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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
COMMISSION FILE NO. 0-24972
INKINE PHARMACEUTICAL COMPANY, INC.
(Exact name of Registrant as specified in its charter)
NEW YORK 13-3754005
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1787 SENTRY PARKWAY WEST
BUILDING 18, SUITE 440
BLUE BELL, PA 19422
(Address of principal executive offices)
215-283-6850
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). YES X NO
--- ---
At October 31, 2003, the registrant had outstanding 48,435,001 shares of
common stock, par value $.0001 per share.
3
INKINE PHARMACEUTICAL COMPANY, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEETS - as of September 30, 2003 (unaudited) and
December 31, 2002.............................................................3
STATEMENTS OF OPERATIONS (unaudited) - for the Three and Nine-Months
Ended September 30, 2003 and 2002.............................................4
STATEMENTS OF CASH FLOWS (unaudited) - for the Nine-Months Ended
September 30, 2003 and 2002...................................................5
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) (unaudited) -
for the Nine-Months Ended September 30, 2003..................................6
NOTES TO FINANCIAL STATEMENTS (unaudited).....................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.........................................10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS................20
ITEM 4. CONTROLS AND PROCEDURES....................................................20
PART II - OTHER INFORMATION.................................................................21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...........................................21
SIGNATURES..................................................................................22
EXHIBITS INDEX..............................................................................23
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INKINE PHARMACEUTICAL COMPANY, INC.
BALANCE SHEETS
(in thousands, except share and per share amounts)
September 30, 2003 December 31, 2002
------------------ -----------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents .......................................................... $ 11,510 $ 12,151
Accounts receivable ................................................................ 1,120 856
Inventory .......................................................................... 1,028 677
Prepaid expenses and other current assets .......................................... 216 87
-------- --------
Total current assets ........................................................... 13,874 13,771
Deposits ............................................................................... 34 34
Fixed assets ........................................................................... 158 274
-------- --------
TOTAL ASSETS ................................................................... $ 14,066 $ 14,079
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ................................................................... $ 951 $ 967
Accrued expenses ................................................................... 1,797 3,222
Line of credit ..................................................................... 1,500 4,444
-------- --------
Total current liabilities ................................................ 4,248 8,633
Convertible subordinated notes (face value $13,000) .................................... -- 11,657
-------- --------
Total liabilities .............................................................. 4,248 20,290
Shareholders' equity (deficit):
Preferred stock, $.0001 par value; authorized 5,000,000
shares; none issued and outstanding ............................................ -- --
Common stock, $.0001 par value; authorized 75,000,000
shares; issued 48,451,266 and 37,812,458 shares,respectively................... 5 4
Less common stock held in treasury (16,515 shares) ................................. (37) (37)
Additional paid-in capital ......................................................... 82,425 64,222
Deferred compensation .............................................................. (48) --
Accumulated deficit ................................................................ (72,527) (70,400)
-------- --------
Total shareholders' equity (deficit) ........................................... 9,818 (6,211)
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) ........................... $ 14,066 $ 14,079
======== ========
See accompanying notes to unaudited financial statements.
3
INKINE PHARMACEUTICAL COMPANY, INC.
STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
Three-Months Ended September 30, Nine-Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Product revenue ........................................ $ 4,333 $ 2,222 $ 10,208 $ 5,143
Other revenue .......................................... -- -- 49 63
-------- -------- -------- --------
REVENUE ............................................. 4,333 2,222 10,257 5,206
Cost of goods sold ..................................... (604) (445) (1,465) (1,234)
-------- -------- -------- --------
GROSS PROFIT ........................................ 3,729 1,777 8,792 3,972
Costs and expenses:
Research and development ............................ 464 459 1,253 2,931
Sales and marketing ................................. 1,443 1,698 4,338 4,078
General and administrative .......................... 634 541 1,882 1,711
-------- -------- -------- --------
OPERATING EXPENSES ................................. 2,541 2,698 7,473 8,720
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS ........................ 1,188 (921) 1,319 (4,748)
Interest income ........................................ 9 28 39 92
Interest expense ....................................... (19) (272) (663) (773)
Debt conversion inducement, non-cash
accretion and non-cash premium ....................... -- (312) (2,822) (380)
-------- -------- -------- --------
NET INCOME (LOSS) ................................... $ 1,178 $ (1,477) $ (2,127) $ (5,809)
======== ======== ======== ========
EARNINGS (LOSS) PER SHARE:
BASIC ............................................. $ 0.03 $ (0.04) $ (0.05) $ (0.17)
======== ======== ======== ========
DILUTED ........................................... $ 0.02 $ (0.04) $ (0.05) $ (0.17)
======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC ............................................. 46,703 34,948 40,966 34,895
DILUTED ........................................... 51,170 34,948 40,966 34,895
See accompanying notes to unaudited financial statements.
4
INKINE PHARMACEUTICAL COMPANY, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Nine-Months Ended September 30,
-------------------------------
2003 2002
-------- --------
Operating activities:
Net loss ................................................................................. $ (2,127) $ (5,809)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation ........................................................................... 118 125
Amortization of deferred compensation .................................................. 83 57
Stock issued for interest earned on convertible notes .................................. -- 275
Non-cash accretion and premium ......................................................... 2,047 102
Changes in operating assets and liabilities:
(Increase) in accounts receivable ...................................................... (264) (170)
(Increase) in inventory ................................................................ (351) (388)
(Increase) decrease in prepaid expenses and other assets ............................... (129) 514
Increase (decrease) in accounts payable and accrued expenses ........................... (1,441) 412
-------- --------
NET CASH USED IN OPERATING ACTIVITIES ...................................................... (2,064) (4,882)
Investing activities:
Capital expenditures ................................................................... (2) (41)
Proceeds from maturities and sales of investments ...................................... -- 4,787
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ........................................ (2) 4,746
Financing activities:
Proceeds from exercise of options and warrants - net of expenses ....................... 4,369 191
Borrowings, net of repayments on line of credit ........................................ (2,944) 8
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES .................................................. 1,425 199
-------- --------
Net increase (decrease) in cash and cash equivalents ....................................... (641) 63
Cash and cash equivalents - beginning of period ............................................ 12,151 7,379
-------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD .................................................. $ 11,510 $ 7,442
======== ========
See accompanying notes to unaudited financial statements.
