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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 2003
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.)
8 Campus Drive, Parsippany, NJ 07054
------------------------------ -----
(Address of Principal 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
As of October 31, 2003, the registrant had 47,343,225 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...... 10
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................. 32
ITEM 4 - CONTROLS AND PROCEDURES.................................................................... 32
PART II. OTHER INFORMATION............................................................................. 33
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS.................................................. 33
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K........................................................... 33
SIGNATURES ............................................................................................ 34
EXHIBIT INDEX ......................................................................................... 35
PART I. FINANCIAL INFORMATION
ITEM 1 - UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THE MEDICINES COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 27,425,984 $ 36,777,007
Available for sale securities 99,450,778 6,731,728
Accrued interest receivable 873,819 129,414
Accounts receivable, net of allowances of approximately $1.80 million
and $0.64 million at September 30, 2003 and December 31, 2002, respectively 18,795,022 15,078,488
Inventories 6,426,329 14,178,660
Prepaid expenses and other current assets 1,122,325 660,720
------------- -------------
Total current assets 154,094,257 73,556,017
Fixed assets, net 1,432,976 924,497
Other assets 276,814 233,854
------------- -------------
Total assets $ 155,804,047 $ 74,714,368
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,763,790 $ 8,291,995
Accrued expenses 16,019,848 11,092,134
------------- -------------
Total current liabilities 18,783,638 19,384,129
Deferred revenue 1,302,083 1,395,833
Commitments and contingencies - -
------------- -------------
Total liabilities 20,085,721 20,779,962
Stockholders' equity:
Preferred stock, $1.00 par value per share, 5,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, $.001 par value per share, 75,000,000 shares authorized
at September 30, 2003 and December 31, 2002, respectively; 47,308,498
and 39,894,285 issued and outstanding at September 30, 2003 and
December 31, 2002, respectively 47,308 39,894
Additional paid-in capital 453,201,180 354,239,193
Deferred compensation (1,308,317) (3,125,494)
Accumulated deficit (316,440,174) (297,274,830)
Accumulated other comprehensive income 218,329 55,643
------------- -------------
Total stockholders' equity 135,718,326 53,934,406
------------- -------------
Total liabilities and stockholders' equity $ 155,804,047 $ 74,714,368
============= =============
See accompanying notes to unaudited condensed consolidated financial statements.
Page 1
THE MEDICINES COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net revenue $ 21,248,027 $ 9,133,199 $ 56,702,827 $ 24,004,230
Operating expenses:
Cost of revenue 6,602,543 2,227,178 19,835,063 4,959,808
Research and development 9,382,934 9,866,139 24,835,640 28,567,263
Selling, general and administrative 11,834,740 8,467,569 32,190,894 27,199,457
------------ ------------ ------------ ------------
Total operating expenses 27,820,217 20,560,886 76,861,597 60,726,528
------------ ------------ ------------ ------------
Loss from operations (6,572,190) (11,427,687) (20,158,770) (36,722,298)
Other income (expense):
Interest income 409,962 215,927 993,426 760,996
Interest expense - - - (32,847)
------------ ------------ ------------ ------------
Net loss $ (6,162,228) $(11,211,761) $(19,165,344) $(35,994,149)
============ ============ ============ ============
Basic and diluted net loss per
common share $ (0.13) $ (0.29) $ (0.43) $ (0.99)
============ ============ ============ ============
Shares used in computing net loss
per common share:
Basic and diluted 47,129,695 39,161,664 45,035,965 36,409,258
============ ============ ============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
Page 2
THE MEDICINES COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2003 2002
------------- -------------
Cash flows from operating activities:
Net loss $ (19,165,344) $ (35,994,149)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 439,099 409,748
Amortization of premiums on available for sale securities 510,718 -
Non-cash stock compensation 2,594,972 2,434,243
Loss on disposals of fixed assets 107,572 -
Changes in operating assets and liabilities:
Accrued interest receivable (744,405) (127,595)
Accounts receivable (3,716,535) (1,911,423)
Inventory 7,752,331 (1,017,707)
Prepaid expenses and other current assets (461,146) (532,210)
Other assets (42,960) (38,567)
Accounts payable (5,529,166) (6,985,831)
Accrued expenses 4,907,193 6,580,263
Deferred revenue (93,750) 1,427,083
------------- -------------
Net cash used in operating activities (13,441,421) (35,756,145)
Cash flows from investing activities:
Purchases of available for sale securities (113,667,999) (6,749,399)
Maturities and sales of available for sale securities 20,654,989 -
Purchase of fixed assets (1,050,985) (54,026)
------------- -------------
Net cash used in investing activities (94,063,995) (6,803,425)
Cash flows from financing activities:
Proceeds from short-term borrowings - 10,000,000
Repayments of revolving line of credit borrowings - (10,000,000)
Proceeds from issuances of common stock, net 98,191,611 33,525,590
Repurchases of common stock - (542)
------------- -------------
Net cash provided by financing activities 98,191,611 33,525,048
Effect of exchange rate changes on cash (37,218) 5,986
------------- -------------
Increase in cash and cash equivalents (9,351,023) (9,028,536)
Cash and cash equivalents at beginning of period 36,777,007 53,884,376
------------- -------------
Cash and cash equivalents at end of period $ 27,425,984 $ 44,855,839
============= =============
See accompanying notes to unaudited condensed consolidated financial statements.
Page 3
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
The Medicines Company (the Company) was incorporated in Delaware on July 31,
1996. The Company is a specialty pharmaceutical company engaged in the
acquisition, development and commercialization of late-stage development drugs
or drugs approved for marketing. In December 2000 the U.S. Food and Drug
Administration approved Angiomax(R) (bivalirudin), the Company's first product,
for use as an anticoagulant in combination with aspirin in patients with
unstable angina undergoing coronary angioplasty. The Company commenced sales of
Angiomax in the United States in the first quarter of 2001. In 2003, the Company
acquired the rights to Clevelox(R) (clevidipine), a phase 2 product being
studied for blood pressure control during surgical procedures.
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-month and nine-month periods ended
September 30, 2003 are not necessarily indicative of the results that may be
expected for the entire fiscal year ending December 31, 2003. 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, 2002 filed with the Securities and Exchange
Commission.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassification
Certain reclassifications have been made to the prior year's information to
conform to the 2003 presentation.
Page 4
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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
September 30, 2003 consisted of investments of $26.3 million in money market
funds and $1.1 million of corporate bonds with original maturities of less than
three months. Cash equivalents at December 31, 2002 consisted 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. The cost of debt securities in this category is
adjusted for amortization of premium and accretion of discount to maturity.
