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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File No. 0-24424
CIMA LABS INC.
(Exact name of Registrant as specified in its charter)
--------------------------
DELAWARE 41-1569769
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10000 VALLEY VIEW ROAD, EDEN PRAIRIE, MINNESOTA 55344-9361
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (612) 947-8700
SECURITIES REGISTERED PURSUANT TO Section 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO Section 12(g) OF THE ACT:
COMMON STOCK $.01 PAR VALUE
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The approximate aggregate market value of the voting stock held by nonaffiliates
of the Registrant as of March 15, 1999, based upon the last trade price of the
Common Stock reported on the Nasdaq National Market on March 15, 1999, was
$18,542,055.*
The number of shares of Common Stock outstanding as of March 15, 1999 was
9,610,394.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Definitive Proxy Statement which will be filed with the
Commission pursuant to Regulation 14A in connection with the 1998 Annual Meeting
of Stockholders are incorporated herein by reference in Part III of this Report.
- ------------------------------
* Excludes approximately 3,794,191 shares of common stock held by Directors,
Officers and holders of 5% or more of the Registrant's outstanding Common
Stock at March 15, 1999. Exclusion of shares held by any person should not
be construed to indicate that such person possesses the power, direct or
indirect, to direct or cause the direction of the management or policies of
the Registrant, or that such person is controlled by or under common
control with the Registrant.
1
PART I.
Unless the context otherwise indicates, all references to the "Registrant,"
the "Company," or "CIMA" in this Annual Report on Form 10-K relate to CIMA LABS
INC., a Delaware corporation.
The following trademarks of the Company are used in this Annual Report on
Form 10-K: "CIMA-Registered Trademark-," "CIMA LABS INC.-Registered Trademark-,"
"OraSolv-Registered Trademark-," "OraSolv-Registered Trademark-SR",
DuraSolv-TM-, PakSolv-TM-, "OraVescent-TM-SL/BL and "OraVescent-TM-SS."
ITEM 1. BUSINESS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. WHEN USED HEREIN, THE WORDS "BELIEVE," "ANTICIPATE," "EXPECT,"
"ESTIMATE" AND SIMILAR EXPRESSIONS AS THEY RELATE TO THE COMPANY OR ITS
MANAGEMENT ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THE SUCCESS OF THE COMPANY IN MANUFACTURING THE COMPANY'S
TECHNOLOGIES, THE AVAILABILITY OF ADEQUATE FUNDS FOR THE COMPANY'S OPERATIONS,
THE SUCCESS OF THE COMPANY IN COMMERCIALIZING ITS NEW DRUG DELIVERY PROGRAMS,
AND THE COMPANY'S RELIANCE ON ITS KEY PERSONNEL AND PARTNERS, WHICH ARE
DISCUSSED IN THIS SECTION, AND IN GREATER DETAIL UNDER THE CAPTION "BUSINESS
RISKS," AND IN "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
OVERVIEW
CIMA, a Delaware corporation incorporated in 1986, is a drug delivery
company focused primarily on the development and manufacture of
pharmaceutical products based upon its patented oral drug delivery
technologies for marketing by national and multinational pharmaceutical
companies. The Company offers technologies in the fast-dissolve and oral
transmucosal areas. OraSolv and DuraSolv, its premier fast-dissolve
technologies, are oral dosage formulations incorporating microencapsulated
active drug ingredients into tablets which dissolve quickly in the mouth
without chewing or water and which effectively mask the taste of the
medication being delivered. OraSolv's and DuraSolv's fast-dissolving
capability may enable patients in certain age groups or those with a variety
of conditions that limit their ability to swallow conventional tablets to
receive medication in a more convenient oral dosage form. The Company
believes that OraSolv and DuraSolv are more convenient than traditional
tablet-based oral dosages as they dissolve quickly in the mouth and do not
require water to be ingested, thereby enabling immediate medication at the
onset of symptoms. In addition, OraSolv and DuraSolv can provide more
accurate administration of doses than liquid or suspension formulations as no
measuring is required. The Company believes OraSolv's and DuraSolv's ease of
use and effective taste-masking may foster greater patient compliance with
recommended dosage regimens, both for over-the-counter ("OTC") and
prescription products, thereby improving therapeutic outcomes and reducing
costs in the healthcare system. In addition to OraSolv and DuraSolv, CIMA is
developing several new technologies; OraSolv SR, PakSolv, OraVescent SL/BL
and OraVescent SS.
CIMA's business focus has evolved over the last several years. From
inception until 1992, the Company focused on the development of liquid
effervescent products and technologies. In 1993, the U.S. patent covering
OraSolv was issued and the Company, perceiving a greater commercial opportunity,
shifted its focus to the development of OraSolv products. Since the issuance of
the OraSolv patent in 1993, the Company completed construction on its current
manufacturing facility and produced numerous full-scale trial and validation
batches, entered into various license and product development agreements with
pharmaceutical companies, and launched the first commercial product using the
OraSolv dosage form in the first-half of 1997. The Company generates its
revenue from signing license agreements, product development fees, sales of
products in the OraSolv dosage form, and royalties.
2
The Company's business strategy is to commercialize its drug delivery
technologies through collaborations with pharmaceutical companies worldwide with
emphasis on products which command a large market share and/or are in large
market segments. The Company's current focus is primarily on the development
and manufacture of OraSolv and DuraSolv products for the prescription market.
Product differentiation and brand name identity are becoming more critical than
ever to the successful marketing of pharmaceutical products. Increasingly
pharmaceutical companies are emphasizing the development of strong prescription
franchises through branding and direct-to-consumer promotional efforts. The
Company believes that OraSolv and DuraSolv afford pharmaceutical companies a
means to significantly differentiate their products in the competitive
marketplace. Because they are the subject of issued patents or patent
applications, OraSolv and DuraSolv can allow extended market life to products
that may go off-patent and become subject to generic competition. OraSolv and
DuraSolv also afford more enduring product differentiation than the more
traditional approaches of changing product flavor or packaging innovations,
which can be easily replicated. The Company believes that this has allowed it
to enter into agreements with a number of pharmaceutical companies for
development, manufacture and commercialization of prescription and
non-prescription products.
The Company has also initiated the development of new OraVescent drug
delivery technologies in the oral transmucosal area. These technologies are
designed to deliver poorly absorbed and large molecule drugs through membranes
in the oral cavity or the gastrointestinal tract.
Major events that affected the Company in 1998 included:
- - The Company announced the launch of Triaminic-Registered Trademark-
pediatric cough cold products using the OraSolv technology by Novartis
Consumer Health. This represents the third commercial launch of a product
using the Company's OraSolv technology.
- - The Company announced that a major milestone, the completion of the
clinical study, was reached in its collaboration with Zeneca on the
development of an OraSolv fast-dissolving form of Zomig-Registered
Trademark-.
- - The Company announced the completion of a clinical study on its new oral
transmucosal technology.
- - The Company entered into a prescription agreement with N.V. Organon to
develop and manufacture an OraSolv quick-dissolving dosage form for one of
Organon's prescription drugs.
- - The Company's collaboration with SmithKline Beecham Consumer Healthcare on
the development of OraSolv formulations for over-the-counter products was
terminated.
- - The Company entered into exclusive license and supply license agreements
with Novartis Consumer Health for the development and manufacture of
several Triaminic-Registered Trademark- pediatric cough cold products in
CIMA's OraSolv dosage form. The Company also announced that Novartis
Consumer Health took an exclusive option on a second license covering
additional products.
3
BACKGROUND
DRUG DELIVERY TECHNOLOGY
Patient medications are available in a variety of delivery forms,
including solid dosage forms, liquids, effervescents, transdermal delivery
methods, inhalation devices and products, and intramuscular and intravenous
injections. Enteral medication delivery includes those medications delivered
through the stomach, including tablets, liquids and effervescents. Enteral
medications are most frequently patient-administered, because of their
non-invasive delivery method. Parental medications are those delivered by
injection. Parenteral medications are most often administered by a healthcare
provider.
The Company believes the convenience of patient administration has made
enteral medications in general, and tablets in particular, popular with
patients, providers and payors. Industry sources estimate that patients most
frequently receive medications in an oral tablet form. However, children and
the elderly, as well as those with certain physiological or medical conditions,
frequently experience difficulty in swallowing tablets. These patients often
receive medications in liquid or effervescent form, or through parenteral
methods as an alternative to tablets. The Company believes that tablets are a
more convenient, accurate and effective medication form than are liquids or
effervescents (which may spill in the process of administering the medication,
especially to children) and are easier for patients to self-administer than
parenteral therapeutics.
RECENT TRENDS IN THE HEALTHCARE AND PHARMACEUTICAL INDUSTRIES
The healthcare industry has experienced significant change in the past and
the Company expects this change to continue for the foreseeable future. The
emergence of managed care organizations has focused providers and payors on the
efficient utilization of healthcare resources. In addition, the trend towards
the "capitation" of fees, or management of a patient's health requirements for a
pre-determined, regular payment, has created an awareness among providers of the
cost-effectiveness of various medical treatments. Healthcare providers and
payors have implemented a variety of strategies to reduce the cost of medical
care, including the use of generic versions of prescription and
non-prescription drugs, the use of non-prescription remedies and the use of
therapies that have improved patient compliance. The Company believes that
patient non-compliance with medicinal dosing regimens is widespread, and that
such non-compliance results in unnecessary costs to the healthcare system.
These changes in the healthcare industry have also had an impact on
participants in the pharmaceutical industry. In particular, a greater emphasis
on cost effectiveness by providers and payors has resulted in pharmaceutical
companies developing products that reduce the cost of therapy. These
pharmaceutical companies have responded by developing treatments with improved
efficacy, reduced complications and side effects, easier delivery and lower
costs. The focus on cost-effectiveness has also led to the development of
generic versions of off-patent prescription drugs. Increasingly, healthcare
payors and providers have embraced generic equivalents of branded drugs because
generic drugs provide a substantial cost savings. In addition, many
pharmaceutical companies are extending their presence in a particular
therapeutic area with the introduction of a non-prescription, versions of a
prescription drug. Many patients and providers have indicated a preference for
OTC versions of prescription formulations because of the convenience that
patient-administration of OTC therapies provides as well as the cost savings.
In addition, healthcare providers and payors have indicated a continuing
interest in therapies that improve patient compliance which ultimately leads to
significant healthcare cost savings.
As these pharmaceutical companies adjust to the evolving healthcare
industry, they must differentiate their products in an increasingly crowded
therapeutic market. To do this effectively, they must develop products or
product extensions that can successfully compete in the prescription, generic
and non-prescription market for drugs, develop products or product extensions
that enhance patient compliance, and do all of this within a highly regulated
and cost-constrained environment.
4
Another change affecting the healthcare industry has been the number and
size of business combinations, strategic alliances, and mergers in both the
pharmaceutical and the managed care industries. In the pharmaceutical industry
these changes are driving the major pharmaceutical companies to focus more and
more on major new chemical entities (NCE's) which might be block-buster drugs.
The significant revenue and profit from these drugs present the major growth
area for these companies. Drug delivery product development is increasingly
being given to specialty drug delivery companies to provide unique development
products that contribute important sales revenue and profit, but not at the
level of block-buster drugs. The managed care business environment provides
even greater focus on patient benefits which, in most cases, are derived from a
combination of blockbuster drugs and drug delivery development.
Several pharmaceutical companies are taking advantage of the recent U.S.
federal legislation which would grant them an additional six months of market
exclusivity if they conduct clinical studies on pediatric patients. This serves
to highlight the growing regulatory pressure to encourage the development of
drugs formulated specifically for children. The Company sees this as a
potential benefit as pharmaceutical companies explore various drug delivery
systems.
MARKET OPPORTUNITY
The Company believes that its OraSolv, DuraSolv and OraVescent drug
delivery systems will provide benefits to patients as well as healthcare
industry providers and payors. These benefits, in turn, should provide
marketing advantages to CIMA's pharmaceutical partners. The benefit to patients
is ease of medication and convenience, which the Company believes will result in
improved compliance with dosing regimens. The benefits to providers and payors
are lower costs resulting from better efficacy and improved compliance with
dosing regimens. The benefits to pharmaceutical partners are the capabilities
to leverage their drug delivery development programs by going to specialty drug
delivery companies, like CIMA, for brand differentiation, the ability to retain
brand integrity and brand life cycle management.
ADVANTAGES FOR PATIENTS, PROVIDERS AND PAYORS
The Company believes a broad group of patients could benefit from its
fast-dissolve and oral transmucosal technologies because they enable immediate
medication at symptom emergence and facilitate conformance to dosing regimens.
Patient non-compliance with dosing regimens has been associated with increased
costs of medical therapies by prolonging treatment duration, increasing the
likelihood of secondary or tertiary disease manifestation and contributing to
over-utilization of medical personnel and facilities. By improving patient
compliance, providers and payors may reduce unnecessary expenditures and improve
therapeutic outcomes. Reduction of expenditures is an increasingly important
issue to providers as capitated payment plans become more prevalent in the
healthcare industry.