5
INKINE PHARMACEUTICAL COMPANY, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(unaudited)
(in thousands)
Total
Common Stock Additional Treasury Stock Shareholder's
----------------- Paid-In Deferred -------------- Accumulated Equity
Shares Amount Capital Compensation Shares Amount Deficit (Deficit)
------ -------- -------- ------------ ------ ------ ------- --------
BALANCE - DECEMBER 31, 2002 .......... 37,796 $ 4 $ 64,222 $ -- (17) $ (37) $ (70,400) $ (6,211)
Common stock issued pursuant to
conversion of convertible notes ... 7,027 1 12,999 -- -- -- -- 13,000
Value of consultant options granted .. -- -- 131 (131) -- -- -- --
Proceeds from options and warrants ... 3,612 -- 4,369 -- -- -- -- 4,369
Amortization of deferred
compensation ...................... -- -- -- 83 -- -- -- 83
Unrealized debt premium on
converted notes ................... -- -- 704 -- -- -- -- 704
Net loss ............................. -- -- -- -- -- -- (2,127) (2,127)
------ -------- -------- -------- ---- ------- ------- --------
BALANCE - SEPTEMBER 30, 2003.......... 48,435 $ 5 $ 82,425 $ (48) (17) $ (37) (72,527) $ 9,818
====== ======== ======== ======== ==== ======= ======= ========
The accompanying notes are an integral part of these financial statements.
6
INKINE PHARMACEUTICAL COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
1. ORGANIZATION AND BUSINESS ACTIVITIES
InKine Pharmaceutical Company, Inc. (the "Company") is a
biopharmaceutical company that was incorporated in May 1993. The Company's
portfolio of product and product candidates includes Visicol(R), a
bowel-cleansing agent currently marketed for use prior to colonoscopy. The
Company's portfolio also includes IB-Stat(R), an antispasmodic product currently
marketed to gastroenterologists and others for use as an immediately available
acute care product for a variety of indications. The Company is also developing
Colirest(TM), a steroid molecule for the treatment of inflammatory bowel disease
("IBD"). The Company is focused on the diagnosis and treatment of
gastrointestinal disorders and has the additional strategy of acquiring drug
candidates that are close to commercialization.
2. BASIS OF PRESENTATION
The accompanying financial statements are unaudited and have been
prepared by the Company in accordance with accounting principles generally
accepted in the United States of America.
Certain information and footnote disclosures normally included in the
Company's audited annual financial statements have been condensed or omitted in
the Company's interim financial statements. In the opinion of management, the
interim financial statements reflect all adjustments (consisting of normal
recurring adjustments) necessary for a fair representation of the results for
the interim periods presented.
The results of operations for the interim periods may not necessarily be
indicative of the results of operations expected for the full year. These
interim financial statements should be read in conjunction with the audited
financial statements for the year ended December 31, 2002, which are contained
in the Company's most recent Annual Report on Form 10-K.
3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 2002, the Emerging Issues Task Force ("EITF") finalized
its consensus on EITF Issue 00-21, "Revenue Arrangements with Multiple
Deliverables", which provides guidance on the timing and method of revenue
recognition for sales arrangements that include the delivery of more than one
product or service. EITF Issue 00-21 is effective for arrangements entered into
after June 30, 2003 and can be adopted prospectively. EITF Issue 00-21 has been
adopted and did not impact the Company's financial position, results of
operations or cash flows.
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standard No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
amends Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and Statement of Financial
Accounting Standard No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities," and is related to certain derivatives embedded in
other contracts and for hedging activities under Statement of Financial
Accounting Standard No. 133. SFAS No. 149 is effective for contracts entered
into or modified after June 30, 2003 and to certain preexisting contracts. SFAS
No. 149 is to be applied prospectively. SFAS No. 149 currently has not had an
impact on the Company's financial position, results of operations or cash flows.
In May 2003, the FASB issued Statement of Financial Accounting
Standard No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity" ("SFAS No. 150"). SFAS No. 150
establishes standards for how companies classify and measure, in their statement
of financial position, certain financial instruments with characteristics of
both liabilities and equities. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after July 1,
7
2003. SFAS No. 150 currently has not had an impact on the Company's financial
position, results of operations or cash flows.
4. USE OF ESTIMATES
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date(s) of the financial statements and the reported amounts
of revenues and expenses during the reporting period(s). Actual results could
differ from those estimates.
5. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to
current period presentation.
6. EARNINGS PER SHARE
The following is a reconciliation of the denominator used in basic and
diluted earnings (loss) per share (EPS) computations for the three and
nine-months ending September 30, 2003 and 2002:
Three-Months Ended Nine-Months Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
-------- -------- -------- --------
Numerator:
Net income (loss) ........................................... $ 1,178 $ (1,477) $ (2,127) $ (5,809)
======== ======== ======== ========
Denominator:
Weighted-average shares outstanding used for
basic earnings (loss) per share .......................... 46,703 34,948 40,966 34,895
Effect of dilutive securities:
Stock options and warrants ............................... 4,467 -- -- --
-------- -------- -------- --------
Weighted-average shares and dilutive stock
options and warrants used for diluted
earnings (loss) per share ................................ 51,170 34,948 40,966 34,895
======== ======== ======== ========
Stock options and warrants to purchase 1,089,000 shares of common stock
between $3.94 and $8.44 per share were outstanding in the third quarter of 2003,
but were excluded from the computation of diluted earnings (loss) per share
because such stock options and warrants were anti-dilutive. All outstanding
stock options and warrants to purchase shares of common stock during the
nine-months ending September 30, 2003 and the three and nine-months ending
September 30, 2002 were excluded from the computation of diluted earnings (loss)
per share because such options were anti-dilutive since the Company we had net
losses in the respective periods.
7. ALLOWANCE FOR SALES RETURNS
The Company maintains an allowance for potential future sales returns.
This allowance is evaluated on a quarterly basis based on product
characteristics, wholesaler stocking patterns, and prescription trends. At
September 30, 2003, the Company had a $229,000 returns allowance that was
included in accrued expenses on the balance sheet. The following is an analysis
of the sales returns allowance for the nine-months ended September 30, 2003:
Allowance at December 31, 2002 $149,000
Provision for estimated sales returns 215,000
Actual sales returns (135,000)
--------
Allowance at September 30, 2003 $229,000
========
8
8. DEFERRED REVENUE
For IB-Stat(R), the Company recognizes revenue based on prescription
data. This practice will continue until such time as data becomes available that
indicates that the product has achieved adequate market acceptance and that
future product returns can be reasonably estimated. As a result, the Company has
recorded deferred revenue of $496,000 and $524,000 that were included in accrued
expenses on the balance sheet as of September 30, 2003 and December 31, 2002,
respectively.
9. LINE OF CREDIT
The Company maintains a $7,500,000 line of credit with a financial
institution, which expires January 31, 2004. Monthly interest-only payments are
made at a variable per annum rate of 2.20% plus the 30-day Dealer Commercial
Paper Rate. Amounts outstanding under this credit line were $1,500,000 and
$4,444,000 at September 30, 2003 and December 31, 2002, respectively. Average
interest rates for the nine-month periods ended September 30, 2003 and 2002 were
3.35% and 3.95%, respectively.