At September 30, 2003, the Company held available for sale securities with fair
value totaling $99.5 million. These available for sale securities included
various certificates of deposit, corporate debt securities and United States
government agency notes, $58.1 million of which had original maturities of more
than one year but less than two years and $41.4 million of which had original
maturities of more than three months and less than one year. At December 31,
2002, the Company held available for sale securities with fair value totaling
$6.7 million, all with original maturities greater than three months and less
than one year. These available for sale securities included various certificates
of deposit, corporate debt securities and United States government agency notes.
Revenue Recognition
The Company sells its products primarily to wholesalers and distributors who, in
turn sell to hospitals. Revenue from product sales is not recognized until there
is persuasive evidence of an arrangement, delivery has occurred, the price is
fixed and determinable, and collectibility is reasonably assured. Also, because
the Company's products are sold with limited rights of return, revenue is not
recognized until 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 obligation to bring about sale of the product and the amount of returns
can be reasonably estimated.
The Company records allowances for product returns, rebates and discounts at the
time of sale, and reports revenue net of such allowances. The Company must make
significant judgments and estimates in determining the allowances. For instance:
Page 5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- The Company's wholesaler customers have the right to return any
unopened product during the 18 month period beginning six months prior
to the labeled expiration date and ending 12 months after the labeled
expiration date. As a result, in calculating the allowance for product
returns, the Company must estimate the likelihood that product sold to
wholesalers might remain in their inventory to within six months of
expiration and determine if it will be returned. The Company bases its
estimates on information from wholesalers, historic patterns of
returns, industry data and on the expiration dates of product currently
being shipped.
- Certain hospitals purchasing the Company's products from wholesalers
have the right to receive a discounted price and a volume-based rebate
if they have a direct contract with the Company or participate in a
group purchasing organization that has a contract with the Company. As
a result, the Company must estimate the likelihood that product sold to
wholesalers might be ultimately sold to a participating hospital. The
Company bases its estimates on information from wholesalers and
hospitals, industry data, historic patterns of discounts and customer
rebate thresholds.
If actual results differ from the Company's estimates, the Company will be
required to make adjustments to these allowances in the future.
Revenue from collaborative agreements may include non-refundable fees or
milestone payments. These payments are recorded as deferred revenue until
contractual performance obligations have been satisfied, and they are recognized
ratably over the term of these agreements. When the period of deferral cannot be
specifically identified from the contract, the Company must estimate the period
based upon other critical factors contained within the contract. The Company
reviews these estimates at least annually, which could result in a change in the
deferral period.
Inventories
Inventory is recorded upon the transfer of title from the Company's vendors.
Inventory is stated at the lower of cost or market value. Angiomax bulk drug
product is classified as raw materials and its costs are determined using a
weighted average of production run manufacturing costs. Work-in-progress costs
of filling, finishing and packaging are recorded against specific product
batches, or lots. Prior to FDA approval of Angiomax and of its original
manufacturing process in December 2000, the Company expensed all of these costs
as research and development. The Company records as inventory any Angiomax bulk
drug product manufactured according to its original manufacturing process to
which the Company took title after FDA approval.
Together with its contract-manufacturing partner, UCB Bioproducts S.A., the
Company has developed a second-generation chemical synthesis process, the
Chemilog process, for the manufacture of Angiomax bulk drug substance. On May
23, 2003 the Company received FDA approval of this process. Accordingly, all
Angiomax bulk drug product manufactured using the Chemilog process to which
title had transferred to the Company prior to May 23, 2003 has been expensed as
research and development, and all bulk drug product manufactured after FDA
approval has been and will be recorded as inventory.
Page 6
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company reviews inventory for slow-moving or obsolete amounts based on
expected revenues. If actual revenues are less than expected, allowances for
excess amounts may be required in the future.
SEPTEMBER 30, DECEMBER, 31
INVENTORIES 2003 2002
- ----------- ------------ ------------
Raw materials....................................... $ 5,099,342 $ 4,126,870
Work-in-progress.................................... 380,452 8,370,949
Finished Goods...................................... 946,535 1,680,841
------------ ------------
TOTAL........................................... $ 6,426,329 $ 14,178,660
============ ============
Research and Development
Expenditures for research and development costs are expensed as incurred.
Stock-Based Compensation
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation" encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" requires the disclosure of the impacts of SFAS No. 123 in quarterly
reports. The Company has elected to account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees."
The following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition and share-based compensation
costs provisions of SFAS No. 123 and SFAS No. 148 to stock-based employee
compensation:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------- -------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net loss - As reported $ (6,162,228) $(11,211,761) $(19,165,344) $(35,994,149)
Add: Total stock-based employee compensation
expense included in net income as reported 557,025 633,808 1,673,056 2,434,243
Less: Total stock-based compensation expense
determined under fair value based method for
all stock option awards and discounts under
the 2000 Employee Stock Purchase Plan (2,708,941) (2,217,143) (7,670,869) (4,965,905)
------------ ------------ ------------ ------------
Net loss - Proforma $ (8,314,144) $(12,795,096) $(25,163,157) $(38,525,811)
============ ============ ============ ============
Net loss per share - As reported $ (0.13) $ (0.29) $ (0.43) $ (0.99)
============ ============ ============ ============
Net loss per share - Proforma $ (0.18) $ (0.33) $ (0.56) $ (1.06)
============ ============ ============ ============
Page 7
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- -------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Expected dividend yield 0% 0% 0% 0%
Expected stock price volatility 87% 90% 88% 90%
Risk-free interest rate 2% 3% 2% 3%
Expected option term 2.90 2.79 2.83 2.79
3. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss per
share for the three-month and nine-month periods ended September 30, 2003 and
2002.
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
---- ---- ---- ----
BASIC AND DILUTED
Net loss $ (6,162,228) $(11,211,761) $(19,165,344) $(35,994,149)
Weighted average common shares outstanding 47,132,607 39,172,483 45,041,522 36,423,982
Less: unvested restricted common shares
outstanding (2,911) (10,819) (5,557) (14,724)
------------ ------------ ------------ ------------
Weighted average common shares used to
compute net loss per share $ 47,129,695 $ 39,161,664 $ 45,035,965 $ 36,409,258
============ ============ ============ ============
Basic and diluted net loss per share $ (0.13) $ (0.29) $ (0.43) $ (0.99)
============ ============ ============ ============
Options to purchase 4,760,084 and 4,427,298 shares of common stock outstanding
as of September 30, 2003 and 2002, 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 795,432 and 2,873,688 shares of
common stock as of September 30, 2003 and 2002, respectively, were also excluded
from the computation of diluted net loss per share as their effect would have
been antidilutive.
During the period from January 1, 2000 to September 30, 2000, the Company issued
options to purchase 2,273,624 shares 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 in connection with the
Company's initial public offering. The total deferred stock compensation
associated with these options is approximately $17.3 million. The Company
Page 8
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
amortizes deferred stock compensation over the respective vesting periods of the
individual stock options. Total deferred compensation is reduced when the
associated options are cancelled prior to exercise. During the nine months ended
September 30, 2003, cancellation of options that had not been exercised resulted
in a reduction in the total deferred stock compensation of approximately $0.1
million.
