================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
----------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
Commission File Number 0-23490
VIVUS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 94-3136179
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1172 Castro Street
Mountain View, California 94040
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(650) 934-5200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) Yes [X] No [_]
At November 5, 2004, 38,094,181 shares of common stock were outstanding.
================================================================================
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VIVUS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
ASSETS
SEPTEMBER 30 DECEMBER 31
2004 2003 *
------------ ------------
(UNAUDITED)
Current assets:
Cash and cash equivalents $ 5,960 $ 13,097
Available-for-sale securities 23,362 21,488
Accounts receivable, net 3,053 2,623
Inventories, net 3,316 3,109
Prepaid expenses and other assets 1,707 1,108
------------ ------------
Total current assets 37,398 41,425
Property and equipment, net 6,863 8,220
Restricted cash 3,324 3,324
Available-for-sale securities, non-current 4,797 13,763
------------ ------------
Total assets $ 52,382 $ 66,732
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,483 $ 2,917
Accrued and other liabilities 10,458 8,409
------------ ------------
Total current liabilities 12,941 11,326
Notes payable 2,205 --
Accrued and other long-term liabilities 5,894 4,171
------------ ------------
Total liabilities 21,040 15,497
------------ ------------
Stockholders' equity:
Preferred stock; $1.00 par value;
shares authorized 5,000; shares issued and outstanding -
0 at September 30, 2004 and December 31, 2003 -- --
Common stock; $.001 par value; shares authorized 200,000;
shares issued and outstanding - 38,048 at September 30,
2004, and 37,788 at December 31, 2003 38 38
Additional paid-in capital 152,980 152,093
Accumulated other comprehensive (loss) income (20) 64
Accumulated deficit (121,656) (100,960)
------------ ------------
Total stockholders' equity 31,342 51,235
------------ ------------
Total liabilities and stockholders' equity $ 52,382 $ 66,732
============ ============
* The Condensed Consolidated Balance Sheet at December 31, 2003 has been
derived from the Company's audited financial statements at that date.
See accompanying notes to the condensed consolidated financial statements.
2
VIVUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
2004 2003 2004 2003
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Revenue
United States product $ 4,017 $ 4,443 $ 7,357 $ 11,212
International product 666 1,426 2,778 3,264
Other -- 5,033 -- 5,033
Returns provision (352) (372) (660) (1,062)
------------ ------------ ------------ ------------
Total revenue 4,331 10,530 9,475 18,447
Cost of goods sold 2,634 3,002 7,238 8,210
------------ ------------ ------------ ------------
Gross profit 1,697 7,528 2,237 10,237
------------ ------------ ------------ ------------
Operating expenses:
Research and development 3,856 1,821 14,629 5,951
Selling, general and administrative 2,863 2,255 8,685 7,319
------------ ------------ ------------ ------------
Total operating expenses 6,719 4,076 23,314 13,270
------------ ------------ ------------ ------------
(Loss) income from operations (5,022) 3,452 (21,077) (3,033)
Interest and other income:
Interest income 155 177 471 537
Gain on disposal of property and equipment -- 20 1 19
Foreign exchange (loss) gain (2) 5 5 15
Interest expense (48) -- (91) --
------------ ------------ ------------ ------------
(Loss) income before provision for income taxes (4,917) 3,654 (20,691) (2,462)
Benefit (provision) for income taxes -- 219 (5) 219
------------ ------------ ------------ ------------
Net (loss) income $ (4,917) $ 3,873 $ (20,696) $ (2,243)
============ ============ ============ ============
Net (loss) income per share:
Basic $ (0.13) $ 0.10 $ (0.54) $ (0.06)
Diluted $ (0.13) $ 0.10 $ (0.54) $ (0.06)
Shares used in per share computation:
Basic 38,048 37,653 37,986 35,263
Diluted 38,048 38,064 37,986 35,263
See accompanying notes to the condensed consolidated financial statements.
3
VIVUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
2004 2003 2004 2003
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net (loss) income $ (4,917) $ 3,873 $ (20,696) $ (2,243)
Other comprehensive (loss) income:
Change in unrealized gain (loss) on securities 23 (54) (84) (177)
------------ ------------ ------------ ------------
Comprehensive (loss) income $ (4,894) $ 3,819 $ (20,780) $ (2,420)
============ ============ ============ ============
See accompanying notes to the condensed consolidated financial statements.
4
VIVUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------------
2004 2003
------------ ------------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (20,696) $ (2,243)
Adjustments to reconcile net loss to net cash used for
operating activities:
Provision for doubtful accounts 299 (81)
Depreciation and amortization 1,459 1,581
Stock compensation costs 30 29
Gain on disposal of property and equipment (1) (19)
Changes in assets and liabilities:
Accounts receivable (729) 1,732
Other receivables -- (3,994)
Inventories (207) 38
Prepaid expenses and other assets (599) (127)
Accounts payable (434) (230)
Accrued and other liabilities 3,772 (2,015)
------------ ------------
Net cash used for operating activities (17,106) (5,329)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment purchases (102) (135)
Proceeds from sale of property and equipment 1 20
Investment purchases (19,473) (34,559)
Proceeds from sale/maturity of securities 26,481 18,616
------------ ------------
Net cash provided by (used for)
investing activities 6,907 (16,058)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing under note agreements 2,205 --
Exercise of common stock options 699 186
Sale of common stock through employee stock purchase plan 158 162
Proceeds from issuance of common stock -- 17,500
Common stock issuance costs -- (1,086)
------------ ------------
Net cash provided by financing activities 3,062 16,762
------------ ------------
NET DECREASE IN CASH (7,137) (4,625)
CASH:
Beginning of period 13,097 12,296
------------ ------------
End of period $ 5,960 $ 7,671
============ ============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Change in unrealized loss on securities $ (84) $ (177)
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Income taxes paid $ 13 $ 18
See accompanying notes to the condensed consolidated financial statements.
5
VIVUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulations S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the nine-month period ended September
30, 2004 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2004. For further information, refer to the
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2003. Certain
reclassifications have been made to the Company's 2003 consolidated financial
statements to conform to the current period presentations.
2. SIGNIFICANT ACCOUNTING POLICIES
STOCK OPTIONS
The Company applies the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board, or APB, Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES, and related interpretations including Financial
Accounting Standards Board, or FASB, Interpretation No. 44, ACCOUNTING FOR
CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION, AN INTERPRETATION OF APB
OPINION NO. 25, issued in March 2000, to account for its fixed-plan stock
options. Under this method, compensation expense is recorded on the date of the
grant only if the current market price of the underlying stock exceeded the
exercise price. SFAS No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION,
established accounting and disclosure requirements using a fair-value-based
method of accounting for stock-based employee compensation plans. As allowed by
SFAS No. 123, the Company has elected to continue to apply the
intrinsic-value-based method of accounting described above, and has adopted only
the disclosure requirements of SFAS No. 123. The following table illustrates the
effect on net income if the fair-value-based method had been applied to all
outstanding and unvested awards during the three and nine months ended September
30, 2004 and 2003.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
2004 2003 2004 2003
-------- -------- -------- --------
Net (loss) income, as reported $ (4,917) $ 3,873 $(20,696) $ (2,243)
Deduct total stock-based employee compensation
expense determined under fair-value-based method
for all rewards, net of tax (415) (442) (1,302) (1,307)
-------- -------- -------- --------
Pro forma net (loss) income $ (5,332) $ 3,431 $(21,998) $ (3,550)
======== ======== ======== ========
Pro forma net (loss) income per share:
Basic $ (0.14) $ 0.09 $ (0.58) $ (0.10)
Diluted $ (0.14) $ 0.09 $ (0.58) $ (0.10)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in the third quarter of 2004 and 2003: no dividend
yield, expected volatility of 63% and 52%, respectively, risk-free interest
rates of between 1% and 5% for both periods, and an expected life of five years
for both periods.
6
3. INVENTORIES
Inventories are recorded net of reserves of $4.4 million and $5.6 million as
of September 30, 2004 and December 31, 2003, respectively, and consist of (in
thousands):
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
Raw materials $ 1,915 $ 2,370
Work in process 135 81
Finished goods 1,266 658
------------ ------------
Inventory, net $ 3,316 $ 3,109
============ ============
As noted above, the Company has recorded significant reserves against the
carrying value of its inventories. The reserves relate primarily to raw
materials inventory that the Company previously estimated would not be used. The
Company now estimates that at least some portion of the fully reserved inventory
will be used in production. The Company used $814,000 and $799,000 of its fully
reserved raw materials inventory during the first nine months of 2004 and 2003,
respectively. The fully reserved used raw materials were charged to cost of
goods sold at a zero basis, which had a favorable impact on gross profit.
4. NOTES PAYABLE
In the first quarter of 2004, we signed an agreement for a secured line of
credit with Tanabe Holding America, Inc., a subsidiary of Tanabe Seiyaku Co.,
Ltd., or Tanabe, allowing us to borrow up to $8.5 million to be used for the
development of avanafil (formerly TA-1790), our erectile dysfunction compound
currently in Phase 2 clinical trials. The secured line of credit may be drawn
upon quarterly and each quarterly borrowing has a 48-month term and bears
interest at the annual rate of 2%. There are no financial covenants associated
with this secured line of credit. As of September 30, 2004 we had long-term
notes payable to Tanabe of $2.2 million, and $6.3 million of available credit
under this agreement.
The amount of each quarterly borrowing and its due date are (in thousands):
Date of Note Amount of Note Due Date
------------ -------------- --------
March 31, 2004 $ 315 March 31, 2008
June 30, 2004 $ 883 June 30, 2008
September 30, 2004 $ 1,007 September 30, 2008
-----------
Total Notes Payable $ 2,205
===========
5. ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities as of September 30, 2004 and December 31, 2003
consist of (in thousands):
Short-term accrued and other liabilities SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
Product returns $ 2,625 $ 2,932
Income taxes 1,212 1,216
Research and clinical expenses 2,234 458
Royalties 509 629
Deferred revenue 281 281
Employee compensation and benefits 1,272 1,249
Chargebacks and rebates 527 900
Customer liabilities 866 135
Other 932 609
------------ ------------
Total short-term accrued and other liabilities $ 10,458 $ 8,409
============ ============
Long-term accrued and other liabilities SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
Restructuring $ 3,021 $ 3,021
Research and clinical expenses 1,835 --
Deferred revenue 1,038 1,150
------------ ------------
Total long-term accrued and other liabilities $ 5,894 $ 4,171
============ ============
7
6. RESTRUCTURING RESERVE
During 1998, VIVUS, Inc. experienced a significant decline in market demand
for MUSE(R) due to the market launch of sildenafil, the first oral treatment for
erectile dysfunction. During the second and third quarters of 1998, the Company
took significant steps to restructure its operations in an attempt to bring the
cost structure in line with current and projected revenues. (See Notes 1 and 6
to the Consolidated Financial Statements for the year ended December 31, 2003
included in the Company's Annual Report on Form 10-K.) The restructuring reserve
balance at September 30, 2004 was $3.0 million, remaining the same as at
December 31, 2003.