10. CONVERTIBLE SUBORDINATED NOTES
In December 2002, the Company completed a $13,000,000 private placement
of June 2005 convertible notes together with 2,459,460 warrants. Proceeds from
the placement were used to redeem the Company's then outstanding June 2003
convertible notes. The June 2005 notes were convertible into the Company's
common stock at a conversion price of $1.85 per share and the warrants, which
are not exercisable until December 2003, also have an exercise price of $1.85
per share. On June 30, 2003, the then holders of the June 2005 convertible notes
executed a Conversion Agreement to convert all of the outstanding notes into the
Company's common stock. The Company paid a fee of $750,000 to induce the
execution of the conversion agreement. In addition to the inducement fee, the
Company incurred $1,605,000 in non-cash charges associated with the previously
outstanding convertible notes. The Company also reclassified to additional
paid-in capital $704,000 in charges that were taken in prior periods related to
the amortization of the maturity premium associated with the previously
outstanding convertible notes.
11. STOCK-BASED COMPENSATION
The Company applies the intrinsic method of accounting for all
stock-based employee compensation in accordance with APB No. 25 "Accounting for
Stock Issued to Employees," and related interpretations. The Company records
deferred compensation for option grants to employees for the amount, if any, by
which the market price per share exceeds the exercise price per share. The
Company generally grants its derivative securities at market on the grant date.
The Company has elected to adopt the disclosure only provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123"), as amended
by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure (SFAS No. 148")." The following table illustrates the effect on the
Company's net income (loss) and basic and diluted income (loss) per share if the
Company had recorded compensation expense for the estimated fair value of its
stock-based employee compensation, consistent with SFAS No. 123:
Three-Months Ended Nine-Months Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
---------- --------- ----------- ----------
Net income (loss) - as reported .............................. $ 1,178 $ (1,477) $ (2,127) $ (5,809)
Deduct: Total stock based employee compensation ............... (893) (896) (2,476) (2,479)
---------- --------- ----------- ----------
Net income (loss) - pro forma ................................ $ 285 $ (2,373) $ (4,603) $ (8,288)
========== ========= =========== ==========
Earnings (loss) per share:
Basic - as reported .......................................... $ 0.03 $ (0.04) $ (0.05) $ (0.17)
========== ========= =========== ==========
Basic - pro forma ............................................ $ 0.01 $ (0.07) $ (0.11) $ (0.24)
========== ========= =========== ==========
Diluted - as reported ........................................ $ 0.02 $ (0.04) $ (0.05) (0.17)
========== ========= =========== ==========
Diluted - pro forma .......................................... $ 0.01 $ (0.07) $ (0.11) $ (0.24)
========== ========= =========== ==========
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to historical facts or statements of current condition, this
report contains some forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
provide our current expectations or forecasts of future events. These may
include statements regarding anticipated scientific progress on our research
programs, development of potential pharmaceutical products, interpretation of
clinical results, prospects for regulatory approval, manufacturing development
and capabilities, market prospects for our products, sales and earnings
projections, and other statements regarding matters that are not historical
facts. You may identify some of these forward-looking statements by the use of
words in the statements such as "anticipate," "estimate," "expect," "project,"
"intend," "plan," "believe" or other words and terms of similar meaning. Our
performance and financial results could differ materially from those reflected
in these forward-looking statements due to general financial, economic,
regulatory and political conditions affecting the biotechnology and
pharmaceutical industries as well as more specific risks and uncertainties such
as those listed below under "Certain Risks Related to Our Business." Given these
risks and uncertainties, any or all of these forward-looking statements may
prove to be incorrect. Therefore, you should not rely on any such factors or
forward-looking statements. Furthermore, we do not intend (and we are not
obligated) to update publicly any forward-looking statements.
GENERAL
We are a biopharmaceutical company focused on the diagnosis and
treatment of gastrointestinal disorders, including: colon cancer, irritable
bowel syndrome, or IBS, and inflammatory bowel disease, or IBD. Our development
strategy has been to acquire late-stage drug candidates with short time lines to
commercialization. We currently market and sell two pharmaceutical products,
Visicol(R) and IB-Stat(R). In addition to our marketed products, we have two
product candidates, Colirest(TM) and Hematrol(TM).
The following table outlines our product pipeline from which we intend
to focus the majority of our research, development, marketing and sales efforts
at least through calendar year 2003 and also sets forth the current development
status of our products and product candidates in each targeted therapeutic
indication:
PRODUCT THERAPEUTIC INDICATIONS DEVELOPMENT STATUS
- ----------------------- ------------------------------------------- -------------------------------
Visicol(R) o Cleansing of colon prior to FDA approved; marketed product
colonoscopy FDA approved SNDA for new
formulation
- ----------------------- ------------------------------------------- -------------------------------
o Constipation Post marketing study completed
Phase IV ongoing
- ----------------------- ------------------------------------------- -------------------------------
o Pre-operative colonic surgical Phase IV will commence in 2003
procedures
- ----------------------- ------------------------------------------- -------------------------------
IB-Stat(R) o Acute antispasmodic product for a Marketed product
variety of indications, including
spasm of the colon and the
diagnostic procedure ERCP
- ----------------------- ------------------------------------------- -------------------------------
Colirest(TM) o Crohn's disease and ulcerative Phase II Crohn's disease
colitis, collectively IBD complete
Phase II ulcerative colitis
complete
Phase IIb Crohn's disease
ongoing
- ----------------------- ------------------------------------------- -------------------------------
Hematrol(TM) o Idiopathic Thrombocytopenic Phase II complete
Purpura, or ITP Phase III placed on hold by
InKine
- ----------------------- ------------------------------------------- -------------------------------
We began generating sales revenue in January 2001 with the commercial
introduction of our lead product, Visicol(R), and during the quarter ended June
30, 2002, we launched IB-Stat(R), our second commercial product. Operations were
previously funded primarily from the proceeds of public and private placements
of securities. We have incurred net losses in each year since our inception.
Prospectively, we expect to be profitable for the remainder of the calendar year
2003. At September 30, 2003, our accumulated deficit was approximately
$72,527,000.
10
CRITICAL ACCOUNTING POLICIES AND PRACTICES
In "Cautionary Advice Regarding Disclosures about Critical Accounting
Policies" (SEC Release No. 33-8040, December 12, 2001), the SEC advised
companies to provide more information about a company's most critical accounting
policies, i.e., the specific accounting policies that have the most impact on a
company's results and require the most difficult, subjective or complex
judgments by management. We have identified the following accounting policies
that may constitute "critical accounting policies," under the guidance provided
by the release.
o Revenue Recognition. Revenue from sales of Visicol(R)is recognized when,
pursuant to Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements," all four of the following criteria are met: (i) we
have persuasive evidence that an arrangement exists, (ii) the price is
fixed and determinable, (iii) title has passed and (iv) collection is
reasonably assured. Product demand from our customers during a given period
may not correlate with prescription demand for the product in that period.
