 26
PART II. OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 29, 2002, we received notice of the cashless exercise of
outstanding warrants covering aggregate of 162,976 shares of our
common stock, which shares were issued in the second quarter of
2002. The purchase price of $5.92 per share was paid in the form of
cancellation of a portion of the warrants, in accordance with the
cashless exercise provision provided for therein; accordingly, we
received no proceeds from the issuance of the shares. The shares
were issued to an "accredited investor" without registration under
the Securities Act or the securities laws of certain states, in
reliance on the exemptions provided by Section 4(2) of the
Securities Act and Regulation D promulgated thereunder and in
reliance on similar exemptions under applicable state laws.
Page 27
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 30, 2002 the following proposals were voted on at the Annual
Meeting of Stockholders:
Proposal For Against/Withheld Abstain Broker Non-Votes
- ----------------------------------------------------------------------------------------------------------------------------
To elect M. Fazle Husain to serve as class 2 20,120,678 61,396 N/A N/A
director until the 2005 annual meeting of
stockholders
To elect Nicholas J. Lowcock to serve as
class 2 director until the 2005 annual
meeting of stockholders 20,074,874 107,200 N/A N/A
To elect Clive A. Meanwell to serve as class
2 director until the 2005 annual meeting of
stockholders 19,277,110 904,964 N/A N/A
To increase the number of shares of common
stock authorized for issuance under our 1998
stock incentive plan from 4,368,259 to
6,118,259 shares. 16,137,272 934,884 206,908 2,903,210
To ratify the appointment of Ernst & Young
LLP as the Company's independent public
accountants for the current fiscal year 20,039,815 140,571 1,688 -
In addition to the three directors listed above who were elected at the meeting,
the terms of the following directors continued after the meeting: Leonard Bell,
Armin M. Kessler, James E. Thomas, David M. Stack, Stewart J. Hen, and T. Scott
Johnson.
Page 28
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
See the Exhibit Index on the page immediately preceding the exhibits
for a list of exhibits filed as part of this Quarterly Report, which
Exhibit Index is incorporated herein by this reference.
b) Reports on Form 8-K
On April 25, 2002, the Company filed with the SEC a Current Report
on Form 8-K dated April 23, 2002 in connection with its
announcements of financial results for the quarter ended March 31,
2002, the naming of a new Chief Financial Officer and the filing of
a Form S-3 Shelf Registration Statement registering 4,000,000 shares
of common stock.
On June 25, 2002, the Company filed with the SEC a Current Report on
Form 8-K dated June 20, 2002 with the SEC in connection with its
public announcement of a public offering of 4,000,000 shares of its
common stock at a price to the public of $8.20 per share pursuant to
its Form S-3 Shelf Registration Statement.
Page 29
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.
THE MEDICINES COMPANY
By: /s/ Steven H. Koehler
-----------------------
Steven H. Koehler
Date: August 14, 2002 Chief Financial Officer
Page 30
EXHIBIT INDEX
Exhibit Number Description
10.1 Amended and Restated Registration Rights Agreement, dated as
of August 12, 1998, as amended, by and among the registrant
and the other parties thereto.
99.1 Executive Chairman - Certification pursuant to 18 U.S.C.
Section 1350, as Adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Chief Executive Officer - Certification pursuant to 18 U.S.C.
Section 1350, as Adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.3 Chief Financial Officer - Certification pursuant to 18 U.S.C.
Section 1350, as Adopted pursuant to section 906 of The
Sarbanes-Oxley Act of 2002
Page 31