The balance in the restructuring reserve is related to the restoration
liability for our leased manufacturing facilities. This liability will remain in
effect through the end of the lease term, including any renewals. The Company
has exercised its first option to renew the original lease, thereby extending
any cash payments to be made for this liability out to 2007. The second renewal
term, if exercised, would then extend the liability out an additional five
years, to 2012.
7. NET INCOME PER SHARE
Net income per share is calculated in accordance with Statement of Financial
Accounting Standards No. 128, EARNINGS PER SHARE, which requires a dual
presentation of basic and diluted earnings per share, or EPS. Basic income per
share is based on the weighted average number of common shares outstanding
during the period. Diluted income per share is based on the weighted average
number of common and potentially dilutive shares, which represent shares that
may be issued in the future upon the exercise of outstanding stock options to
employees. Potentially dilutive options outstanding of 349,820 at September 30,
2004 are excluded from the computation of diluted EPS for the third quarter of
2004 because the effect would have been anti-dilutive. Potentially dilutive
options outstanding of 675,219 and 552,600 at September 30, 2004 and 2003,
respectively, are excluded from the computation of diluted EPS for the first
nine months of 2004 and 2003 because the effect would have been anti-dilutive.
8. COMMITMENTS
We lease our manufacturing facilities in Lakewood, New Jersey under a
non-cancelable operating lease expiring in 2007 and have the option to extend
this lease for one additional renewal term of five years. In January 2000, we
entered into a seven-year lease for our corporate headquarters in Mountain View,
California, which expires in January 2007.
In November 2002, we entered into a manufacturing agreement to purchase raw
materials from a supplier beginning in 2003 and ending in 2008. In 2003, we
purchased $2.1 million of product and are required to purchase a minimum total
of $3.8 million of product from 2004 through 2008. During 2004, we have not
purchased any additional product from this supplier, however, due to product
specification requirements, we returned $617,000 of product in the third quarter
of 2004 and expect to receive replacement product by the end of 2004.
In January 2004, we entered into a manufacturing agreement to purchase raw
materials from an additional supplier beginning in 2004 and ending in 2006. We
are required to purchase a minimum total of $2.3 million of product from 2004
through 2006. As of September 30, 2004, we have purchased $234,000 of product
from this supplier.
In January 2004, we entered into exclusive licensing agreements with a
subsidiary of Acrux Limited, a specialty pharmaceutical company based in
Melbourne, Australia, under which we will develop and commercialize an estradiol
spray for the alleviation of the symptoms of menopause and a testosterone spray
for the treatment of low sexual desire in women. We have reported a total $3.0
million of licensing fees incurred under the terms of the agreements. The
remaining portion of these licensing fees will be paid in June 2005 ($958,000).
We expect to make other substantial payments to Acrux in accordance with our
agreements with them. These payments are based on certain development,
regulatory and sales milestones. In addition, we are required to make royalty
payments on any future product sales.
In addition, during the first quarter of 2004, we initiated a Phase 2
clinical trial with avanafil, our oral phosphodiesterase type 5 (PDE5) inhibitor
being studied for the treatment of erectile dysfunction. Under the terms of our
2001 development, licensing and supply agreement with Tanabe Seiyaku Co., LTD.,
or Tanabe, a Japanese pharmaceutical company, we reported a $1.8 million
milestone obligation to Tanabe in the first quarter of 2004. The payment of this
milestone will be made in March 2006. We expect to make other substantial
payments to Tanabe in accordance with our agreements with them. These payments
are based on certain development, regulatory and sales milestones. In addition,
we are required to make royalty payments on any future product sales.
8
9. CONCENTRATION OF CUSTOMERS AND SUPPLIERS
During the first nine months of 2004 and 2003, sales to significant
customers as a percentage of total revenues were as follows:
2004 2003
---- ----
Customer A 38% 26%
Customer B 21% 18%
Customer C 17% 11%
Customer D 15% 17%
The Company did not have any suppliers making up more than 10% of operating
costs.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Conditions and
Results of Operations and other parts of this Form 10-Q contain
"forward-looking" statements that involve risks and uncertainties. These
statements typically may be identified by the use of forward-looking words or
phrases such as "believe," "expect," "intend," "anticipate," "should,"
"planned," "estimated," and "potential," among others. All forward-looking
statements included in this document are based on our current expectations, and
we assume no obligation to update any such forward-looking statements. The
Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for
such forward-looking statements. In order to comply with the terms of the safe
harbor, we note that a variety of factors could cause actual results and
experiences to differ materially from the anticipated results or other
expectations expressed in such forward-looking statements. The risks and
uncertainties that may affect the operations, performance, development, and
results of our business include but are not limited to: (1) our history of
losses and variable quarterly results; (2) substantial competition; (3) risks
related to the failure to protect our intellectual property and litigation in
which we may become involved; (4) our reliance on sole source suppliers; (5) our
limited sales and marketing efforts and our reliance on third parties; (6)
failure to continue to develop innovative products; (7) risks related to
noncompliance with United States Food and Drug Administration regulations; and
(8) other factors that are described from time to time in our periodic filings
with the Securities and Exchange Commission, including those set forth in this
filing as "Risk Factors Affecting Operations and Future Results."
All percentage amounts and ratios were calculated using the underlying data
in thousands. Operating results for the nine-month period ended September 30,
2004 are not necessarily indicative of the results that may be expected for the
full fiscal year or any future period.
BUSINESS OVERVIEW
VIVUS, Inc. is a specialty pharmaceutical company focused on the research,
development and commercialization of products to restore sexual function in men
and women. In addition to our currently marketed therapies, we have a pipeline
that includes both new chemical entities and existing compounds that are being
developed to address unmet medical needs. Our business strategy is to apply our
scientific and medical expertise to identify, develop and commercialize
therapies that restore sexual function. In the United States, we market MUSE(R)
(alprostadil) and ACTIS(R), two products for the treatment of erectile
dysfunction. We have entered into supply agreements with Meda AB to market and
distribute MUSE and ACTIS in all Member States of the European Union, the Baltic
States, the Czech Republic, Hungary, Iceland, Norway, Poland, Switzerland and
Turkey. In Canada, we have entered into a license and supply agreement with
Paladin Labs, Inc. to market and distribute MUSE.
We currently have four significant research and development programs in
progress targeting male and female sexual function:
o ALISTA(TM) to treat female sexual arousal disorder;
o Estradiol MDTS(R), a short-term therapy to alleviate symptoms
associated with menopause;
o Testosterone MDTS(R) for treating women with low sexual desire; and
o Avanafil, formerly known as TA-1790, for the treatment of erectile
dysfunction.
ALISTA entered Phase 3 clinical development in the third quarter of 2004,
while Estradiol MDTS is expected to enter Phase 3 clinical development in the
fourth quarter of 2004. The other two research and development programs are in
Phase 2 clinical development. We believe that each of these programs addresses
either established markets with sales in excess of $1.0 billion annually or
potential markets with sales that could exceed $1.0 billion annually.
When we were founded in 1991, our sole purpose was to develop a therapy for
men suffering from erectile dysfunction. In 1997, we commercially launched MUSE
in the United States. At that time, MUSE revolutionized erectile dysfunction
therapy at a time when few effective therapies existed. Developing and bringing
MUSE to the market provided us experience in clinical and regulatory matters
when no intra-urethral drugs had been approved for this indication. This
experience serves us well today in making progress towards developing and
commercializing product candidates in our research and development programs.
OUR FUTURE
It is our objective to become a global leader in the development and
commercialization of products that help to restore sexual health in men and
women. We believe that we have strong intellectual property supporting many
opportunities in sexual health. Our future growth will come from further
development and approval of our product candidates as well as in-licensing and
product line extensions.
10
THIRD QUARTER 2004 UPDATE
FEMALE SEXUAL HEALTH
We believe that the market for the treatment of sexual disorders in women is
large and underserved. Today, there are no treatments on the market that have
been approved by the United States Food and Drug Administration, or the FDA, for
the treatment of sexual disorders in women. A paper by Lauman, et. al.,
published in the JOURNAL OF THE AMERICAN MEDICAL ASSOCIATION in 1999, noted 43%
of women between the ages of 18 and 65 identified themselves as afflicted with a
sexual disorder, with two prevalent conditions being low sexual desire and
arousal disorder. VIVUS' research and development programs in female sexual
health address both of these conditions.
ALISTA
------
ALISTA is a topical formulation of alprostadil applied locally to the female
genitalia as an on-demand treatment for female sexual arousal disorder. It
increases blood flow in the genital region, allowing for greater sensitivity and
sexual arousal. ALISTA has a fast onset of action with low systemic
distribution.
In the second quarter of 2004, we completed an at-home Phase 2 study to
assess the efficacy and safety of ALISTA when used by pre-menopausal women with
female sexual arousal disorder. The study demonstrated that ALISTA significantly
increased the percentage of satisfying sexual events in pre-menopausal women
when compared with placebo. Results from this Phase 2 clinical trial were
similar to the results from earlier clinical trials in post-menopausal women.
At the end of the third quarter of 2004, we began a Phase 3 study of ALISTA.
METERED DOSE TRANSDERMAL SPRAY, OR MDTS
---------------------------------------
In the first quarter of 2004, we entered into license agreements with a
subsidiary of Acrux Limited, a specialty pharmaceutical company based in
Melbourne, Australia, pursuant to which we have the exclusive rights to market
two drugs in the United States, estradiol and testosterone, using Acrux's
Metered Dose Transdermal Spray, or MDTS. The MDTS is a small, easy-to-use,
handheld spray that delivers either estradiol or testosterone topically to the
skin. It dries in approximately 30 seconds, and when dry, is invisible. Data
generated to date suggests that, once dry, there is little chance for transfer
or removal by washing. We believe that MDTS will have high patient
acceptability.
The MDTS drug formulations utilize proprietary skin penetration enhancers
commonly found in sunscreens. The once-per-day dosing has demonstrated a
sustained plasma level of drug over a 24-hour period.
o Estradiol MDTS - The estradiol spray is a low-dose estrogen-only
treatment addressing the symptoms associated with menopause, primarily
hot flashes. This proprietary spray product utilizes the MDTS
technology, which is patented. This transdermal spray product is
simple to apply and may have safety benefits compared to oral estrogen
pills.