As a result, we periodically evaluate inventory positions in the
distribution channel. If we believe these levels are too high based on
prescription demand, we may not accept purchase orders from or may not ship
additional product to our customers until these levels are reduced.
Provisions for sales discounts, and estimates for chargebacks, rebates, and
product returns are established as a reduction of product sales revenues at
the time such revenues are recognized. We establish these revenue
reductions as our best estimate at the time of sale based on historical
experience, adjusted to reflect known changes in the factors that impact
such reserves. For IB-Stat(R), we recognize revenue based on prescription
data, net of estimated cash discounts. This practice will continue until
such time as data becomes available that indicates that the product has
achieved adequate market acceptance and that future product returns can be
reasonably estimated.
o Stock based compensation. It is our policy, which is consistent with most
public company policies, to apply Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees", to account for our stock
option plans rather than Statement of Financial Accounting Standards No.
123, "Accounting for Stock Based Compensation." Had we applied SFAS No.
123, our net income for the three-months ended September 30, 2003 would
have been less and our net loss for the three-months ended September 30,
2002 and nine-months ended September 30, 2003 and 2002 would have been
greater (see financial statement note 11).
o Product returns. It is our policy to estimate and record an allowance for
future product returns in connection with our sales of Visicol(R). We have
applied a return rate to our unit sales to provide this allowance under our
product return policy. This return rate is calculated based on actual
return experience and our monitoring of distribution channels taking into
account the expiration dating of Visicol(R). The product return rate is
periodically updated to reflect actual experience and changes to other
factors affecting future product returns.
o Deferred taxes. In assessing the reliability of deferred tax assets,
management considers whether it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The ultimate
realization of the deferred tax assets is dependent upon the generation of
future taxable income during the period in which those temporary
differences become deductible. Management considers the scheduled reversal
of deferred tax liabilities, projected future taxable income and
projections for future taxable income over the periods in which the
deferred tax asset items are deductible. At September 30, 2003, management
has concluded that a full valuation allowance is necessary for deferred tax
assets give that we have only been profitable for one quarter.
RESULTS OF OPERATIONS
We generated net income of $1,178,000 or $0.03 per basic share ($0.02
per diluted share) and a net loss of ($2,127,000) or ($0.05) per basic and
diluted share for the three and nine-month periods ended September 30, 2003,
compared to losses of ($1,477,000) and ($5,809,000) or ($0.04) and ($0.17) per
basic and diluted share for the same periods a year ago. The loss for the
nine-month period ending September 30, 2003 included a one-time $2,822,000
11
non-cash charge related to our previously outstanding June 2005 convertible
notes. Similar charges of $312,000 and $380,000 were incurred during the three
and nine-month periods ended September 30, 2002 for our previously outstanding
June 2003 convertible notes. These charges appear on our income statement below
income (loss) from operations as a separate line item described as debt
conversion inducement, non-cash accretion and non-cash premium. Prospectively,
we expect to have net income for the last quarter of 2003 as a result of
continued demand for Visicol(R) and decreased expenses due to the elimination of
our convertible notes.
Product revenue was $4,333,000 and $10,208,000 for the three and
nine-month periods ended September 30, 2003, compared to $2,222,000 and
$5,143,000 for the same periods a year ago. Prescription levels continue to
increase, resulting in increased orders from wholesalers and large retail
chains. We believe the increased prescription levels have been fueled by
increased market awareness and acceptance of Visicol(R). Approximately 95,000
prescriptions were filled for Visicol(R) during the third quarter of 2003 as
compared to approximately 89,000, 80,000, 69,000, and 61,000 during the four
preceding quarters. We anticipate that product revenues for the 2003-year will
be in the range of $13,000,000 to $14,000,000.
Our gross profit was $3,729,000 and $8,792,000 for the three and
nine-month periods ended September 30, 2003, compared to $1,777,000 and
$3,972,000 for the same periods a year ago. Gross profit as a percentage of
sales for product revenue was 86% for both the three and nine-month periods
ended September 30, 2003, compared to 80% and 76% for the same periods a year
ago. Increases in gross profit and gross profit as a percent of sales for
product revenue were the result of increased order volume, increased sales price
per unit, decreased manufacturing cost per unit, and decreased distribution
costs for Visicol(R). We expect that gross profit and gross profit as a percent
of sales for product revenue will increase as our sales volume increases,
allowing us to spread further our fixed cost of goods and the opportunity to
more strongly negotiate our future agreements with suppliers and manufacturers.
We incurred research and development expenses of $464,000 and $1,253,000
for the three and nine-month periods ended September 30, 2003, compared to
$459,000 and $2,931,000 for the same periods a year ago. The decrease for the
nine-month period ending September 30, 2003 was the result of internalizing the
management of previously outsourced functions related to the ongoing
Colirest(TM) clinical trial. We expect that research and development costs will
be in the range of $1,500,000 and $1,700,000 for the 2003-year.
Sales and marketing costs of $1,443,000 and $4,338,000 were incurred for
the three and nine-months ended September 30, 2003, compared to $1,698,000 and
$4,078,000 for the same periods a year ago. Sales and marketing costs included
expenses associated with our sales force, which currently stands at 36 sales
representatives and three district managers, along with marketing campaigns
related to Visicol(R) and IB-Stat(R). We expect that sales and marketing costs
will be in the range of $5,400,000 and $6,000,000 for the 2003-year.
General and administrative expenses were $634,000 and $1,882,000 for the
three and nine-months ended September 30, 2003, compared to $541,000 and
$1,711,000 for the same periods a year ago. We expect that general and
administrative costs will be in the range of $2,300,000 and $2,500,000 for the
2003-year.
Decreased interest income was primarily the result of significantly
reduced interest rates for the three and nine-months ended September 30, 2003
compared to the same period a year ago. Decreased interest expense compared to
the same period a year ago was the result of the elimination of our convertible
notes and decreased balance and interest rate on our line of credit.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003, we had cash and cash equivalents of $11,510,000. The
cash and cash equivalents balance at September 30, 2003 included net proceeds
from third quarter warrant and option exercises of $2,646,000.
We believe that our financial resources are adequate for our operations for
at least the next 12 months and, if we meet our sales objectives, we do not
anticipate requiring additional capital to fund our operations. Our line of
credit is due to expire in January 2004. While it is our intention to renew the
credit facility for an additional one-year term, we believe that the combination
of our current cash balance along with anticipated cash flows from operations
would be adequate to pay in full our outstanding borrowings on this credit line
if it were not renewed in January 2004.