Included in the results of operations is deferred stock compensation expense
associated with these options of $0.6 million and $1.7 million for the three and
nine months ended September 30, 2003, respectively, and $0.6 million and $2.4
million for the three and nine months ended September 30, 2002, respectively. We
expect to record amortization expense for the remaining deferred stock
compensation associated with these options as follows: approximately $0.5
million for the remainder of 2003, and approximately $0.8 million in 2004,
assuming the continued vesting of the associated options.
In May 2003, the Company granted options to a non-employee consultant to
purchase 50,000 shares at an exercise price based on the fair market value of
the Company's common stock on the date of the consulting agreement in April
2003. In September 2003, the Company amended the terms of fully-vested options
to purchase 10,000 shares of common stock that were granted to a non-employee
consultant in May 2001. In each case, these options were valued utilizing the
Black-Scholes option-pricing model. Included in selling, general and
administrative expenses in the results of operations for the three and nine
months ended September 30, 2003 were $0.3 million and $0.9 million,
respectively, of non-cash stock compensation expense associated with these
options. The options granted in May 2003 will be revalued and expensed over the
remainder of their vesting term.
4. SALES OF COMMON STOCK
On March 19, 2003, the Company sold through a public offering 5.6 million shares
of its common stock at a price of $17.50 per share. The Company is using and
expects to continue to use the $91.5 million net proceeds from the sale of
common stock to fund further clinical development and commercialization of
Angiomax, to fund research and development of Clevelox(R) (clevidipine) and for
working capital and other general corporate purposes. In addition, employees of
the Company purchased stock pursuant to option exercises and our employee stock
purchase plan for aggregate net proceeds to the Company of approximately $3.5
million and $6.7 million, respectively, for the three and nine months ended
September 30, 2003.
5. COMPREHENSIVE LOSS
Comprehensive losses are primarily comprised of net losses, unrealized gains and
losses on available for sales securities and currency translation adjustments.
Comprehensive losses for the three and nine months ended September 30, 2003 were
$6.1 million and $19.0 million, respectively. Comprehensive losses for the three
and nine months ended September 30, 2002 were $11.2 million and $36.0 million,
respectively.
Page 9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion and analysis of our financial
condition and results of operations together with our financial statements and
accompanying notes in this quarterly report. In addition to the historical
information, the discussion in this quarterly report contains certain
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated by the forward-looking
statements due to factors including, but not limited to, those set forth under
"Factors That May Affect Future Results" below.
OVERVIEW
We are a specialty pharmaceutical company with growing revenue from
sales of our first product, Angiomax, a direct thrombin inhibitor used as an
anticoagulant in patients undergoing coronary angioplasty. The U.S. Food and
Drug Administration, or FDA, approved Angiomax in December 2000 for use as an
anticoagulant in combination with aspirin in patients with unstable angina
undergoing coronary angioplasty, and we began selling the product in the United
States in January 2001. Our revenues to date have been generated almost entirely
from sales of Angiomax in the United States.
Since our inception we have generated significant losses. We expect to
continue to spend significant amounts on the development of our products and on
the sales and marketing of Angiomax in the balance of 2003 and thereafter. We
also plan to continue to invest in clinical studies to expand the use of
Angiomax and to develop Clevelox(R) (clevidipine), an intravenous compound for
the short-term control of high blood pressure in patients undergoing cardiac
surgery. Additionally, we plan to continue to evaluate possible acquisitions of
development-stage or approved products that would fit within our growth
strategy. Accordingly, we will need to generate greater revenues to achieve and
then maintain profitability.
Angiomax in Angioplasty
We believe that continued increased use of Angiomax by existing
hospital customers, as well as penetration to new hospitals, will be critical
elements of our ability to increase revenues. In November 2002, we announced the
primary 30-day results of our REPLACE-2 clinical trial, which was designed to
evaluate Angiomax as the foundation anticoagulant for coronary angioplasty
within the context of modern therapeutic products and technologies, including
coronary stents. Since that time additional hospitals have granted Angiomax
formulary approval, hospital demand for the product has increased and sales of
Angiomax have increased significantly.
In September 2003, we announced the six-month follow-up results for
REPLACE-2. These results confirm that patients undergoing a course of treatment
using Angiomax in elective or urgent coronary angioplasty had lower death rates
at six months, and equivalent rates with respect to myocardial infarction and
urgent revascularization, compared to patients receiving the current standard of
low dose weight-adjusted heparin plus a glycoprotein IIb/IIIa inhibitor.
Patients undergoing an Angiomax regimen also had less bleeding, cost less to
treat and had a
Page 10
shorter duration of treatment. Earlier results raised the question of possible
increased mortality rates due to a slight increase in rates of a less serious
form of a heart attack, known as periprocedural non-Q-wave MI, in Angiomax
patients at 30 days; however, the six-month results actually demonstrated
numerically lower death rates in the Angiomax patients. We expect that
investigators will present the one-year mortality data at the upcoming American
Heart Association Scientific Sessions in November 2003.
In July 2003, we submitted a supplemental New Drug Application to the
FDA requesting an amended label for Angiomax in order to include data from the
REPLACE-1 and REPLACE-2 trials in coronary angioplasty as well as the ATBAT
trial in patients with heparin-induced thrombocytopenia undergoing coronary
angioplasty. We believe the ATBAT data filing fulfills our FDA-required Phase 4
trial obligation.
In August 2003 we submitted a Market Authorisation Application to the
European Agency for the Evaluation of Medicinal Products, or EMEA, for the use
of Angiomax in patients undergoing percutaneous coronary interventions. The
filing in Europe is centralized for the 18 countries covered by the EMEA.
Angiomax Manufacturing
In May 2003, we received approval for the Chemilog process, the
second-generation manufacturing process for the Angiomax bulk drug substance.
The new process involves enhancements to early manufacturing steps to improve
the efficiency of synthesizing bivalirudin, the active ingredient of Angiomax.
We expect the Chemilog process to improve the economies of manufacturing
Angiomax bulk drug substance and to enable us to scale up our manufacturing
efficiently so that we can continue to meet customer demand for Angiomax.
Clevelox(R) (clevidipine)
In March 2003, we acquired from AstraZeneca A.B. exclusive worldwide
(excluding Japan) license rights to Clevelox pursuant to study and exclusive
option agreement with AstraZeneca that we entered into in March 2002. Prior to
March 2002, AstraZeneca conducted Phase 2 clinical trials of Clevelox
demonstrating that Clevelox acts to reduce blood pressure rapidly after
intravenous infusion. We have completed a protocol for, and plan to commence in
2003, a Phase 3 program in patients undergoing cardiac surgery to investigate
the potential of Clevelox to simplify and improve the treatment of these
patients.