In addition to the general market applications, the Company believes its
technologies provide benefits to certain patient groups which experience
significant difficulty in swallowing tablets. Such patient groups include
children, the elderly and patients with certain anatomical or physiological
deformities, certain disease indications or medication-associated dysphagia.
The Company has completed quantitative consumer testing with children and
qualitative testing with physicians, nurses and managed care administrators for
the elderly which indicate the potential for these demographic groups to better
comply with dosing regimens and thus to benefit from the OraSolv, DuraSolv and
OraVescent technologies.
5
ADVANTAGES FOR PHARMACEUTICAL PARTNERS
The Company believes that pharmaceutical companies are facing challenges
to adjust to the evolving healthcare industry. These challenges include: the
impact of generic competition, which generally results in lower pricing as well
as a loss of market share; the impact of direct to consumer marketing; the
impact of the increased role of managed care organizations, forcing increased
economic considerations in patient care, the results of which can include
shorter therapies and therapeutic substitution (including less expensive
products); and the need to maintain brand integrity with its inherent economic
benefits.
Pharmaceutical companies are addressing these issues in several ways. They
are attempting to develop new product forms which will demonstrate a medical and
economic benefit to the patient. For the most part, they use specialty drug
delivery companies to do that. They are also trying to develop products which
will help to improve patient compliance, which should result in a patient's more
rapid return to health. Finally, they are attempting to use approaches which
can be patented or provide a technological differentiation in order to reduce
the threat of competition. The Company believes that the OraSolv, DuraSolv and
OraVescent technologies provide a means for its pharmaceutical partners to meet
each of these challenges.
TECHNOLOGY
ORASOLV
The Company's OraSolv technology is an oral dosage form which combines
taste-masked drug ingredients with a quick dissolving effervescent excipient
system. Taste-masking is achieved through a process of microencapsulation,
which coats or entraps the active compound in an immediate release matrix. The
effervescent excipient system aids in rapid dissolution of the tablet,
permitting swallowing of the pharmaceutical ingredients before they come in
contact with the taste buds. The OraSolv tablet dissolves quickly without
chewing or water and allows for effective taste-masking of a wide variety of
active drug ingredients, both prescription and non-prescription.
Taste-Masking
The taste-masking of the drug ingredients used in OraSolv products is
accomplished using a variety of coating techniques, including spray
coating, spray drying, spray congealing, melt dispersion, phase
separation or solvent evaporation methods. The coating materials are
intended to prevent the active drug substance in the OraSolv tablet
from coming into contact with the patient's taste buds but to provide
for the immediate or the controlled release of the active ingredient
in the stomach. In the past, the Company contracted out taste-masking
actives with a number of different suppliers. Since late 1997, this
activity has been brought in-house, to date the Company scientists
have developed several taste-masked actives, the first of which we
expect to be in commercial distribution in late 1999. The Company has
one issued patent and two pending patents covering taste-masking of
pharmaceuticals actives ingredients.
Quick Dissolve
The microencapsulated drug is combined with fast-dissolving tablet
materials, which can include a variety of flavoring, coloring and
sweetening agents all materials Generally Recognized As Safe materials
(GRAS) and commonly used tablet excipients, such as binding agents and
lubricants. In addition, an effervescent system composed of a dry
acid and a dry base is added to the tablet excipient to facilitate a
mild effervescent reaction when the tablet contacts saliva. This
effervescent reaction accelerates the disintegration of the tablet
through the release of the carbon dioxide. As the OraSolv tablet
dissolves, it releases the microparticles of drug into the saliva,
forming a micro-suspension of the drug in the saliva. This
microencapsulated drug suspension enters the stomach through the
normal swallowing process.
6
NEW TECHNOLOGIES
DuraSolv is an oral dosage system designed to improve manufacturing
efficiency and reduce production costs. Currently, a significant component of
OraSolv's manufacturing cost is a consequence of the sophisticated packaging
systems necessary to protect the softer, more friable OraSolv tablets. DuraSolv
is a higher compaction solid oral dosage system formulated to achieve all the
benefits of a quick dissolve dosage system, such as OraSolv, but capable of
being packaged in traditional packaging systems such as foil pouches or bottles
at much higher production rates and lower packaging costs. The key advantages
of a harder tablet are a more robust tablet leading to lower manufacturing
costs, and simpler, faster and more cost effective packaging.
The Company has successfully developed prototypes in this dosage system,
filed a patent application, and conducted stability tests. Consumer testing has
demonstrated high acceptability of this technology, comparable to that of
OraSolv. To date, the Company has no agreements with any corporate partner
related to this technology.
OraSolv SR is a sustained or controlled release, quick dissolve system
designed to improve convenience and compliance. This system incorporates
time release beads, providing the traditional benefits of a sustained or
controlled release of active ingredients with quick dissolve's improved
convenience. The two key advantages are: 1) use of the sustained release
systems of our partners' which has already been approved by the FDA; and 2)
unique formulations that allow easy swallowing of the sustained release
active. The Company's agreement with Schering-Plough utilizes this new
technology.
OraVescent SL/BL is an improved efficacy technology designed to enhance the
transport of active drug substances across oral mucosal membranes. This
technology improves the bioavailability and accelerates the onset of action of
some molecules. The Company has completed its first human testing of this
technology and expects to initiate two prototype projects with partners in 1999.
OraVescent SS is an improved efficacy technology designed to enhance the
absorption of active drug substances at selected sites along the patients G.I.
tract. This technology is currently being tested in laboratory animal studies.
The Company expects to conduct the first human clinical testing of this
technology in 1999 and to initiate a prototype development project with a
partner in 1999.
PATENTS AND PROPRIETARY RIGHTS
The Company actively seeks, when appropriate, protection for its products
and proprietary information by means of U.S. and foreign patents, trademarks and
contractual arrangements. In addition, the Company relies upon trade secrets
and contractual arrangements to protect certain of its proprietary information
and products.
CIMA holds six issued U.S. patents and several foreign patents covering its
technologies. The core patent relating to the OraSolv technology relates to the
taste masking, microencapsulation and quick dissolving excipient technology
incorporated in products utilizing the OraSolv technology. A corresponding
European patent has been issued. The OraSolv U.S. patent was issued in 1993 and
expires in 2010. Two of the issued U.S. patents relate to the production of
compressed effervescent and non-effervescent tablets using a particular
lubricant developed by the Company.
Issued U.S. patents held by CIMA and their dates of expiration are set out
in the table below. As with any patent, the actual scope of coverage afforded
by each of CIMA's patents is governed by the language of the patent claims
themselves. The descriptions set forth in the table below are intended solely
for ease of identifying patents relevant to various technologies. They are not
intended as a representation regarding the scope of patents.
- -------------------------------------------------------------------------------------------------------------------------------
PATENT TECHNOLOGY COVERED DATE ISSUED DATE EXPIRES
- -------------------------------------------------------------------------------------------------------------------------------
5,178,878 Certain OraSolv-Registered Trademark- technology. 1993 2010
- -------------------------------------------------------------------------------------------------------------------------------
5,219,574 The production of compressed effervescent and non- 1993 and 1995 2010 and 2012
- -------------------------------------------------------------------------------------------------------------------------------
5,401,513 effervescent tablets using a particular lubricant developed by the
Company (two patents).
- -------------------------------------------------------------------------------------------------------------------------------
5,223,264 Effervescent pediatric vitamin and mineral supplement. 1993 2010
- -------------------------------------------------------------------------------------------------------------------------------
5,503,846 The formulation of a base coated, acid effervescent mixture 1996 2013
manufactured by controlled acid base reaction. The obtained mixture
can be used in the formulation of acid sensitive compounds with
OraSolv-Registered Trademark- technology or other effervescent based
products.
- -------------------------------------------------------------------------------------------------------------------------------
5,607,697 Taste-masking of microparticles for oral dosage forms. 1997 2015
- -------------------------------------------------------------------------------------------------------------------------------
As a consequence of the Company's patent position, an off-patent or near
off-patent drug active can be combined with the Company's technology in a new,
competitively differentiated and patent-protected dosage form.
The Company holds two patents in Australia, issued in 1990, one Euro
Patent, issued in 1996 and one Canadian patent, issued in 1999. The Company
also holds a total of 18 U.S. and foreign patent applications, including two
European Patent Office filings.
The Company's success will depend in part on its ability to obtain and
maintain patent protection for its products, its new technology and to preserve
its trade secrets. No assurance can be given, however, that the Company's
patent applications will be approved or that any issued patents will provide
competitive advantages for its products or will not be challenged or
circumvented by competitors.
The Company's ability to commercialize its products will depend on not
infringing the patents of others, and protecting the Company's own proprietary
technology, which may involve litigation. Whether or not the outcome of any
litigation concerning patents and proprietary technologies is favorable to the
Company, the cost of such litigation and the diversion of the Company's
resources during such litigation could have a material adverse effect on the
Company. See "Item 3. Legal Proceedings."
Much of the Company's technology is dependent upon the knowledge,
experience and skills of key scientific and technical personnel. To protect
rights to its proprietary know-how and technology, Company policy requires all
employees and consultants to execute confidentiality agreements that prohibit
the disclosure of confidential information to anyone outside the Company. These
agreements also require disclosure and assignment to the Company of discoveries
and inventions made by such persons while devoted to Company activities. There
can be no assurance that these agreements will not be breached, that the Company
will have adequate remedies for any such breach or that the Company's trade
secrets will not otherwise become known or be independently developed by
competitors. In addition, it is possible others may infringe the patent rights
of the Company.
The Company may desire or be required to obtain licenses from others with
respect to materials used in the Company's products or manufacturing processes,
including drug coating techniques. There can be no assurance that such licenses
will be obtainable on commercially reasonable terms, if at all, or that any
licensed patents or proprietary rights will be valid and enforceable.
STRATEGY
The Company's goal is to have its proprietary drug delivery technologies
incorporated into as many pharmaceutical products as possible with an emphasis
on pharmaceutical products which command a large market segment.
Initially the Company focused its efforts on non-prescription marketed
products which benefit from quicker time to regulatory approval and marketing
which has served to establish CIMA and its technology in the
8
market and provide near term revenue. The Company's longer term strategy is to
build on this base and expand into the prescription market. The prescription
market offers significantly more attractive royalty rates and higher
manufacturing margins. CIMA's priority is to focus on developing OraSolv and
DuraSolv formulations of prescription branded pharmaceuticals as well as
generics and, in particular, those products which have application to pediatric
and geriatric markets.
CIMA has embarked on the development of specifically identified
pharmaceutical products which will go off patent in the next several years. The
Company intends to develop such products through the product registration phase
with or without a partner.
Product therapeutic classes to which the Company believes its technologies
potentially can be applied are highlighted in the table below, together with the
target patient population.
Prescription Markets
Potential Areas of Orasolv Application
---------------------------------------
Therapeutic Area Patient Population
---------------- ------------------
Antibiotics Pediatric
Anti-asthmatics Pediatric
Anti-epileptics Pediatric
Cough/Cold/Allergy All
Cardiovascular Adult/Geriatric
Anti-migraine Adult/Geriatric
Anti-emetics All
Anti-depressants Pediatric/Geriatric
Anti-psychotics Pediatric/Geriatric
Anti-anxiety Pediatric/Geriatric
Cancer Geriatric
AIDS Adult/Pediatric
Parkinson's/Alzheimer's Geriatric
9
The Company's primary strategies are to:
- - COLLABORATE WITH CORPORATE PARTNERS FOR MARKETING OF PRODUCTS. The Company
has entered into and intends to continue to enter into agreements with
pharmaceutical and other healthcare companies for the development and
marketing of products that incorporate its technologies. These partners
will market and sell their products which utilize one of the Company's
technologies. The Company believes this strategy will reduce the time
required to market products, extend patent life for certain actives and
take advantage of the industry knowledge and presence of its partners.
- - DEVELOP PROPRIETARY TECHNOLOGIES. The Company continues to develop
proprietary technologies and obtain patents thereon. To date, the Company
has six U.S., two Australian and one Canadian patents, one Euro Patent and
thirteen patent applications. The Company believes that patented products
and technologies provide attractive marketing features for use by its
corporate partners. In 1996, the Company initiated the development of new
technologies: DuraSolv, OraSolv SR, OraVescent SL/BL and OraVescent SS.
Consumer use testing has already been completed on DuraSolv demonstrating
its feasibility and acceptance by patients. OraSolv SR has also passed the
feasibility stage and is the technology being utilized in the
Schering-Plough partnership. The OraVescent systems have been and are
currently the subject of several feasibility studies.