Our future short and long-term capital requirements will depend on numerous
factors, including marketplace acceptance of our products. In addition to
marketplace acceptance of our products, other factors which cannot be quantified
12
and many of which we cannot control will also impact our short and long-term
capital requirements, including: continued commercial costs of Visicol(R),
continued progress in our research and development activities, progress with
pre-clinical studies and clinical trials, prosecuting and enforcing patent
claims, technological and market developments, the ability to establish product
development arrangements, the cost of manufacturing development, effective
marketing activities and arrangements, and licensing or acquisition activity.
We are currently conducting a clinical trial of Colirest(TM) in Crohn's
disease, continuing to study the use of Visicol(R) for constipation,
anticipating commencing a study for the use of Visicol(R) in pre-operative
colonic surgical procedures, and continuing to market and sell Visicol(R) and
IB-Stat(R) to distributors and drug store chains. During 2003, we expect to
spend up to $300,000 on the Visicol(R) studies and Visicol(R) product
development, $500,000 on the Colirest(TM) study, and $6,000,000 on Visicol(R)
sales and marketing costs. These activities will be funded by our current cash
balance and future product sales. If product sales fall short of current
expectations or other factors negatively impact our cash balance, we may seek to
obtain additional funds through equity or debt financing, collaborative or other
arrangements with corporate partners, and from other sources. No assurance can
be given that necessary additional financing will be available on terms
acceptable to us, if at all. If adequate additional funds are not available when
required, we may have to delay, scale-back or eliminate certain of our research,
drug discovery or development activities or certain other aspects of our
operations and our business will be materially and adversely affected.
We anticipate being profitable for the fourth quarter. To achieve operating
profits, we, alone or with others, must successfully market and sell our
products. In addition, revenues from product sales must be greater than the sum
of cost of goods sold, research and development costs, sales and marketing costs
and general and administrative costs. While we expect to realize net income for
the remainder of 2003, we cannot provide any assurance that we will be able to
reach and/or sustain any level of profitability.
RESEARCH AND DEVELOPMENT PROGRAMS
We currently have two significant research and development projects
relating to: (i) Visicol(R)and (ii) Colirest(TM).
Visicol(R). We have focused our Visicol(R) research and development on
cleansing of the colon prior to colonoscopy and are presently marketing
Visicol(R) for that indication. In addition, we expect to develop Visicol(R) for
cleansing the colon prior to pre-operative colonic surgical procedures and for
treating constipation. The current status of these projects are as follows: (i)
for cleansing of the colon prior to colonoscopy, the FDA has approved both our
NDA as well as our SNDA; (ii) for cleansing the colon prior to pre-operative
colonic surgical procedures we intend to commence a Phase IV study; and (iii)
for treating constipation, we completed a post marketing study and commenced a
Phase IV study during the second quarter of 2003. As of September 30, 2003, we
have incurred cumulative total costs of approximately $11,537,000 in connection
with our Visicol(R) research and development. During the quarter ended September
30, 2003, we incurred an aggregate of $464,000 in research and development
expenses, approximately $90,000 of which was attributable to Visicol(R).
Colirest(TM). We are developing Colirest(TM) for treatment of IBD and have
completed a Phase II study in Crohn's disease patients and a Phase II study in
ulcerative colitis patients. In June 2001, we began a Colirest(TM) clinical
Phase IIb study of Crohn's disease patients. We anticipate an interim analysis
during 2004. As of September 30, 2003, we have incurred cumulative total costs
of approximately $6,687,000 in connection with the development of Colirest(TM)
and related compounds. During the quarter ended September 30, 2003, we incurred
an aggregate of $464,000 in research and development expenses, approximately
$71,000 of which was attributable to Colirest(TM).
Indirect Costs. In addition to the direct costs related to the development
of our technologies, we incurred indirect non-technology specific overhead
costs. These expenses included the salaries and administrative costs of managing
our research and development projects, which for the quarter ended September 30,
2003 equaled approximately $303,000.
13
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 2002, the Emerging Issues Task Force ("EITF") finalized
its consensus on EITF Issue 00-21, "Revenue Arrangements with Multiple
Deliverables", which provides guidance or the timing and method of revenue
recognition for sales arrangements that include the delivery of more than one
product or service. EITF Issue 00-21 is effective for arrangements entered into
in fiscal periods beginning after June 30, 2003 and can be adopted
prospectively. EITF Issue 00-21 has been adopted and did not impact our
financial position, results of operations or cash flows.
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standard No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
amends Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and Statement of Financial
Accounting Standard No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities," and is related to certain derivatives embedded in
other contracts and for hedging activities under Statement of Financial
Accounting Standard No. 133. SFAS No. 149 is effective for contracts entered
into or modified after June 30, 2003 and to certain preexisting contracts. SFAS
No. 149 is to be applied prospectively. SFAS No. 149 currently has not had an
impact on our financial position, results of operations or cash flows.
In May 2003, the FASB issued Statement of Financial Accounting
Standard No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity" ("SFAS No. 150"). SFAS No. 150
establishes standards for how companies classify and measure, in their statement
of financial position, certain financial instruments with characteristics of
both liabilities and equities. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after July 1,
2003. SFAS No. 150 currently has not had an impact on our financial position,
results of operations or cash flows.
CERTAIN RISKS RELATED TO OUR BUSINESS
Risks Related To Our Operations
- -------------------------------
We have generated significant losses to date. If we incur substantial losses in
the future, then the value of our common stock is likely to be reduced. Also, we
may never maintain a profitable level of operations.
Our first sale of Visicol(R) occurred in January 2001 and our first
shipment of IB-Stat(R) occurred in June 2002. We have a significant accumulated
deficit and have incurred losses in each year since our inception on July 1,
1993. Visicol(R), IB-Stat(R) and our product candidates are in various stages of
marketing or development and require significant research, development and
testing. If our sales, marketing, and research spending in the foreseeable
future are greater than product sales, we may never conduct our operations at a
profit. Our common stock is likely to decrease in value if we fail to generate
profits or if the market believes that we are unable to generate profits.
We have granted or committed to grant shares to a founding scientist and
others when we achieve agreed upon product development goals for Colirest(TM)
and Hematrol(TM). These goals relate to our filing applications with the FDA and
achieving agreed upon sales targets. As a result, our potential earnings per
share will decrease because of the necessary accounting treatment of these
shares and options.
If we do not receive adequate reimbursement from the government, managed care
organizations and private insurance plans, then some patients may be unable or
unwilling to purchase our products and we will achieve less revenue from product
sales.
Successful sales of our products in the United States and other
countries depend on the availability of adequate reimbursement from the
government, managed care organizations and private insurance plans.