Expenditures
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 acquisitions, clinical
trials, and activities relating to regulatory filings and manufacturing
development efforts. We outsource many of the activities associated with our
clinical trials and manufacturing development 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
Page 11
and related expenses, general corporate activities and costs associated with
promotion and marketing activities.
Financing
In March 2003, we received $91.5 million in net proceeds from a public
offering of 5.6 million shares of our common stock at a price of $17.50 per
share. We are using and expect to continue to use the proceeds from the offering
to fund further clinical development and commercialization of Angiomax, to fund
research and development of Clevelox and for working capital and other general
corporate purposes.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
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 our reported assets and liabilities,
revenues and expenses, and other financial information. Actual results may
differ significantly from these estimates under different assumptions and
conditions. In addition, our reported financial condition and results of
operations could vary due to a change in the application of a particular
accounting standard.
We regard an accounting estimate underlying our financial statements as
a "critical accounting estimate" if the accounting estimate requires us to make
assumptions about matters that are highly uncertain at the time of estimation
and if different estimates that reasonably could have been used in the current
period, or changes in the estimate that are reasonably likely to occur from
period to period, would have had a material effect on the presentation of
financial condition, changes in financial condition, or results of operations.
Our significant accounting policies are more fully described in the
Notes to Unaudited Consolidated Financial Statements section of this quarterly
report on Form 10-Q and in Note 2 of the Notes to Consolidated Financial
Statements in our annual report on Form 10-K for the year ended December 31,
2002. 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 revenue recognition and
inventory, as described under the caption "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Application of
Critical Accounting Policies" in our annual report on Form 10-K for the year
ended December 31, 2002, fit the definition of "critical accounting estimates
and judgments."
RESULTS OF OPERATIONS
Three Months Ended September 30, 2003 and 2002
Net Revenue. Net revenue increased 133% to $21.2 million for the three
months ended September 30, 2003 as compared to $9.1 million for the three months
ended September 30, 2002.
Page 12
Virtually all of our revenue in each period was from U.S. sales of Angiomax. We
believe that growth in 2003, including the third quarter, has been due primarily
to increased use of Angiomax by existing hospital customers and adoption of
Angiomax by new hospital customers. Since we announced the results of the
REPLACE-2 clinical trial in November 2002, additional hospitals have granted
Angiomax formulary approval and hospital demand for the product has increased.
Cost of Revenue. Cost of revenue for the three months ended September
30, 2003 was $6.6 million, or 31% of net revenue, compared to $2.2 million, or
24% of net revenue, for the three months ended September 30, 2002. Cost of
revenue for the three months ended September 30, 2003 consisted of expenses in
connection with the manufacture of Angiomax that was sold during the period,
which represented 64% of the 2003 cost of revenue, royalty expenses under our
agreement with Biogen, Inc. for the license of bivalirudin, which we have
developed as Angiomax, which represented 23% of the 2003 cost of revenue, and
the logistics costs of selling Angiomax, such as distribution, storage, and
handling, which represented 13% of the 2003 cost of revenue. Cost of revenue for
the three months ended September 30, 2002 consisted of expenses in connection
with the manufacture of the Angiomax sold, which represented 57% of the 2002
cost of revenue, royalty expenses under our agreement with Biogen, which
represented 29% of the 2002 cost of revenue, and the logistics costs of selling
Angiomax, which represented 14% of the 2002 cost of revenue.
Prior to obtaining FDA approval for Angiomax and its original
manufacturing process, all costs of manufacturing Angiomax were expensed as
research and development costs and therefore not reflected in cost of revenue.
In late 2000, after obtaining FDA approval for Angiomax and its original
manufacturing process, we began recording the costs of manufacturing Angiomax as
inventory, which is reflected in cost of revenue, rather than as research and
development expense.
During 2002 and in early 2003, we took delivery of drug material
manufactured using the Chemilog process, which was approved by the FDA on May
23, 2003. Because this material was manufactured prior to FDA approval of the
Chemilog process, we expensed all costs of manufacturing as research and
development. We are recording all costs of manufacturing Angiomax after May 23,
2003 as inventory.
Although we sold some Angiomax in the third quarter of 2003 that had
been manufactured using the Chemilog process and whose cost of manufacturing had
previously been expensed, most of the Angiomax that we sold in the third quarter
of 2003 was manufactured using the original manufacturing process following the
date of FDA approval of Angiomax. As a result, we recorded the cost of
manufacturing such material as cost of revenue during the third quarter of 2003.
In the three months ended September 30, 2002, we sold Angiomax that had been
manufactured using the original manufacturing process both before and after FDA
approval of Angiomax. However, we sold a greater portion of Angiomax whose costs
had been previously expensed than Angiomax for which the cost of manufacturing
needed to be recorded in the three months ended September 30, 2002. As a result,
our cost of manufacturing as a percentage of net revenue was substantially
higher in the 2003 period compared to the 2002 period.
We expect our cost of manufacturing as a percentage of net revenue to
decrease over the next six months as we expect to sell only previously expensed
Angiomax, produced by the Chemilog
Page 13
process prior to FDA approval. We expect that we will begin selling Angiomax
produced using the Chemilog process after FDA approval as soon as the second
quarter of 2004. At such time, we will experience an increase in our cost of
manufacturing as a percentage of net revenue.
Research and Development Expenses. Research and development expenses
for the three months ended September 30, 2003 decreased 5% to $9.4 million, from
$9.9 million for the three months ended September 30, 2002. The decrease in
research and development expenses was primarily due to lower costs relating to
clinical trials. We incurred $7.0 million less in the 2003 period than in the
2002 period for our REPLACE-2 trial, for which we completed patient enrollment
in third quarter of 2002. These lower expenses were partly offset by $5.1
million of additional Angiomax clinical development program costs, mostly
relating to our ACUITY and Phase 4 drug-eluting stents programs described below,
and $1.2 million additional expenses in connection with the development related
start-up costs of our planned Phase 3 trial program of Clevelox.
We have a number of clinical trial programs currently underway, or
about to commence, for expanding the applications of Angiomax for use as an
intravenous anticoagulant in the treatment of arterial thrombosis. As of the
date of this quarterly report, we are conducting:
- - a Phase 2/3 trial program studying the use of Angiomax as an anticoagulant
in patients undergoing coronary artery bypass graft surgery, or CABG, with
and without the use of a bypass pump, and in treatment of patients with an
clinical condition known as heparin-induced thrombocytopenia and
thrombosis syndrome, or HIT/HITTS, who were undergoing CABG, with and
without the use of a bypass pump;
- - a randomized Phase 3 trial program to study called ACUITY to study the use
of Angiomax in patients presenting to the emergency department with
coronary syndromes who may be medically managed or ultimately treated in
the catheterization laboratory or operating room;
- - a Phase 2 trial program to study the use of Angiomax in neonates and
infants up to six months old with active thrombosis; and
- - two Phase 4 programs investigating the use of Angiomax with drug-eluting
stents.