- - RETAIN MANUFACTURING RIGHTS. The Company intends to continue to develop
formulations of oral therapeutics for its partners using its technologies,
to manufacture commercial quantities of these products in its facility in
Eden Prairie, and to rely on its partners to market and sell the developed
products. The Company believes this strategy enables it to better and more
effectively manage increasing manufacturing volumes, control quality of the
products it manufactures and manufacture in small or varying batch sizes,
each of which provide it with a competitive business advantage.
- - RETAIN OWNERSHIP OF PRODUCTS DEVELOPED IN COLLABORATIONS. In most cases
the Company retains and intends to continue to retain ownership of the
developed products using its technologies. The Company believes this
practice, in the case of generic and OTC monographed products, will provide
it with the flexibility of entering into collaborations with other
potential partners should the initial partner decide not to pursue the
commercialization of a particular product.
- - DEVELOP KEY PRODUCTS THROUGH REGISTRATION. A Company objective to develop
key products through registration was established as a part of the
strategic planning process. A complete list of key prescription
pharmaceuticals already off patent and those coming off patent was prepared
and subjected to key criteria identified as part of the process. A grading
system was developed which allowed the Company to identify and rank a
number of key prescription pharmaceuticals for development.
In 1998, the first of these products was developed, scaled up and placed on
stability. One of the products completed stability testing, patient
testing and pharmacokinetic (bioequivalence testing) successfully. A
second product that was identified has been developed, scaled up and placed
on stability. Initial results on this product have been positive.
Additional products are being identified for development during 1999. The
number of products and the extent of that development will depend on the
availability of resources.
10
AGREEMENTS WITH CORPORATE PARTNERS
The Company's business development efforts are focused on entering into
development, licensing and manufacturing agreements with pharmaceutical and
other healthcare companies. Under these agreements, the corporate partner will
be responsible for marketing and distributing the developed products either
worldwide, or in specified markets or territories. The collaborative
arrangements typically begin with a product development phase which, if
successful, may be followed by a development and license option agreement for
development of product prototypes and then license and manufacturing agreements
for commercialization of such products. Alternatively, the Company may develop
product prototypes internally and enter directly into a development,
manufacturing or license agreement for commercialization of those products.
The Company's future ability to generate revenue is dependent upon the
Company's ability to enter into collaborative arrangements with pharmaceutical
and other corporate partners to develop products that meet the requirements of
its corporate partners, and upon the marketing efforts of these corporate
partners. The Company believes these partners will have an economic motivation
to market the Company's products; however, the amount and timing of resources to
be devoted to marketing are not within the control of the Company. Certain of
the Company's non-prescription products are seasonal in nature and the Company's
revenues could vary materially from one financial period to another depending on
which of such products, if any, are then being marketed. In an attempt to
alleviate such risk, the Company is focused on developing for its partners a mix
of non-prescription and prescription products. There can be no assurance that
the Company will be able to enter into additional collaborative arrangements in
the future or that any current or future collaborative arrangements will result
in successful product commercialization. To the extent that agreements with
corporate partners cover products to be sold internationally, such sales could
be adversely affected by governmental, political and economic conditions in
other countries, including tariff regulations, taxes, import quotas and other
factors.
The table below sets forth the partners, market segments and CIMA
technology for the Company's major collaborative arrangements.
PHARMACEUTICAL COLLABORATIONS
PARTNER MARKET SEGMENT TECHNOLOGY
------- -------------- ----------
Bristol-Myers Squibb Pediatric Analgesics OraSolv
Bristol-Myers Squibb Multiple Products OraSolv
Novartis Pediatric Cough Cold OraSolv
Schering-Plough UNDISCLOSED(1) OraSolv SR
Zeneca Anti-migraine OraSolv
Organon UNDISCLOSED(1) OraSolv
(1) Further information is confidential as disclosure of the product category
may force the collaborative partner to alter its marketing plans, which could
have a material effect on the eventual marketing of the product.
BRISTOL-MYERS SQUIBB
The Company started manufacturing commercial quantities in 1997 of an
OraSolv dosage form of Tempra-Registered Trademark- Bristol-Myers Squibb's
pediatric analgesic. Tempra Quicklets-TM-, launched in the United States,
competes directly against children's Tylenol-Registered Trademark- and contains
the drug active common to these products: acetaminophen. The product was also
introduced as Tempra-Registered Trademark- FirstTabs-TM- by Mead Johnson,
Canada, a subsidiary of Bristol-Myers Squibb. The Company has received
milestone payments for the development of this product, manufacturing fees, and
royalty payments on end market sales.
11
In addition, the Company announced in 1997 the signing of a global
non-exclusive license agreement with Bristol-Myers Squibb, which covers multiple
products to be developed by Bristol-Myers Squibb applying or utilizing the
OraSolv technology to be sold in various territories. This agreement makes
provision for advanced royalty payments, minimum royalty payments over a
four-year period and royalties at market rates on total end market sales.
In the fourth quarter of 1998, the global non-exclusive license agreement
with Bristol-Myers Squibb was amended. The Company was given back the rights to
pediatric analgesics in the United States.
NOVARTIS CONSUMER HEALTH
In December 1997, the Company announced that Novartis entered into a
Development and License Option Agreement which covers the application of OraSolv
to the Novartis Triaminic-Registered Trademark- product line. Similar to the
above agreements, the Company will receive option and development fees in
exchange for the license option and development work.
In July 1998, the Company announced that Novartis Consumer Health launched
three Triaminic products using the OraSolv technology. The Company also
announced the signing of exclusive license and supply agreement which include an
option to a second exclusive license covering additional products.
SCHERING-PLOUGH
The Company entered into a Development and Option Agreement with
Schering-Plough in August 1997. The Agreement calls for the development of an
OraSolv SR version of an undisclosed, currently marketed prescription product.
In exchange for the development work and license option, the Company will
receive an option fee and development fees.
ZENECA
In September 1997, the Company entered into a Development and License
Option Agreement with Zeneca to develop an OraSolv version of Zeneca's
anti-migraine drug, Zomig-Registered Trademark-. The Agreement entitles the
company to development and option fees. In October 1998, the Company announced
that it had achieved completion of a major milestone. The clinical study on the
OraSolv formulation of Zomig was completed.
ORGANON
In December 1998, the Company entered into a Development and License Option
Agreement with N.V. Organon, the pharmaceuticals business unit of Nobel. The
Agreement is for the development of an OraSolv version of one of Organon's
prescription products. The Agreement entitles the Company to receive
development and option fees.
RESEARCH AND DEVELOPMENT
The Research and Development ("R&D") department at CIMA is focused on
the development of oral dosage forms based on CIMA proprietary technologies
and new proprietary oral dosage forms focused on improving both compliance
and efficacy. The R&D department includes scientists recruited from the R&D
groups of major U.S. pharmaceutical companies. Currently R&D personnel and
support systems and facilities are organized in a way to effectively develop
formulations from bench scale through full scale/commercial size under GMP
conditions. Such development is carried out at the R&D facilities in
Brooklyn Park, Minnesota and in the full scale manufacturing facility in Eden
Prairie, Minnesota. The Company believes that its R&D facilities are in
compliance with current Good Manufacturing Practice (cGMP). In both
facilities, small cGMP batches are manufactured, packaged and released to
support initial studies in humans, including both consumer studies for OTC
products and clinical studies for prescription products.
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These efforts are conducted to support the Company's strategic and business
goals. The Company's R&D department is devoted to the development of drug
delivery technologies and dosage forms for pharmaceutical applications. The key
goals for the R&D team are: develop innovative drug delivery systems that
fulfill the pharmaceutical partners' needs and meet the strategy of the Company;
develop, expand and support systems required to fulfill cGMP production at
commercial levels necessary to meet the requirements of our partners; recruit
and train high quality technical and scientific personnel; and support the
Company's intellectual property process.
In 1998, the Company began internal development of coated actives for the
manufacture of OraSolv products. To date, the Company has developed numerous
coated actives and is in the process of scaling-up five coated actives to
commercial scale. The Company expects to commercialize its first coated active
in the year 2000. Bringing the taste-masking process in-house has enabled the
Company to commit to a number of very aggressive product development timelines.
The Company believes that the ability to deliver on aggressive development
timelines is an important competitive advantage over our competition and is a
key factor in signing new prescription pharmaceutical agreements.
In 1997, the Company submitted a provisional patent filing on DuraSolv, a
more robust rapidly dissolving tablet technology that can be packaged using
traditional pharmaceutical packaging equipment. Accelerated stability data has
been collected on product packaged in bottles and foil packets for several
DuraSolv prototype formulations. These efforts have not only resulted in a new
potential technology but significant enhancements which have been incorporated
in the base OraSolv technology as a result of these efforts.
In 1997, the Company signed its first agreement to develop an OraSolv SR
product. Due to partner related development activities the timeline for the
Company's first internally developed OraSolv SR product has been delayed. The
Company expects to resume this activity in 1999.
Additional R&D personnel were hired in 1998. They have focused exclusively
on research and development of new drug delivery systems. This has resulted in
the dosing in human subjects of an enhanced efficacy dosage form, OraVescent
SL/BL. Additional human and animal studies will be conducted utilizing this and
another enhanced efficacy dosage form in 1999.
At the early stage of development, the feasibility of these technologies
appears promising. However, there are numerous risks and uncertainties inherent
in any R&D program. Factors that could cause these programs not to reach the
commercialization stage include, but are not limited to, the possibilities that
the research will not be able to be patented or the patent enforced, the
inability to scale-up and manufacture these new technologies in a cost-effective
manner, the ability to find a partner to market the product, and the eventual
market acceptance of this new technology.
For the years ended December 31, 1998, 1997 and 1996, CIMA's total
expenditures for R&D were $4,488,000, $3,364,000 and $5,403,000, respectively.
Some of these expenses were directly related to product development fees earned
from the Company's collaborative partners. For the years ended December 31,
1998, 1997 and 1996, these revenues were $3,458,000, $1,557,000 and $1,197,000,
respectively.
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MANUFACTURING
A key component of the Company's strategy is to be the primary
manufacturer of OraSolv, DuraSolv and its other future drug delivery products.
Advantages of this strategy include the ability to:
- retain control of its technology;
- increase production quickly;
- refine the production process as necessary to bring OraSolv and other
future products to market rapidly and successfully; and
- generate a revenue stream from manufacturing.
The Company's OraSolv production facility, which also houses the Company's
headquarters is located in Eden Prairie, Minnesota. The Company began occupying
and making leasehold improvements to the new facility in late June 1994 and the
facility was completed in December 1994. The Company has operated one
production line at this facility which is capable of producing 200 to 250
million tablets a year. The facility is designed to be expandable to six
production lines and efforts are underway to design and select a second
production line as warranted. The Company expects six production lines to be
more than sufficient capacity to meet the Company's long-term manufacturing
needs. The production equipment consists of state-of-the-art material transfer
and blending systems and integrated high speed tableting and packaging
operations. The configuration of the facility, the production flow layout and
the equipment has been designed by the Company's personnel and consultants.
Most of the equipment consists of high quality components commonly used in
pharmaceutical manufacturing, selected for ease of operation, cleaning,
changeover and cost effectiveness. The production line is capable of packaging
a variety of package designs with rapid conversion between sizes. Modern
technology is also utilized for 24 hour environmental control and monitoring of
air quality, temperature, humidity and pressure differentials in all production
areas.
Although the OraSolv process uses many standard pharmaceutical
production components, some equipment was specifically developed to meet the
unique requirements of OraSolv products. The Company has developed a
manufacturing process that allows high speed packing of soft, friable
tablets, without breakage, into specially designed protective, child
resistant packages in a controlled, low humidity environment. To date, CIMA
is the only company that has proven it has this capability in a production
mode. After conducting over 60 full scale developmental runs and making
production equipment refinements, the manufacturing facility, equipment and
process have all been successfully validated. Additionally, extensive
package transit testing and consumer testing confirmed the integrity of the
package through all modes of transport to the final customer without product
damage. After completion of validation, the quality of the manufacturing
facility, equipment and procedures were confirmed through the successful
inspection by the State of Minnesota, the FDA and Medicines Control Agency
authorities. In addition, there have been numerous successful site audits
conducted by major pharmaceutical companies. The production facility
complies with (cGMP) requirements.
The active ingredients used by the Company are readily available from
suppliers or our partners. In certain cases, the active ingredients are shipped
to coating material suppliers where appropriate coating materials are applied to
microencapsulate the ingredients. In other cases, the Company may purchase the
microencapsulated active ingredient from a supplier. The pharmaceutical
ingredients and other supplies to be used in manufacturing OraSolv products are
standard pharmaceutical products available from numerous suppliers. Most
coating materials are also available from numerous suppliers. In some
instances, however, certain coating materials or techniques may be available
only from a single supplier. If any such coating materials or techniques were
to become unavailable, the Company believes that satisfactory alternative
materials or techniques could be substituted. However, there can be no
assurance that the Company's manufacturing operations would not be disrupted.
Any such disruption could have an adverse effect on the Company's business and
potentially damage relations with its corporate partners.