We expect to begin the Phase 3 clinical trial of the estradiol spray
in the fourth quarter of 2004.
o Testosterone MDTS - This proprietary spray product is designed to
treat females with low sexual desire. There are estimated to be over
10 million women in the United States afflicted with low sexual desire
and there are no FDA approved therapies for this condition.
In October 2004, Acrux completed a Phase 2 clinical trial, which
enrolled approximately 260 patients for the evaluation of the safety
and efficacy of the testosterone spray. This study was completed under
an Investigational New Drug application on file with the FDA. We
expect the results of this Phase 2 study to be available in early
2005. Assuming that the Phase 2 study is successful, we plan to
initiate a Phase 3 clinical trial with Testosterone MDTS in 2005.
11
MALE SEXUAL HEALTH
The erectile dysfunction market produces revenues in excess of $2.0 billion
annually. Pfizer reported that it sold approximately $1.8 billion of Viagra(R),
a phosphodiesterase type 5 (PDE5) inhibitor, worldwide in 2003. Pfizer received
clearance from the FDA to market Viagra in 1998. In late 2003, two additional
PDE5 inhibitors were approved by the FDA: Levitra(R), launched by Bayer and
GlaxoSmithKlineBeecham, and Cialis(R), launched by Lilly ICOS LLC. Based on the
aging baby boomer population and their desire to maintain a healthy sexual
lifestyle, we believe the market for PDE5 inhibitors should continue to grow.
Avanafil
- --------
We are developing avanafil, an orally administered PDE5 inhibitor, licensed
from Tanabe Seiyaku Co., Ltd., or Tanabe, in 2001. Avanafil, formerly known as
TA-1790, is currently in Phase 2 clinical development. Pre-clinical and clinical
data to date suggests the product candidate is:
o Highly selective to PDE5, which we believe should result in a
favorable side effect profile; and
o Fast acting, which should promote spontaneity.
In March 2004, we began enrolling patients in an at-home, double blind,
randomized, parallel design Phase 2 clinical study to evaluate the safety and
efficacy of avanafil. One of the primary goals of this study is to confirm the
appropriate dose range in a large group of patients. Enrollment is anticipated
to be completed by the end of 2004 and data from this study should be available
during the first half of 2005. VIVUS plans to initiate drug interaction studies
with avanafil during 2004 and anticipates completing Phase 2 development in
2005.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to product returns, doubtful accounts, income taxes,
restructuring, inventories and contingencies and litigation. (See Critical
Accounting Policies and Estimates on page 23 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2003.) We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
For the three months ended September 30, 2004, we reported a net loss of
($4.9) million, or ($0.13) net loss per share as compared to net income of $3.9
million, or $0.10 net income per share, during the same quarter in 2003. The net
income in 2003 included $5.0 million in other revenue resulting from the
settlement of the Janssen Pharmaceutica arbitration claim. Clinical activities
related to our four primary development programs increased during the third
quarter of 2004 as compared to the same period last year.
We anticipate continued losses over the next several years because: (1) we
expect MUSE sales to decrease year-over-year, and (2) we plan to continue to
invest in clinical development of our current product candidates to bring those
potential products to market.
REVENUE. United States net product revenue for the quarter ended September
30, 2004 was $3.7 million compared to $4.1 million for the quarter ended
September 30, 2003.
We expect 2004 total annual MUSE sales will be significantly lower than 2003
total annual MUSE sales. However, we believe that wholesalers will continue the
historical buying pattern of building their inventories in the fourth quarter,
and as such, we anticipate that fourth quarter 2004 United States product
revenue will outpace third quarter 2004 sales levels.
12
International product revenue was $666,000 for the third quarter of 2004, a
decrease of $760,000 compared to the same period last year due to a decrease in
product demand by Meda AB.
COST OF GOODS SOLD AND GROSS PROFIT. Cost of goods sold in the third quarter
of 2004 was $2.6 million, as compared to $3.0 million for the third quarter of
2003. During the three months ended September 30, 2004 and 2003, we used certain
raw material inventory, the cost basis of which had been reduced to zero in
prior years. This had a favorable impact on our cost of sales in the third
quarter of 2004 and 2003 of $279,000 and $332,000, respectively. The lower gross
profit in the third quarter of 2004 was primarily due to lower revenues in the
quarter and increased costs for labor, benefits and utilities at the New Jersey
manufacturing facility.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for the
third quarter of 2004 were $3.9 million, as compared to $1.8 million for the
three months ended September 30, 2003. During 2004, we initiated a Phase 2
clinical trial with avanafil, our oral phosphodiesterase type 5 (PDE5) inhibitor
being studied for the treatment of erectile dysfunction. The initiation of this
Phase 2 clinical trial resulted in a $534,000 increase in expenses over the
three months ended September 30, 2003. Increased clinical trial and project
activity for ALISTA, estradiol and testosterone resulted in incremental spending
during the three months ended September 30, 2004 of $848,000. Additionally,
salary, benefit and consulting expenses increased in the third quarter of 2004
in support of our ongoing projects. We do not expect to recognize revenue from
sales of any new product candidates being developed through our research and
development efforts until 2007 at the earliest.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in the third quarter of 2004 of $2.9 million were
$608,000 higher than the same period last year primarily due to an increase in
spending for marketing programs during the third quarter of 2004 and the absence
of the reimbursement of previously incurred legal fees and other expenses
related to the settlement of the Janssen Pharmaceutica arbitration claim in the
third quarter of 2003.
INTEREST INCOME. Interest income for the three months ended September 30,
2004 was $155,000 as compared to $177,000 for the three months ended September
30, 2003. Declining balances of cash, cash equivalents and available-for-sale
securities contributed to the reduction in interest income.
PROVISION FOR INCOME TAXES. During the third quarter of 2003, we recorded a
tax benefit based on an updated estimate of our tax liabilities. No such benefit
was recorded in the third quarter of 2004.
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
For the nine months ended September 30, 2004, we reported a net loss of
($20.7) million, or ($0.54) net loss per share as compared to a net loss of
($2.2) million, or ($0.06) net loss per share, during the same period in 2003.
Lower product sales in the United States, $4.7 million of charges for licensing
and milestone payments associated with three of our four late-stage development
programs in the pipeline, increased clinical trial and project activity for
ALISTA, avanafil, estradiol and testosterone, as well as $5.0 million in other
revenue in 2003 resulting from the settlement of the Janssen Pharmaceutica
arbitration claim were the primary reasons for the change from the same period
last year.
We anticipate continued losses over the next several years because: (1) we
expect MUSE sales to decrease year-over-year, and (2) we plan to continue to
invest in clinical development of our current research and development product
candidates to bring those potential products to market.
REVENUE. United States net product revenue for the nine months ended
September 30, 2004 was $6.7 million compared to $10.2 million for the nine
months ended September 30, 2003.
We believe the decrease in revenue for the nine months ended September 30,
2004 is due to an overall decrease in demand for MUSE in the marketplace. Based
on data acquired from third party providers, total unit demand for MUSE from the
United States government healthcare organizations and general retail pharmacies
through the first nine months of 2004 decreased by 20.3% as compared to the same
period in 2003. We believe the decrease is primarily due to the availability of
competitive oral PDE5 inhibitors.
We expect 2004 total annual MUSE sales will be significantly lower than 2003
total annual MUSE sales. However, we believe that wholesalers will continue the
historical buying pattern of building their inventories in the fourth quarter,
and as such, we anticipate that fourth quarter 2004 United States product
revenue will outpace third quarter 2004 sales levels.
13
International product revenue was $2.8 million for the first nine months of
2004, a decrease of $486,000 compared to the same period last year.
COST OF GOODS SOLD AND GROSS PROFIT. Cost of goods sold in the first nine
months of 2004 was $7.2 million, as compared to $8.2 million for the first nine
months of 2003. The decrease in cost of goods sold in the first nine months of
2004 is primarily due to lower sales. During the nine months ended September 30,
2004 and 2003, we used certain raw material inventory, the cost basis of which
had been reduced to zero in prior years. This had a favorable impact on our cost
of sales in the first nine months of 2004 and 2003 of $814,000 and $799,000,
respectively.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for the
nine months ended September 30, 2004 were $14.6 million, as compared to $6.0
million for the nine months ended September 30, 2003. During the first nine
months of 2004, we entered into exclusive licensing agreements in the United
States with a subsidiary of Acrux under which we will develop and commercialize
an estradiol spray for the alleviation of the symptoms of menopause and a
testosterone spray for the treatment of low sexual desire in women. We reported
a total $3.0 million of licensing fees incurred under the terms of the
agreements. A portion of these licensing fees were already paid in February and
September 2004, with the remainder to be paid in June 2005 ($958,000). In
addition, during the first half of 2004, we initiated a Phase 2 clinical trial
with avanafil, our oral phosphodiesterase type 5 (PDE5) inhibitor being studied
for the treatment of erectile dysfunction. Under the terms of our 2001
development, licensing and supply agreement with Tanabe we reported a $1.8
million milestone obligation to Tanabe in the first quarter of 2004. The payment
of this milestone will be made in March 2006. The initiation of the avanafil
Phase 2 clinical trial in 2004 resulted in an additional $1.9 million increase
in expenses over the nine months ended September 30, 2003. Increased clinical
trial and project activity for ALISTA, estradiol and testosterone resulted in
incremental spending during the nine months ended September 30, 2004 of $1.2
million. Additionally, salary, benefit and consulting expenses increased in
support of our ongoing projects. We do not expect to recognize revenue from
sales of any new product candidates being developed through our research and
development efforts until 2007 at the earliest.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in the first nine months of 2004 of $8.7 million were
$1.4 million higher than the same period last year primarily due to an increase
in spending for investor and public relations activities and marketing programs,
as well as the absence of the reimbursement of previously incurred legal fees
and other expenses related to the settlement of the Janssen Pharmaceutica
arbitration claim in the third quarter of 2003.
INTEREST INCOME. Interest income for the nine months ended September 30,
2004 was $471,000 as compared to $537,000 for the nine months ended September
30, 2003. Declining balances of cash, cash equivalents and available-for-sale
securities contributed to the reduction in interest income.
PROVISION FOR INCOME TAXES. During the first nine months of 2004, we
recorded a net tax provision of $5,000 for minimum state income taxes and UK
income taxes, both due for 2004. During the third quarter of 2003, we recorded a
tax benefit based on an updated estimate of our tax liabilities.