In addition, we are supporting a number of investigations, including clinical
studies, of Angiomax in patients undergoing percutaneous peripheral
angioplasties.
The funding for Angiomax has represented and will continue to represent
a significant portion of research and development spending. For the three months
ended September 30, 2003 and 2002, research and development expenses related to
Angiomax included the costs of clinical trials and the cost associated with
preparation of U.S. and worldwide marketing applications.
Page 14
For the three months ended September 30, 2003, research and development
expenses relating to Clevelox consisted of manufacturing development and other
start-up costs relating to the Phase 3 clinical trial we plan to commence in the
fourth quarter of 2003 in patients undergoing cardiac surgery.
The amount of future research and development expenses associated with
Angiomax and Clevelox is not reasonably certain as these costs are dependent
upon the clinical trial process, the regulatory process and, in the case of
Angiomax, the timing for obtaining marketing approval for other applications of
the product in the United States and other countries.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 40% to $11.8 million for the three months
ended September 30, 2003, from $8.5 million for the three months ended September
30, 2002. The increase in selling, general and administrative expenses of $3.4
million was primarily due to additional sales force and related recruiting
expenses and Angiomax promotion expenses.
Non-cash Stock Compensation. In connection with our initial public
offering, 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.
We amortize the deferred stock compensation that was recorded in 2000
over the respective vesting periods of the individual stock options. We recorded
amortization expense for such deferred compensation of approximately $0.6
million and $0.6 million for the three-month periods ended September 30, 2003,
and September 30, 2002, respectively. We expect to record additional
amortization expense for the deferred compensation associated with these options
of approximately $0.5 million during the remainder of 2003 and approximately
$0.8 million in 2004. The amortization expense is included in our operating
expenses in the consolidated statements of operations.
In September 2003, we amended the terms of fully-vested options to
purchase 10,000 shares of common stock that were granted to a non-employee
consultant in May 2001. We also granted in May 2003 options to a non-employee
consultant to purchase 50,000 shares at an exercise price based on the fair
market value of our common stock on the date of the consulting agreement in
April 2003. In each case, these options were valued utilizing the Black-Scholes
option-pricing model. We recorded $0.3 million in related non-cash stock
compensation expense in selling, general and administrative expenses for the
three months ended September 30, 2003. The options granted in May 2003 will be
revalued and expensed over the remainder of their vesting term.
Other Income and Expense. Interest income increased 90% to $0.4 million
for the three months ended September 30, 2003, from $0.2 million for the three
months ended September 30, 2002. The increase in interest income of $0.2 million
was primarily due to higher average cash, cash equivalents, and available for
sale securities balances. For the three months ended
Page 15
September 30, 2003, interest income was attributable to the investment of the
remaining proceeds of our sales of shares of common stock in public offerings in
2002 and 2003. In the three months ended September 30, 2002, interest income was
primarily attributable to the investment of the remaining proceeds of our sales
of shares of common stock in a private placement in May 2001. We had no interest
expense during the three months ended September 30, 2003 or 2002.
Nine months Ended September 30, 2003 and 2002
Net Revenue. Net revenue increased 136% to $56.7 million for the nine
months ended September 30, 2003 as compared to $24.0 million for the nine months
ended September 30, 2002. Virtually all the revenue in both periods was from
U.S. sales of Angiomax. We believe that growth in 2003 has been due primarily to
increased use of Angiomax by existing hospital customers and adoption of
Angiomax by new hospital customers and increased prices. Since we announced the
results of the REPLACE-2 clinical trial in November 2002, additional hospitals
have granted Angiomax formulary approval and hospital demand for the product has
increased.
Cost of Revenue. Cost of revenue for the nine months ended September
30, 2003 was $19.8 million, or 35% of net revenue, compared to $5.0 million, or
21% of net revenue, for the nine months ended September 30, 2002. Cost of
revenue for the nine months ended September 30, 2003 consisted of expenses in
connection with the manufacture of the Angiomax sold, which represented 69% of
the 2003 cost of revenue, royalty expenses under our agreement with Biogen which
represented 21% of the 2003 cost of revenue and the logistics costs of selling
Angiomax, such as distribution, storage, and handling, which represented 10% of
the 2003 cost of revenue. Cost of revenue for the nine months ended September
30, 2002 consisted of expenses in connection with the manufacture of the
Angiomax sold, which represented 46% of the 2002 cost of revenue, royalty
expenses under our agreement with Biogen, which represented 36% of the 2002 cost
of revenue, and the logistics costs of selling Angiomax, such as distribution,
storage, and handling, which represented 18% of the 2002 cost of revenue. Our
cost of manufacturing as a percentage of net revenue increased substantially in
2003 because almost all Angiomax sold in the nine months ended September 30,
2003 was product manufactured after the date of FDA approval of Angiomax.
Research and Development Expenses. Research and development expenses
for the nine months ended September 30, 2003 decreased 13% to $24.8 million,
from $28.6 million for the nine months ended September 30, 2002. The decrease in
research and development expenses was primarily due to lower development costs
relating to clinical trials and manufacturing processes. We incurred $15.4
million less in the 2003 period than in the 2002 period for our REPLACE-2 trial,
for which we completed patient enrollment in the third quarter of 2002, and we
incurred $0.8 million less in the 2003 period than in the 2002 period for
manufacturing development of Angiomax using the Chemilog process. These lower
costs were partly offset by $6.9 million of new Angiomax clinical development
programs, mostly related to ACUITY, a $1.0 million license fee to AstraZeneca in
connection with the licensing of rights to Clevelox, expenses associated with
pre-existing contracts for manufacturing Clevelox and related start-up costs of
our planned Phase 3 trial program of Clevelox. We do not expect to incur further
development expenses relating to the Chemilog process in future periods, as
costs relating to
Page 16
Angiomax bulk drug product manufactured using the Chemilog process are now
recorded as inventory.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 18% to $32.2 million for the nine months ended
September 30, 2003, from $27.2 million for the nine months ended September 30,
2002. The increase in selling, general and administrative expenses of $5.0
million was primarily due to increased sales force, promotional spending and
additional administrative and recruiting expenses.
Non-cash Stock Compensation. No additional deferred compensation was
recorded during the nine months ended September 30, 2003 or during the full year
2002 because all of the exercise prices of all grants of stock options during
these periods were at the fair market value of our common stock on the date of
grant.
We amortize the deferred stock compensation that was recorded in 2000
over the respective vesting periods of the individual stock options. We recorded
amortization expense for deferred compensation of approximately and $1.7 million
and $2.4 million for the nine months ended September 30, 2003 and September 30,
2002, respectively.