14
In February 1997, CIMA began commercial production for the first commercial
launch by Bristol-Myers Squibb of a product incorporating the OraSolv
technology. Since then, the Company has been producing commercial OraSolv
product utilizing multiple shifts. It has gained valuable knowledge to make
improvements in production efficiencies and operating speed and to reduce
wastage. There are currently seven SKU in the marketplace.
MARKETING
The Company's marketing strategy is to rely on its corporate partners for
the marketing and sale of its products. The Company believes this strategy will
enable it to respond quickly to market demands, while avoiding the effort and
expense associated with the establishment of an end-user marketing capability.
The Company's marketing department has focused on promoting the benefits of its
technologies to its corporate pharmaceutical partners. The Company believes
that it is a leader in the drug delivery industry in the fast-dissolve area by
offering potential pharmaceutical partners the largest selection of
technologies. Also, its fast-dissolve tablet technology competes favorably to
its competition. In quantitative consumer studies conducted by a major
independent market research company and sponsored by the Company, significantly
more consumers liked the OraSolv formulation versus the Zydis-Registered
Trademark- formulation (R.P. Scherer Corporation) of the same drug. Currently,
the Company has corporate collaborations with Bristol-Myers Squibb,
Schering-Plough, Zeneca, Novartis Consumer Health and Organon.
COMPETITION
Competition in the areas of pharmaceutical products and drug delivery
systems is intense. The Company's primary competitors in the business of
developing and applying drug delivery systems include companies which have
substantially greater financial, technological, marketing, personnel and
research and development resources than the Company. The Company's products
will compete not only with products employing advanced drug delivery systems but
also with products employing conventional dosage forms. New drugs or future
developments in alternative drug delivery technologies may provide therapeutic
or cost advantages over the Company's potential products.
Among the technologies expected to provide competition for the Company's
OraSolv and Durasolv technologies are the Zydis technology developed by R.P.
Scherer Corporation ("Scherer"), the Shearform Matrix technology developed by
Fuisz Technologies, Ltd. ("Fuisz"), the Wowtab technology developed by
Yamanouchi Shaklee Pharmaceuticals, and the Flashtab developed by Prographarm.
The Zydis technology is a fast-dissolving oral drug delivery system based on a
freeze-dried gelatin tablet. The Shearform Matrix technology has application to
two tablet formats, one of which involves waterless, fast-dissolving oral
delivery which Fuisz calls "FlashDose-Registered Trademark-." The Wowtab and
Flashtab technologies are fast-dissolving technologies which result in an oral
fast-dissolving tablet which is more like the Company's DuraSolv tablet.
The principal competitive factors in the market for rapid dissolving tablet
technologies are compatibility with taste-masking techniques, dosage capacity,
drug compatibility, cost and ease of manufacture, patient acceptance and
required capital investment for manufacturing. The Company believes that its
rapid dissolving tablet technologies compete favorably with respect to these
factors. In a recent quantitative consumer study conducted by the Company,
significantly more consumers liked the OraSolv formulation versus the Zydis
formulation of the same drug. Scherer, Fuisz , Yamanouchi Shaklee and
Prographarm have been successful in licensing their technologies to a number of
pharmaceutical companies. The Company also believes that certain pharmaceutical
companies may be developing other rapid dissolving tablet technologies which
might be competitive with the Company's technology.
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GOVERNMENT REGULATION
All pharmaceutical manufacturers are subject to extensive regulation of
their activities, including research and development and production and
marketing, by numerous governmental authorities in the U.S. and other countries.
In the U.S., pharmaceutical products are subject to rigorous regulation by the
FDA. The federal Food, Drug, and Cosmetic Act, as amended, and the regulations
promulgated thereunder, and other federal and state statutes and regulations,
govern, among other things, the research, development, testing, manufacture,
storage, record keeping, labeling, advertising and promotion, and marketing and
distribution of pharmaceutical products. If a company fails to comply with
applicable requirements, it may be subject to administrative or judicially
imposed sanctions such as civil penalties, criminal prosecution of the company,
its officers and employees, injunctions, product seizure or detention, product
recalls, total or partial suspension of production and FDA refusal to approve
pending premarket approval applications or supplements to approved applications.
In general, FDA approval is required before a new drug product may be
marketed in the U.S. However, most OTC drug products are exempt from the FDA's
premarketing approval requirements. In 1972, the FDA instituted the ongoing
OTC Drug Review in order to evaluate the safety and effectiveness of all OTC
drugs then on the market. Through the OTC Drug Review process, the FDA issues
monographs that set forth the specific active ingredients, dosages, indications,
and labeling statements for OTC drugs that the FDA will consider generally
recognized as safe and effective and therefore not subject to premarket
approval. For certain categories of OTC drug products not yet subject to a
final monograph, the FDA usually will not take regulatory action against such a
product unless failure to do so poses a potential health hazard to consumers.
The Company's initial product launch was an OTC drug product that did not
require FDA approval. Products subject to final monographs, however, are
subject to various FDA regulations such as those outlining cGMP requirements,
general and specific OTC labeling requirements (including warning statements),
the restriction against advertising for conditions other than those stated in
product labeling, and the requirement that OTC drugs contain only suitable
inactive ingredients. OTC products and manufacturing facilities are subject to
FDA inspection, and failure to comply with applicable regulatory requirements
may lead to administrative or judicially imposed penalties.
Future marketing of products not formulated in compliance with final OTC
drug monographs typically will require a formal submission to the FDA, such as a
New Drug Application ("NDA") or Supplement to existing New Drug Application
("sNDA"), and ultimate approval by the FDA. This application and approval
process can be expensive and time consuming, typically taking from six months to
several years to complete. Further, there can be no assurance that approvals can
be obtained, or that any such approvals will be on the terms or have the scope
necessary for successful commercialization of these products. The Company
expects that any required FDA approvals in connection with the introduction of
new, non-monographed products would be sought by the Company's corporate
partners. Marketing of such products could be delayed or prevented because of
this process. Even after a NDA or sNDA has been approved, existing FDA
procedures may delay initial product shipment. Delays caused by the FDA
approval process may materially reduce the period during which there is an
exclusive right to exploit patented products or technologies. Even if any
required FDA approval has been obtained with respect to a product, foreign
regulatory approval of a product must be obtained prior to marketing the
product internationally. Foreign approval procedures vary from country to
country and the time required for approval may result in delays in or ultimately
prevent marketing. The Company expects to rely on its pharmaceutical company
partners to obtain any necessary government approvals in foreign countries.
However, considerable amounts of company time and resources may be required to
support the approvals of these foreign filings.
Prescription drug products with proven safety and efficacy profiles may be
"switched" to OTC status through the submission to and approval by the FDA of a
supplement to an existing NDA. The information and data required to support a
switch application vary with individual drugs. In some cases, the manufacturer
may be required to conduct clinical investigations or other scientific studies
to assess the safety and effectiveness of the drug for non-prescription use.
In evaluating an OTC switch, the FDA considers whether the drug product is safe
for use by consumers without the supervision of an appropriate licensed
healthcare professional. As prescription
16
drug products are switched to the OTC market, pharmaceutical companies face the
same challenges to establish brand identification and product differentiation as
they face with current OTC drug products. Although switched products in certain
cases may be eligible for a three-year period of market exclusivity (during
which time the FDA will not consider any ANDAs for the same drug), the Company
believes that its OraSolv drug delivery system can help its corporate partners
differentiate their products during any exclusivity period and maintain a
competitive advantage thereafter.
If a generic version of a drug already approved under an NDA and no longer
subject to any FDA marketing exclusivity, is bioequivalent to the approved
product, preparation and submission of an ANDA will be the most time and
cost-effective approach to FDA approval. The methodology for establishing
bioequivalence through in vitro or in vivo methods is viewed to be
straightforward. Because CIMA's taste-masking systems are used in immediate
release dosage forms, this approach is generally the most expeditious.
Certain drugs may raise distinctive issues, such as a need for a unique
approach to proving bioequivalence. In those cases, premarket approval under
Section 505(b)(2) of the Food, Drug, and Cosmetic Act would be more appropriate.
Section 505(b)(2) allows the FDA to approve an NDA using shortened procedures,
usually for drugs that have proven safety profiles because of their marketplace
performance among a large population group. In a 505(b)(2) application, a
company may rely on clinical investigations conducted by others to which it does
not hold a right of reference. In general, a 505(b)(2) application is supported
by two or three clinical studies among the target population group designed to
verify the safety and efficacy of the drug product in that population using the
target dose and dose sequence. The cost of this approach, which is generally
used when a new delivery system or indication is added to an existing drug
product, is typically much less than a standard NDA. The time to approve may
also be shorter than a traditional NDA and, in some cases, an ANDA.
Each domestic drug product manufacturing facility must be registered with
the FDA. Each manufacturer must inform the FDA of every drug product it has in
commercial distribution and keep such list updated. Domestic manufacturing
facilities are also subject to at least biennial inspection by the FDA for
compliance with cGMP regulations. Compliance with cGMP is required at all times
during the manufacture and processing of drug products. CIMA's existing
manufacturing facilities have been inspected periodically by the FDA. The FDA
last inspected the Eden Prairie facility in November 1996, and the Brooklyn Park
facility in January 1997. No observations were cited during either inspection.
While the Company's new OraSolv manufacturing facility is required to be
registered with the FDA and to comply with cGMP regulations at all times, FDA
approval was not required prior to commencement of manufacturing OTC drug
products. Even though the Company has worked diligently to assure compliance
with FDA regulations and has been audited by the quality control/compliance
groups of several of its current and potential corporate partners, there can be
no guarantee that FDA inspections will proceed without any compliance issues
requiring the expenditure of money and resources to resolve. The Company's
facilities have been inspected by and the Company has received a license from
the Minnesota Board of Pharmacy to manufacture drug products in its facilities.
The Company is also subject to regulation under various federal and state
laws regarding, among other things, occupational safety, environmental
protection, hazardous substance control and product advertising and promotion.
In connection with its research and development activities and its
manufacturing, the Company is subject to federal, state and local laws, rules,
regulations and policies governing the use, generation, manufacture, storage,
air emission, effluent discharge, handling and disposal of certain materials and
wastes. The Company believes that it has complied with these laws and
regulations in all material respects and it has not been required to take any
action to correct any material noncompliance. The Company does not currently
anticipate that any material capital expenditures will be required in order to
comply with federal, state and local environmental laws or that compliance with
such laws will have a material effect on the earnings or competitive position of
the Company. The Company is unable to predict, however, the impact on the
Company's business of any changes in such environmental laws or of any new laws
or regulations that may be imposed in the future and there can be no assurance
that the Company will not be required to incur significant compliance costs or
be held liable for damages resulting from violations of these laws and
regulations.
17
BUSINESS RISKS
The Company considered itself a development stage company until the fourth
quarter of 1997 and must be evaluated in light of the uncertainties and
complications present for any such company and, in particular, one in the
pharmaceutical industry. The Company has accumulated aggregate net losses from
inception through December 31, 1998 of $44,715,000. Losses have resulted
principally from costs incurred in research and development of the Company's
technologies and from general and administrative costs. These costs have
exceeded the Company's revenues . In early 1997, the Company recorded the first
commercial sales using it's OraSolv technology. Prior to this the Company's
revenues had been derived primarily from the manufacturing of AutoLution and
other non-OraSolv products under agreements with third parties. The Company no
longer manufactures such products and no longer derives revenues from their
manufacture. In more recent years, revenues have been generated from research
and development fees, licensing arrangements and to a lesser extent sales of
products using the OraSolv technology to our corporate partners. The Company
expects to continue to incur losses through 1999. There can be no assurance
that the Company will ever generate substantial revenues or achieve
profitability.
The Company believes that its currently available funds, together with any
license fees, product development fees and sales revenue anticipated to be
received in the future, may not meet its needs through 1999. It is anticipated
that in the first half of 1999, the Company will need to raise additional funds.
The Company is considering numerous types of financing. These include public or
private financings, including equity financing which may be dilutive to
shareholders, debt financing with a potential partner that may include product
development projects and/or establishing a line of credit with a financial
institution. There can be no assurance that the Company will be able to raise
additional funds if its capital resources are exhausted, or that funds will be
available on terms attractive to the Company.
The Company is dependent upon its ability to enter into and perform under
collaborative arrangements with pharmaceutical companies for the development and
commercialization of its products. Failure of these partners to market the
Company's products successfully could have a material adverse effect on the
Company's financial condition and results of operations. The Company's revenues
are also dependent upon ultimate consumer acceptance of the OraSolv drug
delivery system and/or its new drug delivery technologies as an alternative to
conventional oral dosage forms. The Company expects that OraSolv products will
be priced slightly higher than conventional swallow or chewable tablets.
Although the Company believes that its initial consumer research, and a
competitors launch of a fast-dissolve product has been encouraging, there can be
no assurance that market acceptance of the Company's OraSolv products will ever
develop or be sustained.