Pharmaceutical companies often rely on reimbursement from third parties as the
basis for the sales of their products. In the pharmaceutical industry, unlike
other consumer product industries, insurance companies, including managed care
organizations, often pay drug stores directly for pharmaceutical products. In
fact, pharmaceutical companies make a majority of their sales to covered
individuals of health insurance companies and not to consumers. These
14
organizations provide for reimbursement only after considering a number of
factors, including product features such as safety, medical necessity, cost and
the experimental nature of the product. We will spend significant amounts of
time and other resources to obtain reimbursement for our products. The
organizations that provide reimbursement routinely limit reimbursement and
attempt to exert significant pressure on medical suppliers to lower their
prices. Visicol(R) is premium priced compared to its competitors and we have not
specifically contracted with any third party to date to give rebates for its
use. We do not know what impact, if any at all, this will have on the coverage
of Visicol(R) by these third party payers.
If Visicol(R) and IB-Stat(R) is not accepted by doctors, hospitals, insurers or
patients, than we may not be profitable.
If Visicol(R) and IB-Stat(R) fail to achieve and maintain market
acceptance, our ability to become profitable in the future will be adversely
affected. We believe that market acceptance will depend on our ability to
provide acceptable evidence of safety, efficacy and cost effectiveness. In
addition, market acceptance depends on the effectiveness of our marketing
strategy and the availability of reimbursement for such products.
If we do not have adequate insurance for product liability claims, then we may
be subject to significant expenses relating to these claims.
We are subject to significant product liability risks relating to the
sale, manufacturing and further testing of the products on the market and the
ones we are developing. These risks include:
o our products could cause undesirable side effects or injury when sold;
o our product candidates could cause undesirable side effects or injury
during clinical trials; and
o we may agree to reimburse others that incur liability relating to our
product and product candidates.
We currently maintain insurance for product liability claims in the amount
of $10,000,000 per occurrence and $10,000,000 in the aggregate. We have no way
of knowing if these amounts will be adequate to cover any product liability
claims filed against us. If we do not or cannot maintain adequate insurance
coverage, we may incur a significant liability if a product liability claim
arises.
If we do not develop and maintain relationships with manufacturers, then we may
not successfully manufacture and sell our products.
We do not possess the capabilities, resources or facilities to
manufacture Visicol(R), IB-Stat(R) and any of our product candidates. We must
contract with manufacturers to produce Visicol(R), IB-Stat(R) and our product
candidates according to government regulations. Our future development and
delivery of our marketed products and our product candidates depends on the
timely, profitable and competitive performance of these manufacturers. A limited
number of manufacturers exist which are capable of manufacturing our marketed
products and our product candidates. We may fail to contract with the necessary
manufacturers or we may contract with manufacturers on terms that may not be
entirely acceptable to us.
We have contracted with Mallinckrodt, Inc. to supply us with active
pharmaceutical ingredients for Visicol(R). A significant portion of the
Visicol(R) tablet is monobasic and dibasic sodium phosphate. Mallinckrodt has
agreed to supply these ingredients in a manner that meets FDA requirements. The
FDA has approved the manufacturing process for these active ingredients, but the
Drug Master File for the sodium phosphate is only for one location at
Mallinckrodt. If this location were to shut down for any reason, a delay in the
delivery of our active pharmaceutical ingredients would occur and could impact
future sales of Visicol(R). We are currently working towards submitting a Drug
Master File with the FDA for another Mallinckrodt facility in order to minimize
this risk.
We have contracted with Pharmaceutical Manufacturing Research Services,
Inc., a manufacturing development company, to supply commercial quantities of
Visicol(R), and Morton Grove Pharmaceutical, a generic drug manufacturer, to
supply IB-Stat(R) in a manner that meets FDA requirements. The FDA has approved
the manufacturing processes of Pharmaceutical Manufacturing Research Services
and Morton Grove. Pharmaceutical Manufacturing Research Services and Morton
Grove must maintain compliance with FDA standards regarding the manufacturing of
Visicol(R) and IB-Stat(R) at all times. The failure to maintain compliance with
15
FDA standards could result in the loss of "approved status" at Pharmaceutical
Manufacturing Research Services and Morton Grove. Any such loss would have a
significant negative impact on us since we do not have an approved secondary
manufacturer for Visicol(R) or IB-Stat(R). We are currently working with an
appropriate secondary manufacturer of Visicol(R), which has not yet been
approved by the FDA.
We have contracted with Cardinal Health Packaging Services to package
Visicol(R) in a manner that meets FDA requirements. The FDA has approved this
facility for the packaging of Visicol(R). In the event that Cardinal Health
Packaging Services were unable to package Visicol(R) for us, the FDA has also
approved Fisher Clinical Services, Inc. for packaging of Visicol(R). IB-Stat(R)
is packaged at Morton Grove, which has been approved by the FDA.
If the owners of technology licensed to us terminate our license agreements,
then these owners could prevent us from developing, manufacturing or selling the
product covered by such license.
We have acquired the worldwide exclusive right to market Visicol(R),
Colirest(TM) and Hematrol(TM) under various license agreements. Each of the
owners of the technology licensed to us may terminate the license prior to its
expiration date under certain circumstances, including our failure to comply
with commitments related to the development of the products specified in the
licenses. For example, some of our licensing agreements require us to spend
specific amounts for research and development of our products. If we do not
comply with the terms of these agreements, the owners of the licensed technology
could demand the return of all rights to the licensed technology, and force us
to cease developing, manufacturing or selling the products covered by that
license.
If we cannot develop and market our products as rapidly or cost-effectively as
our competitors, then we will not be able to conduct our operations at a profit.
We have products and product candidates that compete in four very
competitive segments of the pharmaceutical industry. These products and product
candidates include: (i) purgative agents for cleansing the colon, which include
Visicol(R); (ii) antispasmodics, which include IB-Stat(R); and receptor based
technologies which includes product candidates (iii) Colirest(TM) and (iv)
Hematrol(TM). We are likely to encounter significant competition with respect to
Visicol(R), IB-Stat(R) and our product candidates currently under development,
including, but not limited to, competition from: (a) Braintree Laboratories,
Inc., Schwarz Pharma Inc. and C.B. Fleet Company, Inc. with respect to
Visicol(R); (b) Schwarz Pharma Inc., Eli Lily and Company and Bedford
Laboratories with respect to IB-Stat(R); (c) AstraZeneca plc, Salix
Pharmaceuticals, IDEC Pharmaceuticals Corporation, Procter & Gamble
Pharmaceuticals, Solvay S.A., Centocor, Inc. (Johnson & Johnson) and Shire
Pharmaceuticals Group plc with respect to Colirest(TM); and (d) Immune Response
Corporation, Autoimmune, Inc. and Nabi Biopharmaceuticals with respect to
Hematrol(TM).