In September 2003, we amended the terms of fully-vested options to
purchase 10,000 shares of common stock that were granted to a non-employee
consultant in May 2001. In addition, in May 2003, we granted options to a
non-employee consultant to purchase 50,000 shares at an exercise price based on
the fair market value of the Company's common stock on the date of the
consulting agreement in April 2003. In each case, these options were valued
utilizing the Black-Scholes option-pricing model. We recorded $0.9 million of
expense in selling, general and administrative expenses in the nine months ended
September 30, 2003. The options granted in May 2003 will be revalued and
expensed over the remainder of their vesting term.
Other Income and Expense. Interest income increased 31% to $1.0 million
for the nine months ended September 30, 2003, from $0.7 million for the nine
months ended September 30, 2002. The increase in interest income of $0.2 million
was primarily due to higher average cash and available for sale securities
balances offset in part by lower available interest rates on securities. For the
nine months ended September 30, 2003, interest income was attributable to the
investment of the remaining proceeds of our sales of shares of common stock in a
private placement in May 2001 and in public offerings in 2002 and 2003. In the
nine months ended September 30, 2002, interest income was primarily attributable
to the investment of the remaining proceeds of our initial public offering in
August and September 2000 and our private placement in May 2001.
We had no interest expense during the nine months ended September 30,
2003 as compared to interest expense of $33,000 during the nine months ended
September 30, 2002 that was associated with the draw down of our revolving line
of credit at the end of March 2002. We terminated the revolving line of credit
in August 2002.
Page 17
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity. 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 and revenues from sales of
Angiomax.
In March 2002, we entered into a collaboration agreement 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. 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 approvals in Europe. In addition,
Nycomed purchased 79,428 shares of our common stock for a total purchase price
of approximately $1.0 million.
In March 2003, we filed registration statements on Forms S-3 with the
Securities and Exchange Commission registering 5.6 million shares of our common
stock, including 697,280 shares that the underwriters had the option to purchase
to cover over-allotments. We sold all 5.6 million shares of the common stock on
March 19, 2003 at a price to the public of $17.50 per share. Net proceeds from
the sale totaled $91.5 million.
Cash Flows. As of September 30, 2003, we had $27.4 million in cash and
cash equivalents, as compared to $36.8 million as of December 31, 2002. The
major uses of cash during the nine months ended September 30, 2003 included net
cash used in operating activities of $13.4 million and net cash used in
investing activities of $94.1 million, which was offset by $98.2 million
received from financing activities.
We used net cash of $13.4 million in operating activities during the
nine months ended September 30, 2003. This use of cash consisted primarily of
funding a net loss of $19.2 million and increases in accounts receivable of $3.7
million and accrued interest receivable of $0.7 million and decreases in
accounts payable of $5.5 million, partly offset by a decrease in inventory of
$7.8 million and increases in accrued expenses of $4.9 million, non-cash stock
compensation of $2.6 million, and depreciation of $0.5 million. The decrease in
accounts payable can be largely attributed to the $4.2 million payment in 2003
for Chemilog product purchased in December 2002. The increase in accounts
receivable can largely be attributed to the higher sales volume and the timing
of sales in 2003, offset in part by a $1.4 million increase in the allowances
for customer chargeback and other discounts related to higher sales volume and
the price increase that we initiated in June 2003. The decrease in inventory can
be largely attributed to growth in product sales and the expensing of Chemilog
inventory prior to FDA approval.
During the nine months ended September 30, 2003, we used $94.1 million
in cash in net investing activities, which consisted principally of the purchase
and reinvestment of available for sale securities.
Cash provided by financing activities of $98.2 million during the nine
months ended September 30, 2003 consisted primarily of the proceeds of the
public offering of 5.6 million shares of our common stock in March 2003 that
resulted in net proceeds of $91.5 million. In
Page 18
addition, employees purchased stock pursuant to option exercises and our
employee stock purchase plan for aggregate net proceeds to us of approximately
$6.7 million.
Funding Requirements. We expect 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:
- whether Angiomax is commercially successful;
- the progress, level and timing of our research and development
activities related to our additional clinical trials with respect
to Angiomax and Clevelox;
- 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 operating plan as of the date of this
quarterly report, which includes 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 the foreseeable future.
We expect, however, to periodically assess our financing alternatives and access
the capital markets opportunistically. 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. Any 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.
Page 19
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Our long-term contractual commitments include operating leases for our
facilities in Parsippany, New Jersey and Waltham, Massachusetts, which expire in
January 2013 and August 2008, respectively. Future annual minimum payments under
these operating leases are:
MINIMUM OPERATING LEASE OBLIGATIONS
YEAR(S) AMOUNT
- ---------------------------------------------------------------------------- -------------
2003........................................................................ $ 204,000
2004........................................................................ 772,000
2005........................................................................ 725,000
2006........................................................................ 728,000
2007........................................................................ 744,000
Later years................................................................. 3,350,000
-------------
Total operating lease obligations.................................. $ 6,523,000
=============
In addition to amounts accrued or payable as of September 30, 2003, we have
commitments to make payments to UCB Bioproducts of a total of $14.6 million
through June 2004 for Angiomax bulk drug substance to be produced using the
Chemilog process and $1.2 million in related filling, finishing and packaging
commitments through April 2004. We also have $0.5 million in contractual
commitments related to research and development activities.
Page 20
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q includes forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, 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 could cause actual results or events to differ materially
from those disclosed in the forward-looking statements we make. These important
factors include our "critical accounting estimates" and the risk factors set
forth below under the caption "Factors That May Affect Future Results." 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 this quarterly report.
FACTORS THAT MAY AFFECT FUTURE RESULTS
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF NET LOSSES, AND WE EXPECT TO CONTINUE TO INCUR ADDITIONAL
NET LOSSES AND MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY
We have incurred net losses since our inception, including net losses of
approximately $19.2 million for the nine months ended September 30, 2003. At
September 30, 2003, we had an accumulated deficit of approximately $316.4
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. We will need to
generate significantly greater revenues to achieve and then maintain
profitability. However, we remain unsure as to 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
Angiomax is our only commercial product and, we expect, will account for almost
all of our revenues for the foreseeable future. The commercial success of
Angiomax will depend upon its acceptance by regulators, physicians, patients and
other key decision-makers as a safe, therapeutic and cost-effective alternative
to heparin and other products used in current practice, or currently being
developed. If Angiomax is not commercially successful, we will have to find
additional sources of funding or curtail or cease operations.