The Company began manufacturing OraSolv products in commercial quantities
in February 1997. Commercial sales have been made and revenue has been
recognized from sales of OraSolv products. To achieve future desired levels of
production, the Company will be required to increase its manufacturing
capabilities. There can be no assurance that manufacturing can be scaled-up in
a timely manner to allow production in sufficient quantities to meet the needs
of the Company's corporate partners. Furthermore, the Company has only one
manufacturing line and one facility capable of manufacturing products. If this
production line and/or facility becomes damaged or becomes incapable of
manufacturing products due to natural disaster, governmental regulatory issues
or otherwise, the Company would have no other means of producing OraSolv
products.
The Company intends to increase its research and development expenditures
to enhance its current technologies, and pursue internal proprietary drug
delivery technologies. Even if these technologies appear promising during
various stages of development, they may not reach the commercialization stage
for a number of reasons. Such reasons include the possibilities of not finding
a partner to market the product, of being difficult to manufacture on a large
scale or be uneconomical to market.
18
The quick dissolve drug delivery field is fairly new and rapidly evolving
and it is expected to continue to undergo improvements and rapid technological
changes. There can be no assurance that current or new competitors will not
succeed in developing technologies and products that are more effective than any
which are being developed by the Company or which could render the Company's
technology and products non-competitive or that any technology developed by the
Company will be preferred to any existing or newly developed technologies.
The foregoing risks reflect the Company's stage of development and the
nature of the Company's industry. The Company is also subject to a range of
additional risks, including competition, uncertainties regarding the effects of
healthcare reform on the pharmaceutical industry, including pressures exerted on
the prices charged for pharmaceutical products and uncertainties regarding
protection of patents and proprietary rights, all of which may have a material
adverse effect on the Company's business.
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EMPLOYEES
As of March 15, 1999, the Company had 74 full-time employee, of whom 12
hold degrees at the doctorate level. Of these employees 26 are engaged in
research and development, 19 in manufacturing, 6 in compliance,11 in quality
control and 12 in administration, business development, finance and human
resources. Most of the Company's scientific and engineering employees have
prior experience with pharmaceutical or medical products companies. No employee
is represented by a union, and the Company has never experienced a work
stoppage. The Company believes its employee relations are good.
The success of the Company and of its business strategy is dependent in
large part on the ability of the Company to attract and retain key management
and operating personnel. Such individuals are in high demand and are often
subject to competing offers. In particular, the Company's success will depend,
in part, on its ability to attract and retain the services of its executive
officers and scientific and technical personnel. The loss of the services of
one or more members of management or key employees or the inability to hire
additional personnel as needed may have a material adverse effect on the
Company.
LIABILITY INSURANCE
The Company's business involves exposure to potential product liability
risks that are inherent in the production and manufacture of pharmaceutical
products. Although the Company has not experienced any product liability claims
to date, any such claims could have a material adverse impact on the Company.
The Company currently has product liability insurance with coverage limits of
$5,000,000 per occurrence and $5,000,000 on an annual aggregate basis. The
Company's insurance policies provide coverage on a claims made basis and are
subject to annual renewal. There can be no assurance, however, that the Company
will be able to maintain such insurance on acceptable terms or that the Company
will be able to secure increased coverage as the commercialization of its
products proceeds or that any insurance will provide adequate protection against
potential liabilities.
ITEM 2. PROPERTIES
The Company has leased a 75,000 square foot facility in Eden Prairie,
Minnesota, a suburb of Minneapolis, which houses its corporate headquarters and
has been prepared for use as an OraSolv production facility. This lease has an
initial term expiring on June 1, 2009 with minimum annual base rent payments
(exclusive of real estate taxes) of approximately $373,000 through June 1,
2001. The rent payments will be recalculated on June 1, 2001, and June 1, 2006
based on an index rate. The rent may increase, but will not decrease. The
Company has the option to extend the lease term one period of ten years with a
minimum annual base rent payment (exclusive of real estate taxes and maintenance
fees) of $500,000 for the first five years, and $550,000 for the second five
years of the ten year term.
The Company also leases 32,000 square feet of office, research and
development and manufacturing space in Brooklyn Park, Minnesota. The lease on
the Brooklyn Park facility expires in September 2001, but is renewable at the
Company's option for two additional five-year periods. The Company currently
pays $151,392 in annual base rent (exclusive of real estate taxes and
maintenance fees).
The Company's existing facilities are believed to be adequate to meet its
present and future requirements, and the Company currently believes that
suitable additional space will be available to it, when needed, on commercially
reasonable terms.
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ITEM 3. LEGAL PROCEEDINGS
On October 29, 1997, the Company instituted an opposition proceeding in the
European Patent Office seeking cancellation of a patent owned by Laboratories
Prographarm of Chateauneuf, France ("Prographarm"). The Company has alleged in
the opposition proceeding that publications exist which are prior art against
the European patent, including an international patent, application owned by the
Company which was published prior to the priority date of the European patent.
On February 27, 1997, the United States Patent and Trademark Office
("USPTO") suspended prosecution of a U.S. patent application owned by the
Company to consider the Company's request that an interference proceeding be
declared between a pending U.S. patent application owned by the Company and a
U.S. patent owned by Prographarm. The Company is seeking a determination by the
USPTO that either (i) the Company's personnel are the prior inventors of the
invention encompassed by the Prographarm U.S. patent and accordingly that the
Company is entitled to claims directed to the same invention in a new patent to
be owned by the Company, or (ii) in the alternative, a determination that the
claims are unpatentable to the Company or Prographarm. Either holding would
result in cancellation of the Prographarm U.S. patent. The Company's factual
allegations are the same as in the European opposition, and further include the
Company's pending U.S. patent application itself and the priority date of such
pending application.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
21
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock trades on the Nasdaq National Market under the
symbol "CIMA". The following table sets forth, for the periods indicated, the
high and low sales prices of the Common Stock reported on the Nasdaq National
Market.
HIGH LOW
---- ----
1997
First Quarter . . . . . . . . . . . . . . . . $ 8.25 $ 6.00
Second Quarter . . . . . . . . . . . . . . . . 6.13 3.88
Third Quarter . . . . . . . . . . . . . . . . 6.88 3.88
Fourth Quarter . . . . . . . . . . . . . . . . 7.19 3.94
1998
First Quarter . . . . . . . . . . . . . . . . $ 4.97 $ 2.59
Second Quarter . . . . . . . . . . . . . . . . 4.88 3.25
Third Quarter . . . . . . . . . . . . . . . . 3.91 2.75
Fourth Quarter . . . . . . . . . . . . . . . . 3.53 2.09
On March 15, 1999, the last sale price reported on the Nasdaq National
Market for the Company's Common Stock was $3.188 per share.
HOLDERS
As of March 15, 1999, there were approximately 86 stockholders of record of
the Company's Common Stock.
DIVIDENDS
The Company has not paid dividends on its Common Stock and currently does
not plan to pay any cash dividends in the foreseeable future.
22
ITEM 6. SELECTED FINANCIAL DATA
CIMA LABS INC.
SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENTS OF OPERATIONS DATA:
Revenues:
Net sales...................................... $ 1,097 $ 2,628 $ - $ 151 $ 1,451
R&D fees and licensing revenues................ 6,141 2,282 1,472 684 1,168
----------------------------------------------------------------------
Total revenues................................... 7,238 4,910 1,472 835 2,619
Costs and expenses:
Costs of goods sold............................ 2,444 4,376 - 240 2,799
Research and product development............... 4,488 3,364 5,403 6,505 3,550
Selling, general and administrative............ 3,615 3,487 2,909 3,658 2,972
----------------------------------------------------------------------
Total costs and expenses......................... 10,547 11,227 8,312 10,403 9,321
Other income (expense):
Interest income, net........................... 152 337 498 448 452
Other income (expense), net.................... (30) 142 (4) 13 38
----------------------------------------------------------------------
Total other income............................... 122 479 494 461 490
----------------------------------------------------------------------
Net loss: $ 3,187 $ (5,838) $ (6,346) $ (9,107) $ (6,212)
----------------------------------------------------------------------
----------------------------------------------------------------------
Net loss per share:
Basic.......................................... $ (.33) $ (.61) $ (.72) $ (1.16) $ (1.82)
Diluted........................................ (.33) (.61) (.72) (1.16) (0.95)
Weighted average number of shares outstanding:
Basic.......................................... 9,610 9,519 8,827 7,822 3,413
Diluted........................................ 9,610 9,519 8,827 7,822 5,505
DECEMBER 31
----------------------------------------------------------------------
BALANCE SHEET DATA: 1998 1997 1996 1995 1994
----------------------------------------------------------------------
(IN THOUSANDS)
Cash and investments............................. $ 3,027 $ 4,423 $ 0,263 $ 3,559 $ 2,912
Total assets..................................... 14,916 17,328 22,065 15,519 25,122
Retained earnings (deficit)...................... (44,715) (41,527) (35,660) (29,259) (20,058)
Total stockholders' equity....................... 12,656 15,837 21,021 14,282 22,554
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. WHEN USED HEREIN, THE WORDS "BELIEVE", "ANTICIPATE", "EXPECT",
"ESTIMATE" AND SIMILAR EXPRESSIONS AS THEY RELATE TO THE COMPANY OR ITS
MANAGEMENT ARE INTENDED TO IDENTIFY SUCH FORWARD LOOKING STATEMENTS. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE , BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN THIS SECTION AS WELL AS THOSE DISCUSSED IN
"ITEM 1. BUSINESS-BUSINESS RISKS."
GENERAL
The Company was founded in 1986, and focused initially on contract
manufacturing liquid effervescent products. In September 1992, patent claims
were allowed on the Company's OraSolv-Registered Trademark- technology.
Following issuance of the OraSolv patent, CIMA changed its focus and emerged as
a drug delivery company emphasizing primarily developing and manufacturing
pharmaceutical products based upon OraSolv. OraSolv is an oral dosage form
which incorporates mircoencapsulated drug ingredients into a tablet that
dissolves quickly in the mouth without chewing or water and which effectively
masks the taste of the medication being delivered. Additional drug delivery
technologies are also under development by the Company.
In early-1997 the Company recorded its first commercial sales using the
Company's OraSolv technology. In 1998, another OTC product for a second partner
was launched using the OraSolv technology. The Company anticipates that the
first prescription pharmaceutical product using the OraSolv technology will be
launched by one of its partners later in 1999. Prior to this, the Company's
revenues had been from sales using the Company's AutoLution (a liquid
effervescent) technology, license fees paid by corporate partners in
consideration of the transfer of rights under collaboration agreements, and
product development fees paid by corporate partners to fund the Company's
research and development efforts for products developed under such agreements.
Approximately 44% of the Company's total revenues through 1998 have been
generated from development work and sales of AutoLution products. The Company
does not anticipate that it will manufacture liquid effervescent products, and
has not recognized any revenues from such products since 1995. Over the last
three years, approximately $13,620,000 of revenue has been generated from three
major sources: product development fees ( approximately 46% of the total) for
work related to OraSolv products, and to a lesser extent sales (approximately
27%) of OraSolv products and licensing revenues (approximately 27%) related to
OraSolv products. In addition to revenues from the above sources, the Company
has funded operations from private and public sales of equity securities,
realizing net proceeds of approximately $26,000,000 from private sales of equity
securities and $16,400,000 and $12,000,000 from the Company's July 1994 initial
public offering and May 1996 public offering of its Common Stock, respectively.
At December 31, 1998, the company had 9,610,394 shares of its Common Stock
outstanding.
The Company expects that losses will continue through at least 1999, even
though CIMA expects to be generating revenues from manufacturing, licensing
arrangements, and product development fee related to OraSolv products. At
December 31, 1998, the Company had accumulated net losses of approximately
$44,715,000. Research and development expenses will increase as CIMA
investigates new drug technologies, including the possibility of utilizing
sublingual systems. Personnel costs for research and development are expected
to increase as personnel will be needed to support the development programs for
our new corporate partners and if efforts investigating new technologies prove
to be successful. As CIMA continues production, the Company anticipates
additional operations personnel may need to be added to meet corporate partners'
orders. Management expects administrative support to remain stable.
Manufacturing infrastructure should not increase as there is capacity to meet
short-term production needs.
24
The Company's ability to generate revenues is dependent upon its ability to
develop new, innovative drug delivery technologies and to enter into and be
successful in collaborative arrangements with pharmaceutical and other
healthcare companies for the development and manufacture of OraSolv products and
other technologies to be marketed by these corporate partners. The Company is
highly dependent upon the efforts of the corporate partners to successfully
market the products in the technologies developed by the Company. Although the
Company believes their partners have and will continue to have an economic
motivation to market these products vigorously, the amount and timing of
resources to be devoted to marketing are not within the control of the Company.