The financial strength of competitors is particularly important in the
pharmaceutical industry, where technological innovations occur rapidly. These
technological innovations can dramatically affect the price and effectiveness of
a product line and can render a competing product line obsolete. Our competitors
that have strong financial resources may develop competitive products that are
cheaper and more effective than our products. These competitive products may
render our products unmarketable or non-competitive. Even if our competitors do
not develop better and more cost effective products, they may manufacture and
market their products more successfully than us. Therefore, our competitors may
capture all or a large segment of our market, severely restricting our ability
to achieve a profitable level of product sales.
If we are unable to protect our intellectual property, then our competitors may
develop similar products that could render our products obsolete.
Our success depends, in part, on our ability to develop and maintain a
strong patent position for our products and technologies both in the United
States and other countries. As with most biotechnology and pharmaceutical
companies, our patent position is highly uncertain and involves complex legal
and factual questions. Without patent and other protections, other companies
could offer substantially identical products for sale without incurring the
sizeable development and testing costs that we have incurred. Our ability to
recoup these expenditures and realize profits upon sale of product could be
diminished.
16
Visicol(R), IB-Stat(R) and our product candidates are in various stages of
patent protection as summarized below.
In 1997, the U.S. Patent and Trademark Office issued a patent covering
the use of Visicol(R) as a colonic cleansing agent or as a laxative, and in
December 2000, the U.S. Patent and Trademark Office issued to us a patent for
numerous solid-dose colonic cleansing agents. Similar patents have been issued
in Canada and in Europe.
IB-Stat(R)is not patentable.
In April 2003, the U.S. Patent and Trademark Office granted a Notice of
Allowance for the patent covering the treatment IBD with Colirest(TM) and other
similar compounds.
Hematrol(TM) is not patentable for use in ITP. Instead of a patent, we
will receive protection based on the FDA designation of Orphan Drug Status for
ITP. Orphan Drug Status means the FDA has determined that the number of people
affected by the disease which the drug treats is less than 200,000, and that
having numerous companies compete for the market is unrealistic and likely to
harm, rather than help, prospective users of the product. Since we have received
this designation, we will have an exclusive right to sell Hematrol(TM) for ITP
for seven years after FDA approval if Hematrol(TM) is the first
medroxyprogesterone acetate product to be approved for this indication.
We have also obtained the rights to foreign patents, and intend to apply
for additional foreign patents. Competitors could challenge or develop around
the patents, or the scope of the patents may not be adequate to protect the
patented product from competitors. The commercial success of our products will
also depend upon our ability to make sure the products do not infringe on
patents issued to competitors. We have not conducted a search to determine if
there are any patents similar to those covering Visicol(R) and Colirest(TM).
Our employees or scientific consultants may develop inventions or
processes independently that may be related to our products. These employees or
consultants could claim ownership of these inventions or processes, and these
claims could succeed. We may need to enter into protracted and costly litigation
to enforce or determine the scope of our proprietary rights.
Government agencies and academic institutions have funded the
development of some of our patented technologies. Although we have acquired the
rights to use such technology, these agencies or institutions may have rights to
the technology or inventions, including rights to the royalty-free use, but not
sale, of the invention or technology for their own purposes.
Risks Relating To Financing Our Business
- ----------------------------------------
We may need additional capital in the future in order to continue our
operations.
We may need additional capital to further develop, manufacture and
market Visicol(R), IB-Stat(R) and our product candidates if the future revenues
from our marketed products fall short of current assumptions. Specifically, we
will need funds for the following:
o conducting additional studies of Visicol(R)to increase the utilization of
the product through product enhancements and through new therapeutic areas;
o acquiring additional products and product candidates for our portfolio;
o researching and developing our product candidates, including participating
in human clinical trials;
o seeking necessary approvals from the government;
o developing manufacturing capabilities; and
o funding our growth as a company.
We believe that our current capital resources will continue to fund our
operations for at least the next 12 months, and if we meet our sales objectives,
we will not require additional capital to fund our operations. The success of
Visicol(R) and IB-Stat(R) directly impacts our need for additional capital. Our
future capital requirements will depend on a variety of factors. For example, if
17
we experience continued progress in our research and development activities, or
if we determine that it is necessary to prosecute and enforce our patents, we
may require additional capital. In addition, our current and future marketing
activities will affect our future capital requirements. If we inaccurately
predict our future capital requirements, we may be unable to continue our
operations.
We regularly seek funding for our operations from a variety of sources,
including public and private securities offerings, loans and joint arrangements
with partners. We currently do not possess a commitment to obtain additional
funding, and we may never receive additional funding in the future. If we need
additional capital and we fail to obtain additional funding, we will delay,
scale back or eliminate our research and development activities or enter into
arrangements with others to develop and market certain product candidates that
we may otherwise have developed ourselves.
Risks Relating to Regulatory Matters
- ------------------------------------
If we do not maintain required approvals from the government, then we may not
successfully manufacture, market or sell our marketed products.
FDA manufacturing approval:
- --------------------------
The FDA requires pharmaceutical companies to include detailed
manufacturing information in a new drug application. The FDA has mandated that
all manufacturing facilities and processes comply with good manufacturing
practices, commonly known as GMP. GMP is a body of federal regulations and
guidelines that govern the manufacture of drugs for human use. For example, all
manufacturers must pass manufacturing plant inspections and provide records of
detailed manufacturing processes. Among other things, drug manufacturers must
demonstrate that:
o the drug product can be consistently manufactured at the same quality
standard;
o the drug product is stable over time; and
o the level of chemical impurities in the drug product is under a designated
level.
The FDA has inspected the manufacturing facilities for Visicol(R) and
IB-Stat(R). The FDA may still, however, prevent us from continuing to market
Visicol(R) or IB-Stat(R) if we:
o do not continue to consistently manufacture appropriate amounts of
Visicol(R) and IB-Stat(R)or
o cannot continue to repeat the manufacturing process used to manufacture the
validation batches of Visicol(R).
We currently have only one approved manufacturer of Visicol(R) and one
manufacturer for IB-Stat(R). We have, however, initiated the process to obtain a
qualified secondary manufacturer of Visicol(R).
FDA oversight after product approval:
- -------------------------------------
After the FDA approves a product, the FDA continues to regulate the
product. In particular, the FDA may require post-marketing testing and
surveillance to monitor the effects of our marketed products or may require drug
label changes, which could hinder the marketability of our marketed products. In
addition, the FDA may place conditions on our marketed products that could
restrict the sale or use of our products.
The FDA could prevent us from marketing IB-Stat(R):
- ---------------------------------------------------
IB-Stat(R) is the combination of an FDA approved generic drug
(hyoscyamine sulfate) and an FDA approved delivery system. Hyoscyamine sulfate
was a marketed product prior to 1962. The FDA allows products that were marketed
prior to 1962 to continue to be marketed without an approved NDA. There is no
guarantee that the FDA will continue to allow hyoscyamine sulfate or many other
pre-1962 marketed products to continue to be marketed. In addition, the FDA
could determine that hyoscyamine sulfate is unsafe or that additional data needs
to be submitted to the FDA in order to determine the drug's safety and efficacy.