Page 21
NEAR-TERM GROWTH IN OUR SALES OF ANGIOMAX IS HIGHLY DEPENDENT ON PHYSICIAN
ACCEPTANCE OF THE REPLACE-2 TRIAL
In the fall of 2002, we completed a 6,002 patient post-marketing Phase 3b/4
clinical trial of Angiomax in coronary angioplasty called REPLACE-2. In November
2002, the principal investigators of the clinical trial announced that, based on
30-day patient follow-up results, Angiomax met all of the primary and secondary
objectives of the trial. In March 2003, we released the results of the detailed
cost analysis study to examine per-patient total hospital resource consumption
at U.S. clinical trial sites. In September 2003, the principal investigators of
the clinical trial further announced that, based on six-month patient follow-up
results, Angiomax again met all of the primary and secondary objectives of the
trial. We believe that the near-term commercial success of Angiomax will depend
upon the extent to which physicians, patients and other key decision-makers
accept the results of the REPLACE-2 trial. Since the original results were
announced, additional hospitals have granted Angiomax formulary approval and
hospital demand for the product has increased. We cannot be certain, however,
that these trends will continue. Some commentators have challenged various
aspects of the trial design of REPLACE-2, the conduct of the study and the
analysis and interpretation of the results from the study, including how we
define bleeding and the clinical relevance of types of ischemic events. If
physicians, patients and other key decision-makers do not accept the trial
results, adoption of Angiomax may suffer, and our business will be materially
adversely affected.
We continued to follow the patients involved in the REPLACE-2 trial for the
one-year follow-up period. If the extended follow-up data released by
investigators in November 2003 are less favorable than the 30-day and six-month
patient follow-up data announced to date, physician adoption of Angiomax may be
adversely affected.
WE CANNOT EXPAND THE INDICATIONS FOR WHICH WE ARE MARKETING 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 angioplasty. One of our key objectives is to expand the
indications for which Angiomax is approved for marketing by the FDA. In order to
market Angiomax for these expanded indications, we will need to complete our
clinical trials that are currently underway, conduct additional clinical trials,
obtain positive results from those trials and obtain FDA approval for such
proposed indications. 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 Angiomax through distribution partners in international
markets, including Europe. In order to market Angiomax in the European Union and
many other foreign jurisdictions, we or our distribution partners must obtain
separate regulatory approvals. Obtaining foreign approvals may require
additional trials and expense. In February 1998, we submitted a Marketing
Authorization Application, or MAA, to the European Agency for Evaluation of
Medicinal Products, or the EMEA, for use of Angiomax in unstable angina patients
undergoing coronary angioplasty. Following extended interaction with European
Page 22
regulatory authorities, the Committee of Proprietary Medicinal Products of the
EMEA voted in October 1999 not to recommend Angiomax for approval in coronary
angioplasty, and we withdrew our application to the EMEA. In August 2003, we
resubmitted an MAA with the results of the REPLACE-2 trial. We may not be able
to obtain approval or may be delayed in obtaining approval from any or all of
the jurisdictions in which we seek approval to market Angiomax.
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. 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 Clevelox or any additional product candidates or products we
may acquire on terms that are acceptable to us. Any current or future
arrangements for development and commercialization may not be successful. If we
are not able to establish or maintain agreements relating to Angiomax, Clevelox
or any additional products we may acquire on terms that we deem favorable, our
results of operations 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 are not 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, Clevelox, 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.
Page 23
FAILURE TO ACHIEVE OUR REVENUE TARGETS OR RAISE ADDITIONAL FUNDS IN THE FUTURE
MAY AFFECT THE DEVELOPMENT, MANUFACTURE AND SALE OF OUR PRODUCTS
We will need to generate significantly greater revenues to achieve and then
maintain profitability. The clinical development and regulatory approval of
Angiomax for additional indications, the clinical development and regulatory
approval of Clevelox and the acquisition and development of additional product
candidates by us will require a commitment of substantial funds. Our future
funding requirements depend upon many factors, including our ability to achieve
our revenue targets, and may be significantly greater than we expect.
As of the date of this quarterly report, we believe, based on our current
operating plan, which includes 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 the foreseeable future.
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. Any 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 DEPEND 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 do not manufacture any of our products and do not plan to develop any
capacity to manufacture them. As of the date of this quarterly report, we obtain
all of our Angiomax bulk drug substance from one manufacturer, UCB Bioproducts,
and rely on another manufacturer, Ben Venue Laboratories, 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
terms of our agreement with UCB Bioproducts require us to purchase a substantial
portion of our Angiomax bulk drug product from UCB Bioproducts, which could
hinder our ability to obtain an additional supplier for Angiomax.
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 practices, 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 UCB Bioproducts or Ben
Venue is unable to carry out its respective manufacturing obligations, we may be
unable to obtain 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
Page 24
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.
WE DO NOT OWN THE TECHNOLOGY UNDERLYING THE CHEMILOG PROCESS AND MAY BE UNABLE
TO UTILIZE THE CHEMILOG PROCESS IF UCB BIOPRODUCTS BREACHES OUR AGREEMENT
Our agreement with UCB Bioproducts for the supply of Angiomax bulk drug
substance provides that UCB Bioproducts owns all of the proprietary technology
that was used to develop and that is employed in the Chemilog process. Although
the agreement requires that UCB Bioproducts transfer this technology to a
secondary supplier of Angiomax bulk drug substance or to us or an alternate
supplier at the expiration of the agreement, if UCB Bioproducts fails or is
unable to transfer successfully this technology, we would be unable to employ
the Chemilog process to manufacture our Angiomax bulk drug substance, which
could cause us to experience delays in the manufacturing process and increase
our manufacturing costs in the future.
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 to market any product for a particular
indication, we will be required to complete pre-clinical studies and extensive
clinical trials in humans to demonstrate the safety and efficacy of such product
for such indication. We are evaluating Angiomax in clinical trials for
additional uses in open vascular surgery such as CABG, in medical conditions
that require urgent treatment such as unstable angina, in patients with heparin
allergy, in children and in peripheral angioplasty. 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 a product candidate to
be safe or effective for the intended use. 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 product may be marketed.
OUR FAILURE TO ACQUIRE AND DEVELOP ADDITIONAL PRODUCT CANDIDATES OR APPROVED
PRODUCTS WILL IMPAIR OUR ABILITY TO GROW
Page 25
As part of our growth strategy, we intend to acquire and develop additional
product candidates or approved products. The success of this strategy depends
upon our ability to identify, select and acquire pharmaceutical products 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 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
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.