Their partners independently could make material marketing and other
commercialization decisions which could adversely affect the Company's future
revenue. The Company's revenues could vary materially from quarter to quarter
due to the Company having relatively few agreements with corporate partners,
causing product development fees to fluctuate, and the fact that certain of the
Company's products are seasonal in nature and revenues could vary depending on
corporate partners' ordering patterns.
In recent years, the Company has actively marketed its OraSolv technology
to the pharmaceutical industry. The Company is presently engaged in product
development and manufacturing scale-up efforts with several different
pharmaceutical companies regarding a variety of potential products, with an
emphasis on prescription products. In the first quarter of 1997, the Company
began commercial production for Bristol-Myers Squibb Company ("Bristol-Myers")
of the first product in the Company's OraSolv dosage form, which was officially
launched in September 1997. In the second quarter of 1997, the Company expanded
its relationship with Bristol-Myers and signed a global non-exclusive license
agreement which covers multiple products. In the third quarter of 1997, the
first two prescription product license option and development agreements were
signed. Each agreement is for a product which is currently marketed by the
Company's partners, Schering Corporation ("Schering-Plough") and Zeneca
Pharmaceuticals ("Zeneca"). The product under development for Zeneca is its new
antimigraine compound zolmitriptan (Zomig-Registered Trademark-). In the third
quarter of 1998, the development and option agreement with Schering-Plough was
amended to extend the previously executed agreement. In October of 1998, the
Company and Smithkline Beecham terminated their License Agreement related to an
OTC product. The Company continues to focus its efforts on the development of
prescription pharmaceuticals. In the fourth quarter of 1997, the development
and license option agreement was signed with Novartis which has been converted
to exclusive license and supply agreements effective July 1, 1998. In the third
quarter 1998, sales are recorded to Novartis for shipment of
Triaminic-Registered Trademark- Softchews-Registered Trademark- for a regional
launch. In the fourth quarter 1998, the Company signed its third prescription
product license option and development agreement with Organon. However, there
can be no assurance that any of these activities or discussions will result in
the eventual marketing of products using OraSolv or the Company's other
technologies.
The Company has substantially completed the assessment of the impact that
the Year 2000 date conversion may have on its internal systems and software,
including information technology ("IT") and non-IT, or embedded technology
systems. The Company believes its risks relating to Year 2000 problems in its
systems to be very low, as its IT systems are relatively small and predominately
new and its software consists entirely of "off the shelf" packages for which
Year 2000 compliant upgrades are available and have largely already been
implemented. The Company's engineers also believe that its non-IT systems will
not experience adverse effects from the Year 2000 date conversion.
The Company has designated an individual to oversee Year 2000 compliance,
and has implemented a plan to ensure that during 1999 the Company will have
upgraded each of its software packages to versions, or have converted to a
replacement package, that the vendors thereof claim to be free of Year 2000
problems. The Company plans to replace any hardware that may be affected by the
Year 2000 date conversion, or alter its use to one not sensitive to Year 2000
issues. The Company has spent to date approximately $3,000 on software upgrades
and expects the total expenditure for such upgrades to be less than $10,000.
The Company has largely completed is replacement or reallocation of hardware
that may present Year 2000 concerns, and estimates the total cost of any such
replacement to be less than $10,000. The Company spent approximately $2,000
during the fourth quarter of 1998 to hire a consultant to review the Company's
plans and actions relating to Year 2000 compliance. The review indicated that
the consultant believed there were no major risks to the Company. The Company
believes that its risks related to Year 2000 compliance of its internal systems
to be immaterial.
The Company has also initiated discussions with its corporate partners to
determine that those parties have appropriate plans to remediate Year 2000
issues. To date, none of the Company's partners has indicated significant
concerns about their ability to do so. However, a substantial negative impact
of Year 2000 issues on one of the Company's few large corporate partners that
significantly affects the partner's ability to do business could have a material
adverse effect on the operations and financial condition of the Company.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
The Company's results of operations for the year ended December 31, 1998,
includes the sales of an additional OTC product in the marketplace in the United
States that uses the OraSolv technology and significant revenues for
prescription product development work from our partners. In 1998, product sales
were $1,097,000. These sales were preliminary for Novartis' test market of
Triaminic-Registered Trademark- Softchews-Registered Trademark- and to a lesser
extent for Mead Johnson Canada for Tempra* FirsTabs*. In 1998, product sales
decreased compared to 1997 product sales that were $2,628,000. Management
believes that the 1997 sales, which primarily were for Bristol-Myers launch of
Tempra-Registered Trademark- Quicklets-TM-, were for quantities greater than a
one year period. The Company expects that its current product development
efforts will result in additional commercial production in the near future. In
1996, product sales were zero as the Company ceased to manufacture liquid
effervescent products, as contract manufacturing was de-emphasized. Product
development fees and licensing revenues were $6,141,000, $2,282,000 and
$1,472,000 in 1998, 1997 and 1996, respectively. This increase in fees and
revenues is a reflection of the progress of the Company's development agreements
and expansion of relationships in the prescription pharmaceutical marketplace.
In 1998, revenues and fees from Novartis
25
Consumer Health, Zeneca and Schering Plough represented over 90% of the total.
The Company continues to have relatively few agreements with corporate partners
and, therefore, it expects that these revenues and fees will tend to fluctuate
on a quarter-to-quarter basis.
In 1998, cost of goods sold were $2,444,000 as compared to $4,376,000 in
1997. This decrease is directly related to the decreased production levels
and lower product sales in 1998 as compared to 1997. As noted earlier, the
Company expects that its current product development efforts will result in
increased production levels, and therefore, it expects that costs of sales to
increase in the near future. In 1996, cost of goods sold were zero as there
was no commercial production. Any fixed cost for the production facility
were considered development expenses, and as such were recorded as research
and development expenses. Research and development expenses were $4,488,000,
$3,364,000 and $5,403,000 in 1998, 1997 and 1996, respectively. The increase
in 1998, as compared to 1997, is directly related to the increased product
development fees earned in 1998. This included increased payroll and related
costs in research and development in 1998 to support these product
development projects, and efforts on new technologies. The decrease in 1997
from 1996 is directly related to the commercial production efforts in 1997.
In 1997, fixed costs related to the production facility were charged to cost
of goods sold, and in 1996 were charged to research and development expenses.
Selling, general and administrative expenses were $3,615,000 in 1998
compared to $3,487,000 in 1997 and $2,909,000 in 1996. Spending in 1998 is
still below 1995 spending levels. Selling, general and administrative costs
increased slightly in 1998, only 3.6%, as compared to 1997. In both the
years 1998 and 1997, the Company has made a concerted effort to perform
market research studies to demonstrate consumer preference for its OraSolv
technology. In 1998, it also initiated direct marketing efforts. Comparing
1997 to 1996, expenses increased primarily due to increased bonus payouts to
management and increased marketing efforts for OraSolv.
Net other income was $122,000 in 1998 compared to $479,000 in 1997 and
$494,000 in 1996. Interest income is the main component of net other income and
is dependent upon the cash position of the Company and the decreases represent
the reduced cash position. In addition, the 1997 figures include $120,000 for a
state sales and use tax refund for previously purchased fixed assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date primarily through private
and public sales of its equity securities and revenues from manufacturing
agreements. Through December 31, 1998, CIMA has received net offering proceeds
from such private and public sales of $57,268,000. In addition, the Company has
had net sales of approximately $17,500,000, and has received $13,800,000 for
product development fees and license revenues. Among other things, these funds
were used to purchase approximately $15,685,000 of capital equipment, including
approximately $7,500,000 in the last two quarters of 1994 in connection with
completing the Company's Eden Prairie manufacturing facility. In July 1994, the
Company completed an initial public offering of shares of its common stock,
realizing net proceeds of approximately $16,379,000; and in May 1996 the Company
completed another public offering of shares of its Common Stock, realizing net
proceeds of approximately $12,038,000. The funds raised in CIMA's initial
public offering have been used to build out the manufacturing facility, purchase
and validate the appropriate production equipment, complete the research and
development facilities, and purchase the necessary equipment for that facility.
In 1996, CIMA successfully completed an FDA establishment inspection, a
Minnesota state inspection, and has been granted a Drug Enforcement Agency
license. The Company has used the funds raised in its May 1996 public offering
primarily to prepare for commercial production in its manufacturing facility,
which began in the first quarter of 1997, and to fund research and development
for the application of the OraSolv-Registered Trademark- technology and other
new technologies to pharmaceutical products. The balance of such funds have
been used for working capital and other general corporate purposes.
26
The Company's long-term capital requirements will depend upon numerous
factors, including the status of the Company's collaborative arrangements, the
progress of the Company's research and development programs, receipt of revenues
from the collaborative agreements, sales of the Company's products, and the need
to expand production capacity. Cash, cash equivalents, and restricted cash were
approximately $3,027,000 at December 31, 1998. The Company believes that its
currently available funds, together with any license fees, product development
fees, and sales revenue anticipated to be received in the future, may not meet
its needs through 1999. It is anticipated that in the first half of 1999, the
Company will need to raise additional funds. The Company is considering numerous
types of financing. These include public or private financings, including
equity financing which may be dilutive to shareholders, debt financing with a
potential partner that may include product development projects and/or
establishing a line of credit with a financial institution. There can be no
assurance that the Company will be able to raise additional funds if its capital
resources are exhausted, or that funds will be available on terms attractive to
the Company.
The Company has not generated taxable income through December 1998. At
December 31, 1998, the net operating losses available to offset taxable income
were approximately $45,700,000. Because the Company has experienced ownership
changes, pursuant to Internal Revenue Code regulations, future utilization of
the operating loss carry-forwards will be limited in any one fiscal year. The
carryforwards expire beginning in 2001. As a result of the annual limitations,
a portion of these carryforwards may expire before ultimately becoming available
to reduce potential federal income tax liabilities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's operations are not currently subject to market risks for
interest rates, foreign currency exchange rates, commodity prices or other
market price risks of a material nature.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Financial Statements and notes thereto appear on pages F-1 to
F-17 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
Not applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference from the
information under the captions "Election of Directors", "Executive Officers of
the Company" and "Compliance with the Reporting Requirements of Section 16(a)"
contained in the Company's definitive proxy statement to be filed no later than
April 30, 1999 in connection with the solicitation of proxies for the Company's
Annual Meeting of Stockholders to be held June 2, 1999 (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
information under the caption "Compensation of Executive Officers" contained in
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is incorporated by reference from the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
information under the caption "Certain Transactions" contained in the Proxy
Statement.
28
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) (1) Index to Financial Statements
The Financial Statements required by this item are submitted in a
separate section beginning on page F-1 of this report
PAGE
----
Report of Independent Auditors.. . . . . . . . . . . . . . . . . . . . F-3
Balance Sheets at December 31, 1998 and 1997 . . . . . . . . . . . . . F-4
Statements of Operations for the three years ended
December 31, 1998. . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Statements of Changes for Stockholders' Equity for the three
years ended December 31, 1998. . . . . . . . . . . . . . . . . . . . F-7
Statements of Cash Flows for the three years ended
December 31, 1998. . . . . . . . . . . . . . . . . . . . . . . . . . F-8
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . F-9
(2) Index to Financial Statement Schedules
Schedule II: Valuation and Qualifying Accounts. . . . . . . . . . . .F-17
(3) Exhibits.
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
3.1 Fifth Restated Certificate of Incorporation of the Company. (1)
3.2 Second Restated Bylaws of the Company. (1)
4.1 Form of Certificate for Common Stock. (2)
4.2 Rights Agreement, dated March 14, 1997, between the Company and
Norwest Bank Minnesota, N.A. (3)
10.1 Letter Agreement, dated January 28, 1998, between the Company and
Joseph R. Robinson, Ph.D.*(4)(5)
10.2 Development and License Option Agreement, dated November 18, 1997,
between Novartis Consumer Health, Inc. and the Company. (4)(5)
10.3 Employment Agreement, dated October 29, 1997, between the Company
and John M. Siebert, Ph.D.* (6)
10.4 Development and License Option Agreement, dated December 2, 1998,
between N.V. Organon and the Company.
10.5 Real Property Lease, dated March 6, 1998, between Braun-Kaiser &
Company and the Company.(4)
10.6 Equity Incentive Plan, as amended and restated.*(7)
10.7 1994 Directors' Stock Option Plan, as amended.*(8)
10.8 Form of Director and Officer Indemnification Agreement.*(2)
10.9 License Agreement, dated July 1, 1998, between Novartis Consumer
Health Inc. and the Company.(5)(9)
10.10 Supply Agreement, dated July 1, 1998, between Novartis Consumer
Health Inc. and the Company.(5)(9)
10.11 License Agreement, dated January 28, 1994, between SRI
International and the Company. (2)(5)
10.12 Non-Employee Directors' Fee Option Grant Program.(10)
10.13 Amendment to Supply Agreement, dated June 26, 1997, between
Bristol-Myers Squibb Company and the Company.(5)(10)
10.14 License Agreement, dated June 26, 1997, between Bristol-Myers
Squibb Company and the Company.(5)(10)
29
10.15 Development and Option Agreement, dated August 11, 1997, between
Schering Corporation and the Company.(5)(6)
10.16 Development and License Option Agreement, September 10, 1997,
between IPR Pharmaceuticals, Inc. and the Company.(5)(6)
23 Consent of Ernst & Young LLP.
24 Powers of Attorney (See page [31]).
27 Financial Data Schedule.
- ----------------------------------
* Items that are management contracts or compensatory plans or
arrangements required to be filed as exhibits pursuant to Item
14(c) of Form 10-K.