LIQUIDITY AND CAPITAL RESOURCES
CASH. Unrestricted cash, cash equivalents and available-for-sale securities
totaled $34.1 million at September 30, 2004 as compared to $48.3 million at
December 31, 2003. The decrease is primarily due to low U.S. sales during the
first nine months of 2004, increased research and development spending, and
normal operating expenses.
Since inception, we have financed operations primarily from the issuance of
equity securities. Through September 30, 2004, we raised $173.9 million from
financing activities and had an accumulated deficit of $121.7 million at
September 30, 2004.
AVAILABLE-FOR-SALE SECURITIES. We focus on liquidity and capital
preservation in our investments in available-for-sale securities. We restrict
our cash investments to:
o Direct obligations of the United States Treasury;
14
o Federal Agency securities which carry the direct or implied guarantee
of the United States government; and
o Corporate securities, including commercial paper, rated A1/P1 or
better.
We sequence the maturities of our investments consistent with our cash
forecasts. The weighted average maturity of our portfolio is not to exceed 18
months. Due to our cash requirements over the coming year, as investments are
currently maturing, we are re-investing the money in money market funds versus
purchasing additional securities.
ACCOUNTS RECEIVABLE. Accounts receivable (net of allowance for doubtful
accounts) at September 30, 2004 was $3.1 million as compared to $2.6 million at
December 31, 2003. Notwithstanding an increase to our days' sales outstanding as
of September 30, 2004 as compared to December 31, 2003, we do not have any
significant concerns related to accounts receivable or collections.
LIABILITIES. Total liabilities were $21.0 million at September 30, 2004,
$5.5 million higher than at December 31, 2003. Accrued research and development
expenses increased $2.8 million due to the future payment of milestones to Acrux
and Tanabe and notes payable increased $2.2 million due to borrowing under the
agreement we signed with Tanabe in the first quarter of 2004 for a line of
credit of up to $8.5 million to be used for the development of avanafil.
OPERATING ACTIVITIES. Our operating activities used $17.1 million and $5.3
million of cash during the nine months ended September 30, 2004 and 2003,
respectively. During the first nine months of 2004, our net operating loss of
$20.7 million was offset by a $2.8 million increase in accrued and other
liabilities for the future payment of milestones to Acrux and Tanabe, as well as
depreciation expense of $1.5 million. During the first nine months of 2003, our
net operating loss of $2.2 million was increased by $4.0 million in other
receivables, from the Janssen Pharmaceutica arbitration award, which was
received in November 2003.
INVESTING ACTIVITIES. Net cash provided by investing activities was $6.9
million compared to the use of $16.1 million during the nine months ended
September 30, 2004 and 2003, respectively. The fluctuations from period to
period are due primarily to the timing of purchases, sales and maturity of
investment securities.
FINANCING ACTIVITIES. Financing activities provided cash of $3.0 million and
$16.8 million during the nine months ended September 30, 2004 and 2003,
respectively. These amounts include the proceeds from the exercise of stock
options in both the first nine months of 2004 and 2003, borrowings from Tanabe
during 2004 and the private placement of 4,375,000 shares of common stock for
aggregate net proceeds of $16.4 million in the second quarter of 2003.
We anticipate that our existing capital resources combined with anticipated
future cash flows will be sufficient to support our operating needs for at least
the coming year. However, we anticipate that we will be required to obtain
additional financing to fund the development of our research and development
pipeline in future periods as well as to support the possible launch of any
future products. In particular, we expect to make other substantial payments to
Acrux and Tanabe in accordance with our agreements with them in connection with
the licensing of certain compounds. These payments are based on certain
development, regulatory and sales milestones. In addition, we are required to
make royalty payments on any future product sales.
In the first quarter of 2004, we signed an agreement for a secured line of
credit with Tanabe, allowing us to borrow up to $8.5 million to be used for the
development of avanafil (formerly TA-1790), our erectile dysfunction compound
currently in Phase 2 clinical trials. The secured line of credit may be drawn
upon quarterly and each quarterly borrowing has a 48-month term and bears
interest at the annual rate of 2%. There are no financial covenants associated
with this secured line of credit. As of September 30, 2004 we had long-term
notes payable to Tanabe of $2.2 million, and $6.3 million of available credit
under this agreement.
We expect to evaluate other potential financing sources, including, but not
limited to, the issuance of additional equity or debt securities, corporate
alliances, joint ventures, and licensing agreements to fund the development and
possible commercial launch of any future products. The sale of additional equity
securities would result in additional dilution to our stockholders. Our working
capital and additional funding requirements will depend upon numerous factors,
including:
o the progress of our research and development programs;
o the timing and results of pre-clinical testing and clinical trials;
o results of operations;
15
o demand for MUSE;
o technological advances;
o the level of resources that we devote to our sales and marketing
capabilities; and
o the activities of competitors.
OVERVIEW OF CONTRACTUAL OBLIGATIONS
Contractual Obligations Payments Due by Period (in thousands)
Total Less than 1 year 1 - 3 years 3 - 5 years More than 5 years
------------ ------------ ------------ ------------ ------------
Operating Leases (1) 3,141 1,280 1,861 -- --
Purchases (2) 5,886 2,061 3,060 765 --
Notes Payable (3) 2,205 -- -- 2,205 --
Other Long Term Liabilities (4) 5,814 958 1,835 3,021 --
------------ ------------ ------------ ------------ ------------
Total 17,046 4,299 6,756 5,991 --
============ ============ ============ ============ ============
(1) We lease our manufacturing facilities in Lakewood, New Jersey under a
non-cancelable operating lease expiring in 2007 and have the option to extend
this lease for one additional renewal term of five years. In January 2000, we
entered into a seven-year lease for our corporate headquarters in Mountain View,
California, which expires in January 2007.
(2) In November 2002, we entered into a manufacturing agreement to purchase
raw materials from a supplier beginning in 2003 and ending in 2008. In 2003, we
purchased $2.1 million of product and are committed to purchase a minimum total
of $3.8 million of product from 2004 through 2008. During 2004, we have not
purchased any additional product from this supplier, however, due to product
specification requirements, VIVUS returned $617,000 of product in the third
quarter of 2004 and expects to receive replacement product by the end of 2004.
In January 2004, we entered into a manufacturing agreement to purchase
raw materials from an additional supplier beginning in 2004 and ending in 2006.
We will be required to purchase a minimum total of $2.3 million of product from
2004 through 2006. As of September 30, 2004, we have purchased $234,000 of
product from this supplier.
(3) In the first quarter of 2004, we signed an agreement for a secured line
of credit with Tanabe, allowing us to borrow up to $8.5 million to be used for
the development of avanafil (formerly TA-1790), our erectile dysfunction
compound currently in Phase 2 clinical trials. The secured line of credit may be
drawn upon quarterly and each quarterly borrowing will have a 48-month term and
will bear interest at the annual rate of 2%. There are no financial covenants
associated with this secured line of credit. As of September 30, 2004 we have
$6.3 million of available credit under this agreement.
(4) Other Long Term Liabilities includes the restoration liability for our
leased manufacturing facilities. This liability will remain in effect through
the end of the lease term, including any renewals. We have exercised our first
option to renew the original lease, thereby extending any cash payments to be
made relating to this liability out to 2007. The second renewal term, if
exercised, would then extend the liability out an additional five years, to
2012.
In January 2004, we entered into exclusive licensing agreements with a
subsidiary of Acrux under which we will develop and commercialize an estradiol
spray for the alleviation of the symptoms of menopause and a testosterone spray
for the treatment of low sexual desire in women. We reported a total $3.0
million of licensing fees incurred under the terms of the agreements. The
remaining portion of these licensing fees will be paid in June 2005 ($958,000).
In addition, during the first quarter of 2004, we initiated a Phase 2 clinical
trial with avanafil, our oral phosphodiesterase type 5 (PDE5) inhibitor being
studied for the treatment of erectile dysfunction. Under the terms of our 2001
development, licensing and supply agreement with Tanabe we reported a $1.8
million milestone obligation to Tanabe in the first quarter of 2004. The payment
of this milestone will be made in March 2006.
16
RISK FACTORS AFFECTING OPERATIONS AND FUTURE RESULTS
Set forth below and elsewhere in this Form 10-Q and in other documents we
file with the Securities and Exchange Commission are risks and uncertainties
that could cause actual results to differ materially from the results
contemplated by the forward-looking statements contained in this Quarterly
Report on Form 10-Q. These are not the only risks and uncertainties facing
VIVUS. Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also impair our business operations.
IF WE WERE UNABLE TO CONTINUE TO DEVELOP, MARKET AND OBTAIN REGULATORY APPROVAL
FOR NEW PRODUCT CANDIDATES, OUR BUSINESS WOULD BE HARMED.
The process of developing new drugs and/or therapeutic products is
inherently complex and uncertain. We must make long-term investments and commit
significant resources before knowing whether our development programs will
eventually result in products that will receive regulatory approval and achieve
market acceptance. As with any pharmaceutical product under development, there
are significant risks in development, regulatory approval and commercialization
of new compounds. During the product development phase, there is no assurance
that the United States Food and Drug Administration will approve our clinical
trial protocols. There is no guarantee that future clinical studies, if
performed, will demonstrate the safety and efficacy of any product in
development or that we will receive regulatory approval for such products.
Further, the United States Food and Drug Administration can suspend clinical
studies at any time if the agency believes that the subjects participating in
such studies are being exposed to unacceptable health risks.
We cannot predict with certainty if or when we might submit for regulatory
review those product candidates currently under development. Once we submit our
potential products for review, we cannot assure you that the United States Food
and Drug Administration or other regulatory agencies will grant approvals for
any of our proposed products on a timely basis or at all. Further, even if we
receive regulatory approval for a product, there can be no assurance that such
product will prove to be commercially successful or profitable.
Sales of our products both inside and outside the United States will be
subject to regulatory requirements governing marketing approval. These
requirements vary widely from country to country and could delay the
introduction of our proposed products in those countries. After the United
States Food and Drug Administration and international regulatory authorities
approve a product, we must manufacture sufficient volumes to meet market demand.
This is a process that requires accurate forecasting of market demand. There is
no guarantee that there will be market demand for any future products or that we
will be able to successfully manufacture or adequately support sales of any
future products.
In February 2004, we entered into exclusive license agreements with a
subsidiary of Acrux for the development and commercialization of topically
applied Testosterone MDTS and Estradiol MDTS, in the United States only, for the
treatment of low sexual desire and menopausal symptoms in women, respectively.
Acrux has conducted clinical trials for both products under Investigational New
Drug Applications on file with the United States Food and Drug Administration.