A BREACH OF ANY OF THE AGREEMENTS UNDER WHICH WE LICENSE COMMERCIALIZATION
RIGHTS TO PRODUCTS OR TECHNOLOGY FROM OTHERS COULD CAUSE US TO LOSE LICENSE
RIGHTS THAT ARE IMPORTANT TO OUR BUSINESS OR SUBJECT US TO CLAIMS BY OUR
LICENSORS
We license 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
have exclusively licensed patents and patent applications relating to Angiomax
from Biogen and relating to Clevelox from AstraZeneca. Under these agreements,
we are subject to commercialization and development, sublicensing, royalty,
patent prosecution and maintenance, insurance and other obligations. Any failure
by us to comply with any of these obligations or any other breach by us of these
license agreements could give the licensor the right to terminate the license in
whole, terminate the exclusive nature of the license or bring a claim against us
for damages. Any such termination or claim, particularly relating to our
agreement with Biogen, could have a material adverse effect on our business.
Even if we contest any such termination or claim and are ultimately successful,
our stock price could suffer. In addition, upon any termination of a license
agreement, we may be required to license to the licensor any related
intellectual property that we developed.
WE MAY NOT BE ABLE TO MANAGE OUR BUSINESS EFFECTIVELY IF WE ARE UNABLE TO
ATTRACT AND RETAIN KEY PERSONNEL AND CONSULTANTS
Page 26
Our 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 our industry with the breadth of skills and experience required
to acquire, 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.
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 a widely
used, inexpensive, generic drug used in patients with arterial thrombosis.
Because heparin is inexpensive and has been widely used for many years,
physicians and medical decision-makers may be hesitant to adopt Angiomax. 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 direct and indirect thrombin inhibitors currently on the market,
awaiting regulatory approval and in development, including orally administered
agents. The thrombin inhibitors on the market include products for use in the
treatment of patients with a clinical condition known as HIT/HITTS, patients
with unstable angina and patients with deep vein thrombosis.
ANGIOMAX MAY COMPETE WITH ALL GROUPS OF ANTICOAGULANT DRUGS, INCLUDING PLATELET
INHIBITORS AND FIBRINOLYTIC DRUGS, WHICH MAY LIMIT THE USE OF ANGIOMAX
In general, anticoagulant drugs may be classified into four groups: drugs that
directly target and inhibit thrombin, drugs that 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 platelet inhibitors or
fibrinolytic drugs. Although platelet inhibitors and fibrinolytic drugs may be
complementary to Angiomax, we recognize that Angiomax may compete with these and
other anticoagulant drugs to the extent Angiomax and any of these anticoagulant
drugs are approved for the same indication.
In addition, platelet inhibitors and fibrinolytic drugs may compete with
Angiomax for the use of hospital financial resources. For example, 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, hospitals may be forced to
use either Angiomax or platelet inhibitors or fibrinolytic drugs but not
necessarily several of the drugs together.
WE FACE SUBSTANTIAL COMPETITION, WHICH MAY RESULT IN OTHERS DISCOVERING,
DEVELOPING OR COMMERCIALIZING COMPETING PRODUCTS BEFORE OR MORE SUCCESSFULLY
THAN WE DO
Page 27
Our 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 markets for our products. Potential competitors in the United
States and other countries include major pharmaceutical and chemical companies,
specialized pharmaceutical companies and 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.
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 us
or our competitors, the availability and timing of third-party reimbursement and
the timing of regulatory approvals. 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.
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 business 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 or products, 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 quarter ended September 30, 2003,
revenues from the sale of Angiomax to three 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 fails to
pay us on a timely basis or at all, our financial position and results of
operations could be materially adversely affected.
Page 28
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 for
use as an anticoagulant in patients undergoing coronary angioplasty, and which
has been approved for sale in five other countries for indications similar to
those approved by the FDA, 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 product and product candidates
are subject to extensive and rigorous ongoing domestic and foreign government
regulation of, among other things, the research, development, testing,
manufacture, labeling, promotion, advertising, distribution and marketing of our
products and product candidates. 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.
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 companies like us are generally uncertain
and involve complex legal, scientific and factual issues. Our success depends
significantly on our ability to:
- obtain and maintain U.S. and foreign patents;
- protect trade secrets;
- operate without infringing the proprietary rights of others; and
Page 29
- 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 and Clevelox. As of
the date of this quarterly report, we exclusively license six issued U.S.
patents relating to Angiomax and three issued U. S. patents relating to
Clevelox. 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 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-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
Page 30
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 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 drug treatments by government authorities,
private health insurers and other organizations will have an effect on our
ability to successfully commercialize, and attract collaborative partners to
invest in the development of, 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 31
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. To mitigate market risk, as well as credit and
default risk, we place our investments in high-quality financial instruments,
primarily money market funds, certificates of deposit, corporate debt and U.S.
government agency securities with maturities or auction dates of less than two
years, which we believe are subject to limited credit risk. However, these
instruments are subject to interest rate risk and will decrease in value if
interest rates increase. We currently do not hedge interest rate exposure. At
September 30, 2003, we held $126.9 million in cash, cash equivalents and
available for sale securities, of which 54% were due within one year.
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. If the applicable exchange rate
undergoes a change of 10.0%, we do not believe that it would have a material
impact on our results of operations or cash flows.
ITEM 4 - CONTROLS AND PROCEDURES
Our management, with the participation of our chief executive officers and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)
as of September 30, 2003. Based on this evaluation, our chief executive officers
and chief financial officer concluded that, as of September 30, 2003, our
disclosure controls and procedures were (1) designed to ensure that material
information relating to us, including our consolidated subsidiaries, is made
known to our chief executive officers and chief financial officer by others
within those entities, particularly during the period in which this report was
being prepared and (2) effective, in that they provide reasonable assurance that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms.
No change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal
quarter ended September 30, 2003 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
Page 32
PART II. OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2003, we issued 5,007 shares of our
common stock upon the cashless exercise of outstanding warrants. 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 included in the
warrants; 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 of 1933, as amended, or the securities laws of certain
states, in reliance on the exemptions provided by Section 3(a)(9) of the
Securities Act and in reliance on similar exemptions under applicable state
laws.
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 July 22, 2003, we furnished a current report on Form 8-K
with the SEC in connection with our announcement of financial
results for the quarter ended June 30, 2003.
Page 33
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
Date: November 6, 2003 By: /s/ Steven H. Koehler
-------------------------------
Steven H. Koehler
Chief Financial Officer
Page 34
EXHIBIT INDEX
Exhibit Number Description
31.1 Executive Chairman - Certification pursuant to
Rule 13a-14(a) of the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Chief Executive Officer - Certification pursuant
to Rule 13a-14(a) of the Securities Exchange Act
of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.3 Chief Financial Officer - Certification pursuant
to Rule 13a-14(a) of the Securities Exchange Act
of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Executive Chairman - Certification pursuant to
Rule 13a-14(b) of the Securities Exchange Act of
1934 and 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
32.2 Chief Executive Officer - Certification pursuant
to Rule 13a-14(b) of the Securities Exchange Act
of 1934 and 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
32.3 Chief Financial Officer - Certification pursuant
to Rule 13a-14(b) of the Securities Exchange Act
of 1934 and 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
Page 35