(1) Incorporated herein by reference to the correspondingly numbered
exhibit to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994.
(2) Filed as an exhibit to the Company's Registration Statement on Form
S-1, File No. 33-80194, and incorporated herein by reference.
(3) Incorporated by reference herein to Exhibit 2 to the Company's
Current Report on Form 8-K, filed March 25, 1997.
(4) Incorporated by reference to the correspondingly numbered exhibit
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, File No. 0-24424.
(5) Confidential treatment has been requested for this exhibit.
(6) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997, File No. 0-24424, and
incorporated herein by reference.
(7) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998, File No. 0-24424, and
incorporated herein by reference.
(8) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997, File No. 0-24424, and
incorporated herein by reference.
(9) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998, File No. 0-24424, and
incorporated herein by reference.
(10) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997, File No. 0-24424, and
incorporated herein by reference.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 31th day of
March, 1999.
CIMA LABS INC.
By: /s/ John M. Siebert
-------------------------------------
John M. Siebert
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears on
the following page constitutes and appoints John M. Siebert and Keith P.
Salenger, his attorney-in-fact, each with the power of substitution, for him in
any and all capacities, to sign any amendments to this Report on Form 10-K, and
to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that the said attorney-in-fact, or his substitute or substitutes,
may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the dates indicated.
SIGNATURE TITLE DATE
/s/ John M. Siebert Chief Executive Officer and Director March 31, 1999
- ----------------------- (PRINCIPAL EXECUTIVE OFFICER)
John M. Siebert
/s/ Keith P. Salenger Vice President, Finance and
- ----------------------- Chief Financial Officer
Keith P. Salenger (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER) March 31, 1999
/s/ Terrence W. Glarner Director March 31, 1999
- -----------------------
Terrence W. Glarner
/s/ Steven B. Ratoff Director March 31, 1999
- -----------------------
Steven B. Ratoff
/s/ Joseph R. Robinson Director March 31, 1999
- -----------------------
Joseph R. Robinson
31
FINANCIAL STATEMENTS
CIMA LABS INC.
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
F-1
CIMA LABS INC.
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
CONTENTS
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . F-3
AUDITED FINANCIAL STATEMENTS:
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Statements of Changes in Stockholders' Equity. . . . . . . . . . . . . . . . F-7
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . F-8
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . F-9
F-2
REPORT OF INDEPENDENT AUDITORS
Board of Directors
CIMA LABS INC.
We have audited the accompanying balance sheets of CIMA LABS INC. as of December
31, 1998 and 1997, and the related statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. Our audits also included the financial statement
schedule listed in the index at item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CIMA LABS INC. at December 31,
1998 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 2 to the financial statements, the Company's accumulated
deficit and recurring losses from operations raise substantial doubt about its
ability to continue as a going concern. The Company intends to obtain
additional capital through outside sources to permit it to continue its
operations. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/Ernst & Young LLP
Minneapolis, Minnesota
February 12, 1999
F-3
CIMA LABS INC.
BALANCE SHEETS
DECEMBER 31
-----------------------------
1998 1997
-----------------------------
ASSETS
Cash and cash equivalents $ 2,722,590 $ 1,145,760
Short-term investments - 3,277,300
Accounts receivable:
Net of allowance for doubtful accounts
$0-1998;$32,150--1997 1,654,796 1,597,814
Inventories, net 479,045 630,619
Prepaid expenses 79,866 146,805
-----------------------------
Total current assets 4,936,297 6,798,298
Other assets:
Lease deposits 345,146 40,651
Patents and trademarks, net 204,648 230,889
-----------------------------
Total other assets 549,794 271,540
Property, plant and equipment:
Construction in progress 72,204 174,565
Equipment 9,314,867 8,657,885
Leasehold improvements 4,757,169 4,712,691
Furniture and fixtures 604,204 604,204
-----------------------------
14,748,444 14,149,345
Less accumulated depreciation (5,318,107) (3,891,167)
-----------------------------
9,430,337 10,258,178
-----------------------------
Total assets $ 14,916,428 $ 17,328,016
-----------------------------
-----------------------------
F-4
DECEMBER 31
-----------------------------
1998 1997
-----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 670,597 $ 128,712
Accrued expenses 835,043 620,580
Advance royalties 459,105 741,405
Current portion of lease obligations 64,998 -
-----------------------------
Total current liabilities 2,029,743 1,490,697
Lease obligations 231,145 -
-----------------------------
Total liabilities 2,260,888 1,490,697
Stockholders' equity:
Convertible preferred stock, $0.01 par value
Authorized shares -- 5,000,000
Issued and outstanding shares -- -0-
Common stock, $0.01 par value:
Authorized shares -- 20,000,000
Issued and outstanding shares --
9,610,394--1998
9,608,394--1997 96,104 96,084
Additional paid-in capital 57,274,274 57,268,594
Retained earnings (deficit) (44,714,838) (41,527,359)
-----------------------------
Total stockholders' equity 12,655,540 15,837,319
-----------------------------
Total liabilities and stockholders' equity $ 14,916,428 $ 17,328,016
-----------------------------
-----------------------------
SEE ACCOMPANYING NOTES.
F-5
CIMA LABS INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31
-------------------------------------------
1998 1997 1996
-------------------------------------------
REVENUES:
Net sales $ 1,097,465 $ 2,628,069 $ --
R&D fees and licensing revenue 6,140,894 2,282,166 1,471,859
-------------------------------------------
7,238,359 4,910,235 1,471,859
COSTS AND EXPENSES:
Cost of goods sold 2,443,812 4,376,412 --
Research and product development 4,488,212 3,363,544 5,402,557
Selling, general and
administrative 3,615,613 3,487,239 2,909,041
-------------------------------------------
10,547,637 11,227,195 8,311,598
OTHER INCOME (EXPENSE)
Interest income, net 152,366 336,310 497,534
Other income (expense) (30,567) 142,255 (3,738)
-------------------------------------------
121,799 478,565 493,796
-------------------------------------------
NET LOSS: $(3,187,479) $(5,838,395) $(6,345,943)
-------------------------------------------
-------------------------------------------
Net loss per share:
Basic and diluted $ (.33) $ (.61) $ (.72)
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic and diluted 9,610,104 9,518,679 8,827,177
SEE ACCOMPANYING NOTES
F-6
CIMA LABS INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL PAID-IN RETAINED EARNINGS
--------------------------- CAPITAL (DEFICIT)
SHARES AMOUNT TOTAL
-----------------------------------------------------------------------------------------
Balance at Dec. 31, 1995 7,821,974 $78,201 $43,462,921 $(29,259,472) $14,281,650
Issuance of common stock
at $9.50 per share in May
1996, net of offering costs
of $1,405,794 1,415,096 14,151 12,023,467 -- 12,037,618
Stock options exercised 109,787 1,117 712,824 -- 713,941
Exercise of stock warrants 64,732 647 387,746 (54,527) 333,866
Net loss -- -- -- (6,345,943) (6,345,943)
-----------------------------------------------------------------------------------------
Balance at Dec. 31, 1996 9,411,589 94,116 56,586,958 (35,659,942) 21,021,132
Stock options exercised 191,968 1,920 652,662 -- 654,582
Exercise of stock warrants 4,837 48 28,974 (29,022) --
Net loss - - - (5,838,395) (5,838,395)
-----------------------------------------------------------------------------------------
Balance at Dec. 31, 1997 9,608,394 96,084 57,268,594 (41,527,359) 15,837,319
Stock options exercised 2,000 20 5,680 - 5,700
Net loss - - - (3,187,479) (3,187,479)
-----------------------------------------------------------------------------------------
Balance at Dec. 31, 1998 9,610,394 $96,104 $57,274,274 $(44,714,838) $12,655,540
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
F-7
CIMA LABS INC.
STATEMENTS OF CASH FLOWS
-------------------------------------------------------
1998 1997 1996
-------------------------------------------------------
OPERATING ACTIVITIES
Net loss $ (3,187,479) $ (5,838,395) $ (6,345,943)
Adjustment to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,653,319 1,051,679 606,339
Gain on sale of property, plant and equipment 4,734 - -
Changes in operating assets and liabilities:
Accounts receivable (56,982) (1,350,236) (34,607)
Inventories 151,574 (96,032) (209,977)
Prepaid expenses 66,939 (74,925) 215,399
Accounts payable 541,885 (135,658) (27,497)
Accrued expenses 214,462 91,178 (165,725)
Advance royalties (282,300) 491,405 --
-------------------------------------------------------
Net cash used in operating activities (893,848) (5,860,984) (5,962,011)
-------------------------------------------------------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (451,986) (772,262) (315,276)
Purchases of short-term investments - (29,469,496) (7,597,162)
Proceeds from maturities of short-term investments 3,277,300 33,789,358 -
Proceeds from sale of property, plant and equipment 33,000 - -
Patents and trademarks (88,841) (111,470) (103,685)
-------------------------------------------------------
Net cash provided by (used in) investing activities 2,769,473 3,436,130 (8,016,123)
-------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 5,700 654,582 13,085,423
Security deposits on leases (304,495) 250,000 -
-------------------------------------------------------
Net cash (used in) provided by financing activities (298,795) 904,582 13,085,423
-------------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,576,830 (1,520,272) (892,711)
Cash and cash equivalents at beginning of period 1,145,760 2,666,032 3,558,743
Cash and cash equivalents at end of period 2,722,590 $ 1,145,760 $ 2,666,032
-------------------------------------------------------
-------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Acquisition of equipment pursuant to
capital lease 341,443 - -
SEE ACCOMPANYING NOTES.
F-8
CIMA LABS INC
Notes to Financial Statements
December 31, 1998
1. BUSINESS ACTIVITY
CIMA LABS INC., a Delaware Corporation, was incorporated on December 12, 1986.
CIMA, based in Minneapolis, Minnesota, is a drug delivery company that
specializes in oral drug delivery systems to improve patient compliance and drug
efficacy. The Company currently develops and manufactures products based
primarily upon its OraSolv-Registered Trademark- technology for marketing by
multinational pharmaceutical companies. OraSolv is an oral dosage form which
combines taste-masked, micro-encapsulated drug ingredients with an effervescent
disintegration agent. The effervescent disintegration agent aids in rapid
dissolution of the tablet, permitting swallowing before the pharmaceutical
ingredients are released. The OraSolv tablet dissolves quickly without chewing
or water and allows for effective taste-masking of a wide variety of both
prescription and OTC active drug ingredients to improve patient compliance and
drug efficacy.
The Company's strategy is to enter into collaborative arrangements with
multinational pharmaceutical companies to have its proprietary drug delivery
technologies incorporated into pharmaceutical products with an emphasis on
products which command a large market share and/or are in large market segments.
The Company will incorporate its proprietary drug delivery technology into a
particular oral therapeutic and manufacture it for its corporate partner. The
corporate partner will then market and sell the product. The Company's future
profitability will be dependent upon the Company's ability to develop new,
innovative drug delivery technologies that meet the requirements of its
corporate partners. Although the Company believes these partners will have an
economic motivation to market these products vigorously, the amount and timing
of resources to be devoted to marketing are not within the control of the
Company. These partners independently could make material marketing and other
commercialization decisions which could adversely affect the Company's future
revenues. Failure of these partners to market the Company's products
successfully could have a material adverse effect on the Company's financial
condition and result of operations.
2. GOING CONCERN AND MANAGEMENT PLAN
Net losses since the Company's inception have resulted in an accumulated
deficit of $44,714,858 at December 31, 1998. The Company's ability to
continue as a going concern and the realization of its assets and orderly
satisfaction of its liabilities are dependent upon obtaining additional funds
from outside sources and generating sufficient working capital from
operations. The Company is currently exploring financing alternatives and may
need to complete a financing transaction in 1999. The Company believes that
the successful completion of a financing transaction will satisfy its future
cash requirements. However, there can be no assurance that the Company will
be able to raise additional funds if capital resources are exhausted, or that
funds will be available on terms attractive to the Company.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers highly liquid investments with maturities of ninety days
or less when purchased to be cash equivalents. Cash equivalents are carried at
cost which approximates fair market value.
F-9
SHORT -TERM INVESTMENTS
The Company's investments are primarily U. S. Treasury securities and U.S.