Acrux has completed a 260-patient Phase 2 study in Australia for Testosterone
MDTS. We expect the results of this study to be available in early 2005.
Assuming favorable results, we anticipate that we will begin Phase 3 clinical
development of Testosterone MDTS in 2005. We expect to conduct Phase 3 clinical
development for Estradiol MDTS in the fourth quarter of 2004 for short-term
therapy for women experiencing symptoms associated with menopause. However,
there are no guarantees that Testosterone MDTS and/or Estradiol MDTS will prove
to be safe and effective or receive regulatory approval for any indication.
Further, even if we were to receive regulatory approval for these products,
there can be no assurance that such products will prove to be commercially
successful or profitable.
We are developing avanafil, formerly known as TA-1790, as potential oral and
local treatments for male and female sexual dysfunction, and we are developing
ALISTA for the potential treatment of female sexual arousal disorder. We are
currently conducting pre-clinical safety studies for avanafil and have completed
dosing in two efficacy studies in patients with erectile dysfunction. In March
2004, we began a Phase 2 clinical trial for avanafil, the results of which are
expected in the first half of 2005. We also completed three Phase 2 ALISTA
clinical trials and began our Phase 3 clinical trial for ALISTA in the third
quarter of 2004. We intend to initiate additional clinical studies that would be
required to obtain regulatory approval for avanafil and ALISTA. However, there
are no guarantees that avanafil and/or ALISTA will prove to be safe and
effective or receive regulatory approval for any indication. Further, even if we
were to receive regulatory approval for these products, there can be no
assurance that such products will prove to be commercially successful or
profitable.
17
THE MARKETS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE AND WE MAY BE UNABLE TO
COMPETE SUCCESSFULLY AGAINST NEW ENTRANTS OR ESTABLISHED COMPANIES WITH GREATER
RESOURCES.
Competition in the pharmaceutical and medical products industries is intense
and is characterized by extensive research efforts and rapid technological
progress. The most significant competitive therapy for MUSE is an oral
medication marketed by Pfizer under the name Viagra, which received regulatory
approvals in the United States in March 1998 and in the European Union in
September 1998. The commercial launch of Viagra in the United States in April
1998 significantly decreased demand for MUSE. Another oral medication under the
name Uprima was approved and launched in Europe by Abbott Laboratories and
Takeda in May 2001. In February 2003, a new oral medication under the name
Cialis was launched in Europe by Lilly ICOS LLC and in Australia and New Zealand
by Eli Lilly and Company. Cialis was launched in the United States in January
2004. Bayer AG and GlaxoSmithKline plc launched Levitra in the European Union
and the United States in March and September 2003, respectively.
Other treatments for erectile dysfunction exist, such as needle injection
therapy, vacuum constriction devices and penile implants, and the manufacturers
of these products will most likely continue to improve these therapies.
Additional competitive products in the erectile dysfunction market include
needle injection therapy products from Pfizer (formerly Pharmacia), Schwartz
Pharma, Fornier and Senetek.
Several large pharmaceutical companies are also actively engaged in the
development of therapies for the treatment of erectile dysfunction and female
sexual dysfunction. These companies have substantially greater research and
development capabilities as well as substantially greater marketing, financial
and human resources abilities than VIVUS. In addition, many of these companies
have significantly greater experience than us in undertaking pre-clinical
testing, human clinical trials and other regulatory approval procedures. Our
competitors may develop technologies and products that are more effective than
those we are currently marketing or developing. Such developments could render
our products less competitive or possibly obsolete. We are also competing with
respect to marketing capabilities and manufacturing efficiency, areas in which
we have limited experience.
IF WE, OR OUR SUPPLIERS, FAIL TO COMPLY WITH UNITED STATES FOOD AND DRUG
ADMINISTRATION AND OTHER GOVERNMENT REGULATIONS, OUR MANUFACTURING OPERATIONS
COULD BE INTERRUPTED, AND OUR PRODUCT SALES AND PROFITABILITY COULD SUFFER.
All new drugs, including our products under development, are subject to
extensive and rigorous regulation by the United States Food and Drug
Administration and comparable foreign authorities. These regulations govern,
among other things, the development, pre-clinical and clinical testing,
manufacturing, labeling, storage, pre-market approval, advertising, promotion,
sale and distribution of our products. To date, MUSE has received marketing
approval in more than 40 countries worldwide.
After regulatory approval is obtained, our products are subject to continual
regulatory review. Manufacturing, labeling and promotional activities are
continually regulated by the United States Food and Drug Administration and
equivalent foreign regulatory agencies, and we must also report certain adverse
events involving our products to these agencies. Previously unidentified adverse
events or an increased frequency of adverse events that occur post-approval
could result in labeling modifications of approved products, which could
adversely affect future marketing. Finally, approvals may be withdrawn if
compliance with regulatory standards is not maintained or if problems occur
following initial marketing. The restriction, suspension or revocation of
regulatory approvals or any other failure to comply with regulatory requirements
could have a material adverse effect on our business, financial condition and
results of operations.
Failure to comply with the applicable regulatory requirements can result in,
among other things, civil penalties, suspensions of regulatory approvals,
product recalls, operating restrictions and criminal prosecution. The marketing
and manufacturing of pharmaceutical products are subject to continual United
States Food and Drug Administration and other regulatory review, and later
discovery of previously unknown problems with a product, manufacturer or
facility may result in the United States Food and Drug Administration and/or
other regulatory agencies requiring further clinical research or restrictions on
the product or the manufacturer, including withdrawal of the product from the
market. The restriction, suspension or revocation of regulatory approvals or any
other failure to comply with regulatory requirements could have a material
adverse effect on our business, financial condition and results of operations.
Failure of our third-party manufacturers to maintain satisfactory compliance
with current Good Manufacturing Practices, or cGMPs, could have a material
adverse effect on our ability to continue to market and distribute our products
and, in the most serious cases, could result in the issuance of warning letters,
seizure or recall of products, civil penalties or closure of our manufacturing
facility until such cGMP compliance is achieved. We obtain the necessary raw
materials and components for the manufacture of MUSE as well as certain
18
services, such as testing and sterilization, from third parties. We currently
contract with suppliers and service providers, including foreign manufacturers
that are required to comply with strict standards established by us. Certain
suppliers and service providers are required to follow cGMP requirements and are
subject to routine unannounced periodic inspections by the United States Food
and Drug Administration and by certain state and foreign regulatory agencies for
compliance with cGMP requirements and other applicable regulations. Certain of
our suppliers were inspected for cGMP compliance as part of the approval
process. However, upon routine re-inspection of these facilities, there can be
no assurance that the United States Food and Drug Administration and other
regulatory agencies will find the manufacturing process or facilities to be in
compliance with cGMP requirements and other regulations.
Failure to achieve satisfactory cGMP compliance as confirmed by routine
unannounced inspections could have a material adverse effect on our ability to
continue to manufacture and distribute our products and, in the most serious
case, result in the issuance of a regulatory warning letter or seizure or recall
of products, injunction and/or civil penalties or closure of our manufacturing
facility until cGMP compliance is achieved.
WE HAVE LIMITED SALES AND MARKETING CAPABILITIES IN THE UNITED STATES.
We support MUSE sales in the United States through a small sales support
group targeting major accounts that include the top prescribers of MUSE.
Telephone marketers also focus on urologists who prescribe MUSE. Physician and
patient information/help telephone lines are available to answer additional
questions that may arise after reading the inserts or after actual use of the
product. The sales force actively participates in national urologic and sexual
dysfunction forums and conferences, such as the American Urological Association
annual and regional meetings and the International Society for Impotence
Research. There can be no assurance that our sales programs will effectively
maintain or potentially increase current sales levels. There can be no assurance
that demand for MUSE will continue or that we will be able to adequately support
sales of MUSE in the United States in the future.
WE RELY ON THIRD PARTIES TO MANUFACTURE SUFFICIENT QUANTITIES OF COMPOUNDS FOR
USE IN OUR PRE-CLINICAL AND CLINICAL TRIALS AND AN INTERRUPTION TO THIS SERVICE
MAY HARM OUR BUSINESS.
We do not have the ability to manufacture the materials we use in our
pre-clinical and clinical trials, and we rely on various third parties to
perform this function. There can be no assurance that we will be able to
identify and qualify additional sources for clinical materials. If interruptions
in this supply occur for any reason, including a decision by the third parties
to discontinue manufacturing, labor disputes or a failure of the third parties
to follow regulations, we may not be able to obtain regulatory approvals for our
proposed products and may not be able to successfully commercialize these
proposed products.
WE RELY ON THIRD PARTIES TO CONDUCT CLINICAL TRIALS FOR OUR PRODUCT CANDIDATES
IN DEVELOPMENT AND THOSE THIRD PARTIES MAY NOT PERFORM SATISFACTORILY.
We do not have the ability to independently conduct clinical studies for any
of our products currently in development, and we rely on third parties to
perform this function. If third parties do not successfully carry out their
contractual duties or meet expected timelines, we may not be able to obtain
regulatory approvals for our proposed products and may not be able to
successfully commercialize these proposed products. If third parties do not
perform satisfactorily, we may not be able to locate acceptable replacements or
enter into favorable agreements with them, if at all.
IF THE RESULTS OF FUTURE CLINICAL TESTING INDICATE THAT OUR PROPOSED PRODUCTS
ARE NOT SAFE OR EFFECTIVE FOR HUMAN USE, OUR BUSINESS WILL SUFFER.
All of the drug candidates that we are currently developing require
extensive pre-clinical and clinical testing before we can submit any application
for regulatory approval. Before obtaining regulatory approvals for the
commercial sale of any of our proposed drug products, we must demonstrate
through pre-clinical testing and clinical trials that our product candidates are
safe and effective in humans. Conducting clinical trials is a lengthy, expensive
and uncertain process. Completion of clinical trials may take several years or
more. Our commencement and rate of completion of clinical trials may be delayed
by many factors, including:
o ineffectiveness of the study compound, or perceptions by physicians
that the compound is not effective for a particular indication;
o inability to manufacture sufficient quantities of compounds for use in
clinical trials;
o failure of the United States Food and Drug Administration to approve
our clinical trial protocols;
o slower than expected rate of patient recruitment;
19
o inability to adequately follow patients after treatment;
o unforeseen safety issues; or
o government or regulatory delays.
The clinical results we have obtained to date do not necessarily predict
that the results of further testing, including later stage controlled human
clinical testing, will be successful. If our trials are not successful or are
perceived as not successful by the United States Food and Drug Administration or
physicians, our business, financial condition and results of operations will be
materially harmed.
IF WE REQUIRE ADDITIONAL CAPITAL FOR OUR FUTURE OPERATING PLANS, WE MAY NOT BE
ABLE TO SECURE THE REQUISITE ADDITIONAL FUNDING ON ACCEPTABLE TERMS, IF AT ALL.
Our capital resources from operating activities are expected to continue to
decline over the next several quarters as the result of increased spending for
research and development projects, including clinical trials. We expect that our
existing capital resources combined with future cash flows will be sufficient to
support operating needs for at least the coming year. Financing in future
periods will most likely be required to fund development of our research and
development pipeline and the possible launch of any future products. Our future
capital requirements will depend upon numerous factors, including:
o the progress of our research and development programs;
o the scope, timing and results of pre-clinical testing and clinical
trials;
o the results of operations;
o the cost, timing and outcome of regulatory reviews;
o the rate of technological advances;
o ongoing determinations of the potential commercial success of our
products under development;
o the level of resources devoted to sales and marketing capabilities;
and
o the activities of competitors.
To obtain additional capital when needed, we will evaluate alternative
financing sources, including, but not limited to, the issuance of equity or debt
securities, corporate alliances, joint ventures and licensing agreements.
However, there can be no assurance that funding will be available on favorable
terms, if at all. If we are unable to obtain additional capital, management may
be required to explore alternatives to reduce cash used by operating activities,
including the termination of research and development efforts that may appear to
be promising to the Company.
WE MAY BE SUED FOR INFRINGING ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
There can be no assurance that our products do not or will not infringe on
the patent or proprietary rights of others. Third parties may assert that we are
employing their proprietary technology without authorization. In addition, third
parties may obtain patents in the future and claim that use of our technologies
infringes these patents. We could incur substantial costs and diversion of the
time and attention of management and technical personnel in defending ourselves
against any such claims. Furthermore, parties making claims against us may be
able to obtain injunctive or other equitable relief that could effectively block
our ability to further develop, commercialize and sell products, and such claims
could result in the award of substantial damages against us. In the event of a
successful claim of infringement against us, we may be required to pay damages
and obtain one or more licenses from third parties. We may not be able to obtain
these licenses at a reasonable cost, if at all. In that event, we could
encounter delays in product introductions while we attempt to develop
alternative methods or products or be required to cease commercializing affected
products and our operating results would be harmed.
OUR INABILITY TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGIES COULD HARM OUR
COMPETITIVE POSITION AND HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
We hold various patents and patent applications in the United States and
abroad targeting male and female sexual health. The success of our business
depends, in part, on our ability to obtain patents and maintain adequate
protection of our intellectual property for our proprietary technology and
products in the United States and other countries. The laws of some foreign
countries do not protect proprietary rights to the same extent as the laws of
the United States, and many companies have encountered significant problems in
protecting their proprietary rights in these foreign countries. These problems
can be caused by, for example, a lack of rules and processes allowing for
meaningful defense of intellectual property rights. If we do not adequately
protect our intellectual property, competitors may be able to use our
technologies and erode our competitive advantage, and our business and operating
results could be harmed.
20
The patent positions of pharmaceutical companies, including our patent
position, are often uncertain and involve complex legal and factual questions.
We will be able to protect our proprietary rights from unauthorized use by third
parties only to the extent that our proprietary technologies are covered by
valid and enforceable patents or are effectively maintained as trade secrets. We
apply for patents covering our technologies and products, as we deem
appropriate. However, we may not obtain patents on all inventions for which we
seek patents, and any patents we obtain may be challenged and may be narrowed in
scope or extinguished as a result of such challenges. We could incur substantial
costs in proceedings before the United States Patent and Trademark Office,
including interference proceedings. These proceedings could also result in
adverse decisions as to the priority of our inventions. There can be no
assurance that our patents will not be successfully challenged or designed
around by others.
Our existing patents and any future patents we obtain may not be
sufficiently broad to prevent others from practicing our technologies or from
developing competing products. Others may independently develop similar or
alternative technologies or design around our patented technologies or products.
These companies would then be able to develop, manufacture and sell products
that compete directly with our products. In that case, our revenues and
operating results would decline.
We seek to protect our confidential information by entering into
confidentiality agreements with employees, collaborators and consultants.
Nevertheless, employees, collaborators or consultants may still disclose or
misuse our confidential information, and we may not be able to meaningfully
protect our trade secrets. In addition, others may independently develop
substantially equivalent information or techniques or otherwise gain access to
our trade secrets. Disclosure or misuse of our confidential information would
harm our competitive position and could cause our revenues and operating results
to decline.
IF OUR RAW MATERIAL SUPPLIERS FAIL TO SUPPLY US WITH ALPROSTADIL, FOR WHICH
AVAILABILITY IS LIMITED, WE MAY EXPERIENCE DELAYS IN OUR PRODUCT DEVELOPMENT AND
COMMERCIALIZATION.
We are required to initially receive regulatory approval for suppliers and
we obtained our current supply of alprostadil from two approved sources. The
first is NeraPharm, formerly Spolana Chemical Works a.s., in Neratovice, Czech
Republic. The second is Chinoin Pharmaceutical and Chemical Works Co., Ltd. We
have manufacturing agreements with Chinoin and NeraPharm respectively, to
produce additional quantities of alprostadil for us. We are currently in the
process of assuring the new material meets testing and regulatory
specifications. There can be no guarantees the material will pass these
requirements and be usable material in our manufacturing process. We are
currently in the process of investigating additional sources for our future
alprostadil supplies. However, there can be no assurance that we will be able to
identify and qualify additional suppliers of alprostadil, in a timely manner, if
at all.
Furthermore, alprostadil is subject to periodic re-testing to ensure it
continues to meet specifications. There can be no guarantees that our existing
inventory of alprostadil will pass these re-testing procedures and continue to
be usable material. There is a long lead-time for manufacturing alprostadil. A
short supply of alprostadil to be used in the manufacture of MUSE would have a
material adverse effect on our business, financial condition and results of
operations.
WE OUTSOURCE SEVERAL KEY PARTS OF OUR OPERATIONS AND ANY INTERRUPTION IN THE
SERVICES PROVIDED COULD HARM OUR BUSINESS.
We entered into a distribution agreement with Cardinal Health. Under this
agreement, Cardinal Health takes the following actions:
o warehouses our finished goods for United States distribution;
o takes customer orders;
o picks, packs and ships our products;
o invoices customers; and
o collects related receivables.
As a result of this distribution agreement, we are heavily dependent on
Cardinal Health's efforts to fulfill orders and warehouse our products
effectively in the United States. There can be no assurance that such efforts
will continue to be successful.
Gibraltar Laboratories performs sterility testing on finished product
manufactured by us to ensure that it complies with product specifications.
Gibraltar Laboratories also performs microbial testing on water and compressed
gases used in the manufacturing process and microbial testing on environmental
samples to ensure that the manufacturing environment meets appropriate cGMP
21
regulations and cleanliness standards. As a result of this testing agreement, we
are dependent on Gibraltar Laboratories to perform testing and issue reports on
finished product and the manufacturing environment in a manner that meets cGMP
regulations. There can be no assurance that such efforts will be successful.
We have an agreement with WRB Communications to handle patient and
healthcare professional hotlines for us. WRB Communications maintains a staff of
healthcare professionals to answer questions and inquiries about MUSE and ACTIS.
These calls may include complaints about our products due to efficacy or
quality, as well as the reporting of adverse events. As a result of this
agreement, we are dependent on WRB Communications to effectively handle these
calls and inquiries. There can be no assurance that such efforts will be
successful.
We entered into a distribution agreement with Integrated Commercialization
Services, or ICS, a subsidiary of Bergen Brunswig Corporation. ICS provides
"direct-to-physician" distribution capabilities in support of United States
marketing and sales efforts. As a result of this distribution agreement, we are
dependent on ICS's efforts to distribute product samples effectively. There can
be no assurance that such efforts will be successful.
WE CURRENTLY DEPEND ON A SINGLE SOURCE FOR THE SUPPLY OF PLASTIC APPLICATOR
COMPONENTS, AND AN INTERRUPTION TO THIS SUPPLY SOURCE COULD HARM OUR BUSINESS.
We rely on a single injection molding company, Medegen, for our supply of
plastic applicator components. In turn, Medegen obtains its supply of resin, a
key ingredient of the applicator, from a single source, Huntsman Corporation.
There can be no assurance that we will be able to identify and qualify
additional sources of plastic components. We are required to initially receive
United States Food and Drug Administration approval for suppliers. Until we
secure and qualify additional sources of plastic components, we are entirely
dependent upon Medegen. If interruptions in this supply occur for any reason,
including a decision by Medegen to discontinue manufacturing, labor disputes or
a failure of Medegen to follow regulations, the development and commercial
marketing of MUSE and other potential products could be delayed or prevented. An
extended interruption in the supply of plastic components could have a material
adverse effect on our business, financial condition and results of operations.
ALL OF OUR MANUFACTURING OPERATIONS ARE CURRENTLY CONDUCTED AT A SINGLE
LOCATION, AND A PROLONGED INTERRUPTION TO OUR MANUFACTURING OPERATIONS COULD
HARM OUR BUSINESS.
We lease 90,000 square feet of space in Lakewood, New Jersey for our
manufacturing operation, which includes formulation, filling, packaging,
analytical laboratories, storage, distribution and administrative offices. The
United States Food and Drug Administration and the Medicines and Healthcare
products Regulatory Agency, formerly the Medicines Control Agency, the
regulatory authority in the United Kingdom, authorized us to begin commercial
production and shipment of MUSE from this facility in June and March 1998,
respectively. MUSE is manufactured in this facility and we have no immediate
plans to construct another manufacturing site. Since MUSE is produced with
custom-made equipment under specific manufacturing conditions, the inability of
our manufacturing facility to produce MUSE for whatever reason could have a
material adverse effect on our business, financial condition and results of
operations.
WE DEPEND EXCLUSIVELY ON THIRD-PARTY DISTRIBUTORS OUTSIDE OF THE UNITED STATES
AND WE HAVE VERY LIMITED CONTROL OVER THEIR ACTIVITIES.
We entered into agreements granting Meda AB exclusive marketing and
distribution rights for MUSE and ACTIS in all Member States of the European
Union, the Baltic States, the Czech Republic, Hungary, Iceland, Norway, Poland,
Switzerland and Turkey. These agreements do not have minimum purchase
commitments and we are entirely dependent on Meda AB's efforts to distribute and
sell our products effectively in all these markets. There can be no assurance
that such efforts will be successful or that Meda AB will continue to support
the products.
We entered into an agreement granting Paladin Labs exclusive marketing and
distribution rights for MUSE in Canada. This agreement does not have minimum
purchase commitments and we are entirely dependent on Paladin Labs' efforts to
distribute and sell our product effectively in Canada. There can be no assurance
that such efforts will be successful or that Paladin Labs will continue to
support the product.
22
WE HAVE AN ACCUMULATED DEFICIT OF $121.7 MILLION AS OF SEPTEMBER 30, 2004 AND
EXPECT TO CONTINUE TO INCUR SUBSTANTIAL OPERATING LOSSES FOR THE FORESEEABLE
FUTURE.
We have generated a cumulative net loss of $121.7 million for the period
from our inception through September 30, 2004 and we anticipate losses for the
next several years due to increased investment in our research and development
programs and limited revenues. There can be no assurance that we will be able to
achieve profitability on a sustained basis. Accordingly, there can be no
assurance of our future success.
WE ARE DEPENDENT UPON A SINGLE APPROVED THERAPEUTIC APPROACH TO TREAT ERECTILE
DYSFUNCTION.
MUSE relies on a single approved therapeutic approach to treat erectile
dysfunction, a transurethral system. The existence of side effects or
dissatisfaction with this product may impact a patient's decision to use or
continue to use, or a physician's decision to recommend, this therapeutic
approach as a therapy for the treatment of erectile dysfunction, thereby
affecting the commercial viability of MUSE. In addition, technological changes
or medical advancements could diminish or eliminate the commercial viability of
our product, the results of which could have a material effect on our business
operations and results.
IF WE FAIL TO RETAIN OUR KEY PERSONNEL AND HIRE, TRAIN AND RETAIN QUALIFIED
EMPLOYEES, WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY, WHICH COULD RESULT IN
REDUCED REVENUES.
Our success is highly dependent upon the skills of a limited number of key
management personnel. To reach our business objectives, we will need to retain
and hire qualified personnel in the areas of manufacturing, research and
development, regulatory affairs, clinical trial management and pre-clinical
testing. There can be no assurance that we will be able to hire or retain such
personnel, as we must compete with other companies, academic institutions,
government entities and other agencies. The loss of any of our key personnel or
the failure to attract or retain necessary new employees could have an adverse
effect on our research, product development and business operations.
WE ARE SUBJECT TO ADDITIONAL RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS.
MUSE and ACTIS are currently marketed internationally. Changes in overseas
economic and political conditions, terrorism, currency exchange rates, foreign
tax laws or tariffs or other trade regulations could have an adverse effect on
our business, financial condition and results of operations. The international
nature of our business is also expected to subject us and our representatives,
agents and distributors to laws and regulations of the foreign jurisdictions in
which we operate or where our products are sold. The regulation of drug
therapies in a number of such jurisdictions, particularly in the European Union,
continues to develop, and there can be no assurance that new laws or regulations
will not have a material adverse effect on our business, financial condition and
results of operations. In addition, the laws of certain foreign countries do not
protect our intellectual property rights to the same extent, as do the laws of
the United States.
ANY ADVERSE CHANGES IN REIMBURSEMENT PROCEDURES BY MEDICARE AND OTHER
THIRD-PARTY PAYORS MAY LIMIT OUR ABILITY TO MARKET AND SELL OUR PRODUCTS.
In the United States and elsewhere, sales of pharmaceutical products are
dependent, in part, on the availability of reimbursement to the consumer from
third-party payors, such as government and private insurance plans. Third party
payors are increasingly challenging the prices charged for medical products and
services. While a large percentage of prescriptions in the United States for
MUSE have been reimbursed by third party payors since our commercial launch in
January 1997, there can be no assurance that our products will be considered
cost effective and that reimbursement to the consumer will continue to be
available or sufficient to allow us to sell our products on a competitive basis.
In addition, certain healthcare providers are moving towards a managed care
system in which such providers contract to provide comprehensive healthcare
services, including prescription drugs, for a fixed cost per person. We hope to
further qualify MUSE for reimbursement in the managed care environment. However,
we are unable to predict the reimbursement policies employed by third party
healthcare payors. Furthermore, reimbursement for MUSE could be adversely
affected by changes in reimbursement policies of governmental or private
healthcare payors.
The healthcare industry is undergoing fundamental changes that are the
result of political, economic and regulatory influences. The levels of revenue
and profitability of pharmaceutical companies may be affected by the continuing
efforts of governmental and third party payors to contain or reduce healthcare
23
costs through various means. Reforms that have been and may be considered
include mandated basic healthcare benefits, controls on healthcare spending
through limitations on the increase in private health insurance premiums and
Medicare and Medicaid spending, the creation of large insurance purchasing
groups and fundamental changes to the healthcare delivery system. Due to
uncertainties regarding the outcome of healthcare reform initiatives and their
enactment and implementation, we cannot predict which, if any, of the reform
proposals will be adopted or the effect such adoption may have on us. There can
be no assurance that future healthcare legislation or other changes in the
administration or interpretation of government healthcare or third party
reimbursement programs will not have a material adverse effect on us. Healthcare
reform is also under consideration in some other countries.
IF WE BECOME SUBJECT TO PRODUCT LIABILITY CLAIMS, WE MAY BE REQUIRED TO PAY
DAMAGES THAT EXCEED OUR INSURANCE COVERAGE.
The commercial sale of MUSE and our clinical trials exposes us to a
significant risk of product liability claims due to its availability to a large
population of patients. In addition, pharmaceutical products are subject to
heightened risk for product liability claims due to inherent side effects. We
detail potential side effects in the patient package insert and the physician
package insert, both of which are distributed with MUSE. While we believe that
we are reasonably insured against these risks, we may not be able to obtain
insurance in amounts or scope sufficient to provide us with adequate coverage
against all potential liabilities. A product liability claim in excess of, or
excluded from, our insurance coverage would have to be paid out of cash reserves
and could have a material adverse effect upon our business, financial condition
and results of operations. Product liability insurance is expensive, difficult
to maintain, and current or increased coverage may not be available on
acceptable terms, if at all.
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE.
The market price of our common stock has been volatile and is likely to
continue to be so. The market price of our common stock may fluctuate due to
factors including, but not limited to:
o announcements of technological innovations or new products by us or
our competitors;
o our ability to increase demand for our products in the United States;
o our ability to successfully sell our products in the United States and
internationally;
o actual or anticipated fluctuations in our financial results;
o our ability to obtain needed financing;
o economic conditions in the United States and abroad;
o comments by or changes in Company assessments or financial estimates
by security analysts;
o adverse regulatory actions or decisions;
o any loss of key management;
o the results of our clinical trials or those of our competitors;
o developments or disputes concerning patents or other proprietary
rights;
o product or patent litigation; or
o public concern as to the safety of products developed by us.
These factors and fluctuations, as well as political and market conditions,
may materially adversely affect the market price of our common stock. Securities
class action litigation is often brought against a company following periods of
volatility in the market price of its securities. We may be the target of
similar litigation. Securities litigation, whether with or without merit, could
result in substantial costs and divert management's attention and resources,
which could harm our business and financial condition, as well as the market
price of our common stock.
Additionally, volatility or a lack of positive performance in our stock
price may adversely affect our ability to retain key employees, all of whom have
been granted stock options.
OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD MAKE AN ACQUISITION OF OUR COMPANY
DIFFICULT, EVEN IF AN ACQUISITION MAY BENEFIT OUR STOCKHOLDERS.
Our Board of Directors has adopted a Preferred Shares Rights Plan. The
Preferred Shares Rights Plan has the effect of causing substantial dilution to a
person or group that attempts to acquire us on terms not approved by our Board
of Directors. The existence of the Preferred Shares Rights Plan could limit the
price that certain investors might be willing to pay in the future for shares of
our common stock and could discourage, delay or prevent a merger or acquisition
that a stockholder may consider favorable.
24
Certain provisions of our Amended and Restated Certificate of Incorporation
and Bylaws could also delay or prevent a change in control of our company. Some
of these provisions:
o authorize the issuance of preferred stock by the Board of Directors
without prior stockholder approval, commonly referred to as "blank
check" preferred stock, with rights senior to those of common stock;
o prohibit stockholder actions by written consent;
o specify procedures for director nominations by stockholders and
submission of other proposals for consideration at stockholder
meetings; and
o eliminate cumulative voting in the election of directors.
In addition, we are governed by the provisions of Section 203 of Delaware
General Corporate Law. These provisions may prohibit large stockholders, in
particular those owning 15% or more of our outstanding voting stock, from
merging or combining with us. These and other provisions in our charter
documents could reduce the price that investors might be willing to pay for
shares of our common stock in the future and result in the market price being
lower than it would be without these provisions.
CHANGES IN ACCOUNTING STANDARDS REGARDING STOCK OPTION PLANS COULD LIMIT THE
DESIRABILITY OF GRANTING STOCK OPTIONS, WHICH COULD HARM OUR ABILITY TO ATTRACT
AND RETAIN EMPLOYEES, AND COULD ALSO REDUCE OUR PROFITABILITY.
The Financial Accounting Standards Board is considering whether to require
all companies to treat the value of stock options granted to employees as an
expense. The United States Congress and other governmental and regulatory
authorities have also considered requiring companies to expense stock options.
If this change were to become mandatory, we and other companies would be
required to record a compensation expense equal to the fair market value of each
stock option granted. This expense would be spread over the vesting period of
the stock option. Currently, we account for stock compensation under Accounting
Principles Board, or APB, No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,
which results in no compensation expenses recorded in connection with stock
options granted to our employees. If we were required to expense stock option
grants, it would reduce the attractiveness of granting stock options because of
the additional expense associated with these grants, which would reduce our
profitability. However, stock options are an important employee recruitment and
retention tool, and we may not be able to attract and retain key personnel if we
reduce the scope of our employee stock option program. Accordingly, in the event
we are required to expense stock option grants, our profitability would be
reduced, as would our ability to use stock options as an employee recruitment
and retention tool.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Securities and Exchange Commission's rule related to market risk
disclosure requires that we describe and quantify our potential losses from
market risk sensitive instruments attributable to reasonably possible market
changes. Market risk sensitive instruments include all financial or commodity
instruments and other financial instruments that are sensitive to future changes
in interest rates, currency exchange rates, commodity prices or other market
factors. We are not exposed to market risks from changes in foreign currency
exchange rates or commodity prices. We do not hold derivative financial
instruments nor do we hold securities for trading or speculative purposes. At
September 30, 2004, we had drawn $2.2 million of the $8.5 million secured line
of credit with Tanabe. Each quarterly borrowing will have a 48-month term and
will bear interest at the annual rate of 2%. At December 31, 2003 we had no debt
outstanding, and therefore no risk exposure associated with increasing interest
rates. We, however, are exposed to changes in interest rates on our investments
in cash equivalents and available-for-sale securities. A significant portion of
all of our investments in cash equivalents and available-for-sale securities are
in money market funds that hold short-term investment grade commercial paper,
treasury bills or other United States government obligations. Currently, this
reduces our exposure to long-term interest rate changes.
ITEM 4. CONTROLS AND PROCEDURES
(a.) Evaluation of disclosure controls and procedures. Our management
evaluated, with the participation of our Chief Executive Officer and our Interim
Principal Financial and Principal Accounting Officer, the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive
Officer and our Interim Principal Financial and Principal Accounting Officer
have concluded that our disclosure controls and procedures are effective to
ensure that information we are required to disclose in reports that we file or
submit under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
25
(b.) Changes in internal controls. There was no change in our internal
control over financial reporting that occurred during the period covered by this
Quarterly Report on Form 10-Q that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
(c.) Limitations on the effectiveness of disclosure controls and procedures.
Our management, including the Chief Executive Officer and Interim Principal
Financial and Principal Accounting Officer, has designed the internal disclosure
controls and procedures to provide only reasonable assurance that such
disclosure controls and procedures will meet stated objectives. Even well
designed and operated disclosure controls and procedures systems are susceptible
to inherent limitations resulting in failures to meet stated objectives. Such
inherent limitations include, but are not limited to, faulty assumptions in the
design of the controls and procedures, fraud by individuals, and error or
mistake by those overseeing the controls and procedures. As a result, no
evaluation of the disclosure controls and procedures can provide absolute
assurance that such disclosure controls and procedures will meet stated
objectives.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
NONE.
26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS (IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K)
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.2(4) Amended and Restated Certificate of Incorporation of the
Company.
3.3(3) Bylaws of the Registrant, as amended.
3.4(5) Certificate of Designations of Rights, Preferences and
Privileges of Series A Participating Preferred Stock.
4.1(4) Specimen Common Stock Certificate of the Registrant.
4.5(5) Second Amended and Restated Preferred Shares Rights
Agreement, dated as of April 15, 1997 by and between the
Registrant and Harris Trust Company of California,
including the Certificate of Determination, the form of
Rights Certificate and the Summary of Rights attached
thereto as Exhibits A, B, and C, respectively.
10.1(1)+ Assignment Agreement by and between Alza Corporation and
the Registrant dated December 31, 1993.
10.2(1)+ Memorandum of Understanding by and between Ortho
Pharmaceutical Corporation and the Registrant dated
February 25, 1992.
10.3(1)+ Assignment Agreement by and between Ortho Pharmaceutical
Corporation and the Registrant dated June 9, 1992.
10.4(1)+ License Agreement by and between Gene A. Voss, MD, Allen
C. Eichler, MD, and the Registrant dated December 28,
1992.
10.5A(1)+ License Agreement by and between Ortho Pharmaceutical
Corporation and Kjell Holmquist AB dated June 23, 1989.
10.5B(1)+ Amendment by and between Kjell Holmquist AB and the
Registrant dated July 3, 1992.
10.5C(1) Amendment by and between Kjell Holmquist AB and the
Registrant dated April 22, 1992.
10.5D(1)+ Stock Purchase Agreement by and between Kjell Holmquist
AB and the Registrant dated April 22, 1992.
10.6A(1)+ License Agreement by and between Amsu, Ltd., and Ortho
Pharmaceutical Corporation dated June 23, 1989.
10.6B(1)+ Amendment by and between Amsu, Ltd., and the Registrant
dated July 3, 1992.
10.6C(1) Amendment by and between Amsu, Ltd., and the Registrant
dated April 22, 1992.
10.6D(1)+ Stock Purchase Agreement by and between Amsu, Ltd., and
the Registrant dated July 10, 1992.
10.11(3) Form of Indemnification Agreements by and among the
Registrant and the Directors and Officers of the
Registrant.
10.12(2) 1991 Incentive Stock Plan and Form of Agreement, as
amended.
10.13(1) 1994 Director Option Plan and Form of Agreement.
10.14(1) Form of 1994 Employee Stock Purchase Plan and Form of
Subscription Agreement.
10.17(1) Letter Agreement between the Registrant and Leland F.
Wilson dated June 14, 1991 concerning severance pay.
10.28(4) Lease Agreement made as of January 1, 1997 between the
Registrant and Airport Associates.
10.29(4) Lease Amendment No. 1 as of February 15, 1997 between
Registrant and Airport Associates.
10.29A(6) Lease Amendment No. 2 dated July 24, 1997 by and between
the Registrant and Airport Associates.
10.29B(6) Lease Amendment No. 3 dated July 24, 1997 by and between
the Registrant and Airport Associates.
10.36(7) Form of, "Change of Control Agreements," dated July 8,
1998 by and between the Registrant and certain Executive
Officers of the Company.
10.39(8) Sublease agreement between KVO Public Relations, Inc. and
the Registrant dated December 21, 1999.
10.41(9)+ License and Supply Agreement made as of November 20, 2000
between the Registrant and Paladin Labs, Inc.
10.42(9)+ Development, License and Supply Agreement made as of
January 22, 2001 between the Registrant and TANABE SEIYAKU
CO., LTD.
10.42A Amendment One to Agreement, dated January 9, 2004 between
Registrant and TANABE SEIYAKU CO., LTD.
10.43(10)+ Settlement and Modification Agreement made as of July 12,
2001 between ASIVI, LLC, AndroSolutions, Inc. Gary W.
Neal and the Registrant.
10.44(11) 2001 Stock Option Plan and Form of Agreement.
27
10.45(12)+ Supply Agreement made as of September 3, 2002 between the
Registrant and Meda AB.
10.46(13)+ Amendment Three, dated November 21, 2002 by and between
VIVUS, Inc. and CHINOIN Pharmaceutical and Chemical Works,
Ltd.
10.47(13) Lease Amendment No. 4 and Settlement Agreement dated
October 25, 2000 by and between the Registrant and Airport
Associates.
10.48(13)+ Exclusive Distribution Agreement dated October 1, 2002
between the Registrant and Cord Logistics.
10.49(13)+ Distribution and Supply Agreement made as of February 18,
2003 between the Registrant and Meda AB.
10.50(14)+ Testosterone Development and Commercialization Agreement
made as of February 7, 2004 between the Registrant,
Fempharm Pty Ltd. and Acrux DDS Pty Ltd.
10.51(14)+ Estradiol Development and Commercialization Agreement made
as of February 12, 2004 between the Registrant, Fempharm
Pty Ltd. and Acrux DDS Pty Ltd.
10.52(14)+ Note Purchase Agreement, dated January 8, 2004 between
Registrant and Tanabe Holding America, Inc.
10.53(14)+ Manufacture and Supply Agreement, dated December 22, 2003
between Registrant and NeraPharm spol., s.r.o. and signed
by the Company on January 7, 2004.
31.1 Certification of Chief Executive Officer, dated November
8, 2004, pursuant to Rules 13a-14 and 15d-14 promulgated
under the Securities Exchange Act of 1934, as amended.
31.2 Certification of Interim Principal Financial and Principal
Accounting Officer, dated November 8, 2004, pursuant to
Rules 13a-14 and 15d-14 promulgated under the Securities
Exchange Act of 1934, as amended.
32 Certification of Chief Executive Officer and Interim
Principal Financial and Principal Accounting Officer
pursuant to Section 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
+ Confidential treatment granted.
(1) Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Registration Statement on Form S-1 No. 33-75698, as amended.
(2) Incorporated by reference to the same numbered exhibit filed with the
Registrant's Registration Statement on Form S-1 No. 33-90390, as amended.
(3) Incorporated by reference to the same numbered exhibit filed with the
Registrant's Form 8-B filed with the Commission on June 24, 1996.
(4) Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1996, as amended.
(5) Incorporated by reference to exhibit 99.1 filed with Registrant's
Amendment Number 2 to the Registration Statement of Form 8-A (File No.
0-23490) filed with the Commission on April 23, 1997.
(6) Incorporated by reference to the same numbered exhibit filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1997.
(7) Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1998.
(8) Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1999.
(9) Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
2000.
28
(10) Incorporated by reference to the same numbered exhibit filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
2001.
(11) Incorporated by reference to the same numbered exhibit filed with the
Registrant's Registration Statement on Form S-8 filed with the Commission
on November 15, 2001.
(12) Incorporated by reference to the same numbered exhibit filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended November
30, 2002.
(13) Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
2002.
(14) Incorporated by reference to the same numbered exhibit filed with the
Registrant's Annual Report on Form 10-Q for the quarter ended March, 31,
2004.
(b) Reports on Form 8-K.
On July 14, 2004, we furnished a current report on Form 8-K announcing that
data from a recently completed Phase 2 clinical trial demonstrated that ALISTA,
our topical formulation of alprostadil for the treatment of female sexual
arousal disorder (FSAD), significantly increased the percentage of satisfying
sexual events in pre-menopausal women with FSAD when compared with placebo.
On July 22, 2004, we furnished a current report on Form 8-K that disclosed
our financial results for the second quarter ended June 30, 2004 and certain
other information. The Form 8-K included our unaudited financial statements for
the second quarter ended June 30, 2004.
On August 22, 2004, we furnished a current report on Form 8-K that announced
the appointment of Peter Tam as our Senior Vice President of Product and
Corporate Development and the resignation of Larry Strauss as our Chief
Financial Officer, who acted as the corporation's principal financial officer
and principal accounting officer.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 8, 2004 VIVUS, Inc.
/s/ LORI E. FORREST
----------------------------------------
Lori E. Forrest
Interim Principal Financial and
Principal Accounting Officer
/s/ LELAND F. WILSON
----------------------------------------
Leland F. Wilson
President and Chief Executive Officer
29
VIVUS, INC.
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
- ------- -----------
31.1 Certification of Chief Executive Officer, dated November 8, 2004,
pursuant to Rules 13a-14 and 15d-14 promulgated under the
Securities Exchange Act of 1934, as amended.
31.2 Certification of Interim Principal Financial and Principal
Accounting Officer, dated November 8, 2004, pursuant to Rules
13a-14 and 15d-14 promulgated under the Securities Exchange Act of
1934, as amended.
32 Certification of Chief Executive Officer and Interim Principal
Financial and Principal Accounting Officer pursuant to Section 18
U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
30