The FDA could also determine that IB-Stat(R) is not similar enough to the
18
pre-1962 marketed hyoscyamine sulfate, and as a result cannot be marketed
without an FDA approved NDA.
If we do not obtain required approvals from the government, then we may not
successfully market or sell our product candidates.
The FDA requires multiple stages of tests, known as Phase I, II and III
clinical trials, on all pharmaceutical products. In addition, the FDA must
confirm that drug manufacturers comply with applicable federal regulations. The
process to obtain government approvals of a pharmaceutical product takes many
years and requires substantial resources.
The FDA may delay or halt the clinical development of our product
candidates at any stage, or may deny us approval to market a product. If the FDA
takes any of these adverse actions, we may delay or stop the development of a
product or may be unable to sell such product. We do not believe we are subject
to risks that are materially different than other pharmaceutical companies
seeking FDA approval. The process of obtaining FDA approval is expensive,
time-consuming and often filled with unexpected hurdles. Even if we receive
approval of a product candidate, the FDA may limit and restrict the drug's use
and may subject our products to continuous review. If we fail to comply with any
applicable regulatory requirement, the FDA could impose penalties on us,
including:
o warning letters;
o fines;
o withdrawal of regulatory approval;
o product recalls;
o operating restrictions; injunctions; and/or
o criminal prosecution.
Our product candidates are in various stages of development and in
various stages of the FDA approval process, as set forth below:
o Colirest(TM). We are developing Colirest(TM)as a compound for the treatment
of inflammatory bowel disease, commonly known as IBD. IBD is an autoimmune
disease that causes inflammation and ulceration of the bowel. IBD includes
both Crohn's disease and ulcerative colitis. In September 2000, we
announced positive results of our Phase II study on Crohn's disease and in
December 2000, we announced positive results of our Phase II study in
ulcerative colitis. We have reached an agreement with the FDA for the
advancement of Colirest(TM)to a Pivotal Phase IIb dose ranging study for
Crohn's disease. We are currently enrolling patients in this study.
o Hematrol(TM). We are developing Hematrol(TM) as a compound for the
treatment of ITP. ITP is an autoimmune disease that causes spontaneous
bleeding. Hematrol(TM) is currently on hold in Phase III clinical trials
for ITP.
We may never receive FDA approval for any of these products and without FDA
approval, we cannot market or sell these products.
Risks Related To Our Common Stock Outstanding
- ---------------------------------------------
If the holders of our outstanding options and warrants exercise such options and
warrants and subsequently sell the common stock issued through such exercise,
then the market price of the common stock may drop.
At September 30, 2003, we had approximately 8,697,000 options and
warrants outstanding. Options and warrants give the holder the right to purchase
shares of a company's stock in the future for a predetermined price which may or
may not be below the current market value of such company's stock at the time
the option or warrant is exercised. In addition, as of September 30, 2003, we
had an additional 1,039,000 options available for issuance pursuant to our
option plans. To date, option and warrant holders have exercised approximately
9,707,000 options and warrants in the aggregate at prices ranging from $.50 to
19
$5.56. The exercise of these outstanding warrants and options and the sale of
the related shares may cause our common stock price to drop.
If our common stock continues to be volatile and thinly traded, then our
shareholders may not be able to sell their shares when desired.
The market price of our common stock, similar to other public pharmaceutical
or biotechnology companies, has been volatile and may remain volatile for the
foreseeable future. Our shareholders may not sell their shares when they desire
because the stock price is highly volatile and the stock is not widely traded.
For example, the number of our shares theoretically available for sale in any
one day is approximately 48,435,000 shares and our average daily trading volume
for the twelve-month period ended September 30, 2003 has been approximately
148,000 shares. If our stock continues to trade thinly, our shareholders may not
be able to sell their shares when desired.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are exposed to market risk associated with changes in interest rates on
our line of credit and certain investments. We do not manage the risk of
fluctuations in interest rates associated with the line of credit, as it is a
short-term borrowing with a maturity date in 2004. The interest rate on our line
of credit has fluctuated from 3.11% to 3.57% over the past nine-months and the
outstanding balance on our line of credit at September 30, 2003 was $1,500,000.
Typically, a substantial portion of our assets are investment grade debt
instruments such as direct obligations of the U.S. Treasury, securities of
federal agencies which carry the direct or implied guarantee of the U.S.
government and bank certificates of deposit. The market value of such
investments fluctuates with current market interest rates. In general, as rates
increase, the market value of a debt instrument isexpected to decrease. The
opposite is also true. To minimize such market risk, we have in the past and, to
the extent possible, will continue in the future, to hold such debt instruments
to maturity at which time the debt instrument will be redeemed at its stated or
face value. Due to the short duration and nature of these instruments, we do not
believe that we have a material exposure to interest rate risk related to our
investment portfolio.
We do not anticipate any material changes in our primary market risk
exposures in 2003. We do not hold or issue any derivatives.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. We evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this quarterly report (the
"Evaluation Date"). Our disclosure controls and procedures are designed to
ensure that information required to be disclosed by us in the reports that are
filed or submitted under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. Based on our evaluation,
our Chief Executive Officer and Chief Financial Officer have concluded that
these controls and procedures are effective as of the Evaluation Date.
Changes in internal controls. There were no changes in our internal
control over financial reporting identified in connection with the evaluation of
such internal control over financial reporting that occurred during the period
covered by this report that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
31.1 Chief Executive Officer Certification pursuant to Rule
13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Chief Financial Officer Certification pursuant to Rule
13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Chief Executive Officer Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Chief Financial Officer Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
The following current report on Form 8-K was filed with the
Securities and Exchange Commission via EDGAR:
1. Form 8-K filed on August 7, 2003 with respect to the earnings
release for the quarter ended June 30, 2003. The earliest
event covered by this report occurred on August 5, 2003.
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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.
INKINE PHARMACEUTICAL
COMPANY, INC.
Date: October 31, 2003 By: /s/ Leonard S. Jacob, M.D., Ph.D.
---------------------------------
Leonard S. Jacob, M.D., Ph.D.
Chairman of the Board and
Chief Executive Officer
Date: October 31, 2003 By: /s/ Robert F. Apple
-------------------
Robert F. Apple
Chief Operating and Financial Officer,
(Authorized Officer and
Principal Financial Officer)
EXHIBITS INDEX
31.1 Chief Executive Officer Certification pursuant to Rule 13a-14(a) or
15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Chief Financial Officer Certification pursuant to Rule 13a-14(a) or
15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
22