Government obligations with maturities of greater than ninety days and are
classified as available for sale. Realized gains and losses and declines in
value judged to be other than temporary are included in other income. The
investments are carried at cost which approximates market.
PATENTS AND TRADEMARKS
Costs incurred in obtaining patents and trademarks are amortized on a
straight-line basis over sixty months. Accumulated amortization was
approximately $ 625,000 at December 31,1998 and $510,000 at December 31, 1997.
The Company periodically reviews its patents and trademarks for impairment in
value. Any adjustment from the analysis is charged to operations.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives ranging from three to
twelve years. Depreciation expense was approximately $1,538,000 in 1998;
$919,000 in 1997; and $493,000 in 1996.
INVENTORIES
Inventories, consisting of materials and packaging, are valued at cost under the
first-in, first-out (FIFO); method which is not in excess of market.
Inventories are shown net of reserves for obsolescence of approximately $157,000
at December 31, 1998 and $46,000 at December 31, 1997.
IMPAIRMENT OF LONG - LIVED ASSETS
The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flow estimated to be generated by those assets are less than the assets'
carrying amount.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES ("APB25"), and related interpretations in accounting
for its stock options. Under APB 25, when the exercise price of stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
F-10
INCOME TAXES
Income taxes are accounted for under the liability method. Deferred income
taxes are provided for temporary differences between financial reporting and tax
bases of assets and liabilities.
REVENUE RECOGNITION
Sales of product are recorded upon shipment. Product and development fees are
recognized as the services are provided. Revenues from license agreements are
recorded when obligations under the agreement have been substantially
completed. Royalties are recorded when earned.
RESEARCH AND DEVELOPMENT COSTS
For financial reporting purposes, all costs of research and development
activities are expensed as incurred.
EARNINGS (LOSS) PER SHARE
The Company has adopted Financial Accounting Standards Board Statement No. 128,
EARNINGS PER SHARE. This Statement replaces previously reported primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary EPS, basic EPS excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very similar
to previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented and, where appropriate, restated to
conform to Statement 128 requirements.
4. INCOME TAXES
Deferred income taxes are due to temporary differences between the carrying
values of certain assets and liabilities for financial reporting and income tax
purposes. Significant components of deferred income taxes as of December 31,
1998 and 1997 are as follows:
1998 1997
--------------------------------------
(IN THOUSANDS)
Deferred assets:
Net operating loss $ 18,475 $ 15,213
Accrued vacation 75 61
Inventory reserve 63 17
Other - 11
--------------------------------------
18,613 15,302
F-11
Deferred liability:
Depreciation and amortization 625 448
--------------------------------------
Net deferred income tax asset 17,988 14,854
Valuation allowance $ (17,988) $ (14,854)
--------------------------------------
Net deferred income taxes $ - $ -
--------------------------------------
--------------------------------------
The Company may be subject to federal income taxes when operations become
profitable. The Company's tax operating loss carryforwards of approximately
$45,700,000 may be carried forward to offset future taxable income, limited due
to changes in ownership under the net operating loss limitation rules, and begin
to expire in the Year 2001.
5. LEASES
OPERATING LEASES
The Company leases office, research and development and manufacturing facilities
in Brooklyn Park and Eden Prairie, Minnesota. The 75,000 square foot Eden
Prairie facility houses the general and administrative offices and the
manufacturing operation. The lease has an initial term expiring on June 1,
2009. The rent payments will be recalculated on June 1, 2001 and 2006, based on
a market index. The Company has an option to extend the lease for one ten-year
period. The research and development facility in Brooklyn Park is leased under a
non-cancelable lease that expired in September 1998. The Company opted to renew
the lease for an additional three year term. The Company also has the option to
renew this lease for two additional five-year terms.
Future minimum lease commitments for all operating leases with initial or
remaining terms of one year or more are as follows:
Year ending December 31:
1999 ............................................... $ 622,360
2000 ............................................... 622,360
2001 ............................................... 622,360
2002 ............................................... 459,030
2003 ............................................... 380,460
Thereafter .......................................... 2,282,760
Rent expense of operating leases, excluding operating expenses, for the years
ended December 31, 1998, 1997 and 1996 was $519,000, $517,000 and $494,000
respectively.
CAPITAL LEASES
The Company has three leases between 48 and 60 months in length with Norwest
Equipment Finance, Inc. The deposit balance for the leases is $304,495 at
December 31, 1998 and is reviewed on an annual basis in December and adjusted
to the balance required to
F-12
secure the assets being leased. Future minimum lease commitments for all
capital leases with initial or remaining terms of one year or more are as
follows:
Year ending December 31:
1999 ............................................ $ 90,499
2000 ............................................ 90,499
2001 ............................................ 90,499
2002 ............................................ 77,291
2003 ............................................ 4,993
-----------
353,781
Less lease interest: ................... ............. (57,638)
-----------
Total $296,143
-----------
-----------
6. STOCK OPTIONS
The Company has an Equity Incentive Plan ("the Plan") under which options to
purchase up to 2,400,000 shares of Common Stock may be granted to employees,
consultants and others. The Compensation Committee, established by the Board
of Directors, establishes the terms and conditions of all stock option grants,
subject to the Plan and applicable provisions of the Internal Revenue Code. The
options expire ten years from the date of grant and are usually exercisable in
annual increments ranging from 25% to 33% beginning one year from the date of
grant.
The Company also has a Directors' Stock Option Plan which provides for the
granting of non-management directors of the Company options to purchase shares
of Common Stock. The maximum number of shares with respect to which options may
be granted under this Plan is 410,000 shares. As of December 31, 1998, options
to purchase 296,430 shares have been granted ranging from $1.30 to $10.125 per
share. To date, none of these options have been exercised.
Shares available and options granted for the Equity Incentive Plan are as
follows:
NON-
INCENTIVE QUALIFIED WEIGHTED
SHARES AVAILABLE STOCK STOCK TOTAL AVERAGE EXERCISE
FOR GRANT OPTIONS OPTIONS OUTSTANDING PRICE PER SHARE
------------------------------------------------------------------------------------------
Balance at Dec.31, 1995 225,487 820,408 287,800 1,108,208 $5.36
Reserved 250,000 - - - -
Granted (199,300) 122,085 77,215 199,300 6.33
Forfeited 91,293 (85,320) (5,973) (91,293) 6.24
Exercised - (91,314) (18,473) (109,787) 6.31
---------------------------------------------------------------------
Balance at Dec.31, 1996 367,480 765,859 340,569 1,106,428 6.27
Granted (390,700) 292,604 98,096 390,700 5.89
Forfeited 203,038 (166,575) (36,463) (203,038) 7.32
Exercised - (149,217) (42,751) (191,968) 3.24
---------------------------------------------------------------------
Balance at Dec.31, 1997 179,818 742,671 359,451 1,102,122 5.71
F-13
Granted (492,679) 101,428 391,251 492,679 4.47
Reserved 400,000 - - -
Forfeited 230,955 (156,259) (74,696) (230,955) 6.88
Exercised - (2,000) - (2,000) 2.85
---------------------------------------------------------------------
Balance at Dec.31, 1998 318,094 658,840 676,006 1,361,846 5.08
Exercisable:
December 31, 1996 548,221 $6.47
December 31, 1997 506,460 $5.27
December 31, 1998 556,626 $5.21
The following table summarizes information about stock options outstanding at
December 31, 1998:
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE NUMBER AVERAGE
NUMBER REMAINING OUTSTANDING EXERCISABLE AT EXERCISEABLE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE 12/31/98 PRICE
- ----------------------------------------------------------------------------------------------------------------------------------
$ 2.00 - $ 3.00 54,476 4.9 years $2.98 52,528 $2.98
$ 3.01 - $ 5.00 696,437 6.0 years 3.86 310,041 3.88
$ 5.01 - $ 8.00 593,612 8.0 years 6.26 114,065 6.93
$ 8.01 - $10.125 17,321 3.0 years 8.87 79,992 8.91
- -------------------------------------------------------------------------------------------------------------- ------------
$ 2.00 - $10.125 1,361,846 6.9 years $5.71 556,626 $5.27
------------ --------------
------------ --------------
Shares available and options granted for Directors Stock Option Plan are as
follows:
NON-
INCENTIVE QUALIFIED WEIGHTED
SHARES AVAILABLE STOCK STOCK TOTAL AVERAGE EXERCISE
FOR GRANT OPTIONS OPTIONS OUTSTANDING PRICE PER SHARE
--------------------------------------------------------------------------------------------
Balance at Dec.31, 1995 185,000 - 165,000 165,000 $ 7.43
Granted (37,500) - 37,500 37,500 10.13
Forfeited - - - - -
Exercised - - - - -
--------------------------------------------------------------------
Balance at Dec.31, 1996 147,500 - 202,500 202,500 7.93
Granted (56,070) - 56,070 56,070 3.92
Reserved 60,000 - - - -
Forfeited - - - - -
Exercised - - - - -
--------------------------------------------------------------------
Balance at Dec.31, 1997 151,430 - 258,570 258,570 7.06
F-14
Granted (37,860) - 37,860 37,860 2.96
Forfeited - - - - -
Exercised - - - - -
---------------------------------------------------------------------
Balance at Dec.31, 1998 113,570 - 296,430 296,430 $6.54
Options outstanding under the plans expire at various dates during the period
from March 1998 through December 2008. Exercise prices for options outstanding
as of December 31, 1998, ranged from $2.80 to $10.125 per share. The weighted
average fair values of options granted during the years ended December 31, 1998,
1997 and 1996 were $4.36, $5.89 and $3.96 respectively. The Company issued
warrants to purchase 189,801 shares of its Common Stock at $6.00 per share. Of
these warrants, 77,506 were exercised during 1996 and 4,837 during 1997. The
remaining 107,458 warrants have expired.
The Company has elected to follow Accounting Principles Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and related interpretations
in accounting for employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION ("Statement 123"), requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of Statement 123. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions for 1998, 1997 and 1996 respectively; risk-free interest rates of
5.00%, 5.70% and 5.29%; volatility factor of the expected market price of the
Company's common stock of .630, .649 and .641; and a weighted-average expected
life of the option of 5 years.
In management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options because
the Company's employee stock options have characteristics significantly
different from those of traded options and have vesting restrictions and because
changes in the subjective input assumptions can materially affect the fair value
estimates. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require input
of highly subjective assumptions.
During the initial phase-in period, the effects of applying Statement 123 for
recognizing compensation cost may not be representative of the effects on
reported net loss or income for future years because the options in the Stock
Option Plans vest over several years and additional awards will be made in the
future.
F-15
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
1998 1997 1996
--------------------------------------------------------------
Pro forma net loss ............ $ (4,239,938) $ (6,476,902) $ (6,812,761)
Pro forma net loss
per common share,
basic and diluted ............ $ (0.44) $ (0.68) $ (0.77)
7. DEFINED CONTRIBUTION PLAN
The Company has a 401(k) plan (the "Plan") which covers substantially all
employees of the Company. Contributions to the Plan are made through employee
wage deferrals and employer matching contributions. The employer matching
contribution percentage is discretionary and determined each year. In addition,
the Company may contribute two discretionary amounts; one to non-highly
compensated individuals and another to all employees. To qualify for the
discretionary amounts, an employee must be employed by the Company on the last
day of the Plan year or have been credited with a minimum of 500 hours of
service during the Plan year.
The 401(k) expense for the years ended December 31, 1998, 1997, and 1996 was
$36,000, $29,000, and $25,000.
8. EMPLOYMENT AGREEMENT
The Company entered into a new employment agreement with the current President
and Chief Executive Officer in 1997 to continue in said position. The agreement
includes provisions for compensation, stock options and bonuses based upon the
achievement of certain performance targets. The agreement expires on December
31, 2000.
F-16
CIMA LABS INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT ADDITIONS
BEGINNING OF CHARGED TO COSTS LESS BALANCE AT END
DESCRIPTION YEAR AND EXPENSES DEDUCTIONS OF YEAR
- ---------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $ 32,150 $ 32,150 ($64,300) $ 0
Obsolescence reserve 46,388 110,382 0 156,770
----------------------------------------------------------------------------
TOTAL $ 78,538 $ 142,532 ($64,300) $ 156,770
Year ended December 31, 1997:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $ 0 $ 32,150 $ 0 $ 32,150
Obsolescence reserve 140,795 0 (94,407) 46,388
----------------------------------------------------------------------------
TOTAL $ 140,795 $ 32,150 $ (94,407) $ 78,538
Year ended December 31, 1996:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $ 0 $ 0 $ 0 $ 0
Obsolescence reserve 332,207 0 (191,412) 140,795
----------------------------------------------------------------------------
TOTAL $ 332,207 $ 0 $ (191,412) $ 140,795
F-17
EXHIBIT INDEX
NO. OF EXHIBIT DESCRIPTION
- -------------- -----------
10.4 Development and License Option Agreement, dated
December 2, 1998, between N.V. Organon and the Company.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule