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 June 30, 2004
Commission File No. 000-24972
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 August 5, 2004, the registrant had outstanding 48,713,111 shares of
common stock, par value $.0001 per share.
INKINE PHARMACEUTICAL COMPANY, INC.
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BALANCE SHEETS - as of June 30, 2004 (unaudited) and December 31, 2003..........................3
STATEMENTS OF OPERATIONS (unaudited) - for the Three and Six-Months
Ended June 30, 2004 and 2003....................................................................4
STATEMENTS OF CASH FLOWS (unaudited) - for the Six-Months Ended June 30, 2004 and 2003..........5
NOTES TO FINANCIAL STATEMENTS (unaudited).......................................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risks....................................22
Item 4. Controls and Procedures........................................................................22
PART II - OTHER INFORMATION......................................................................................22
Item 1. Legal Proceedings..............................................................................22
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities...............23
Item 4. Submission of Matters to a Vote of Security Holders............................................23
Item 6. Exhibits and Reports on Form 8-K...............................................................24
SIGNATURES.......................................................................................................25
EXHIBITS INDEX...................................................................................................26
2
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
INKINE PHARMACEUTICAL COMPANY, INC.
BALANCE SHEETS
(in thousands, except share and per share amounts)
June 30, 2004 December 31, 2003
------------- -------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents........................................ $ 11,154 $ 10,442
Accounts receivable.............................................. 1,752 1,170
Inventory........................................................ 1,503 780
Prepaid expenses and other current assets........................ 402 727
------------- ------------
Total current assets......................................... 14,811 13,119
Fixed assets.......................................................... 359 124
Deposits ............................................................. 57 54
------------- ------------
Total assets................................................. $ 15,227 $ 13,297
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 1,358 $ 805
Accrued expenses................................................. 1,965 1,863
------------ ------------
Total current liabilities............................... 3,323 2,668
Shareholders' equity:
Preferred stock, $0.0001 par value; authorized 5,000,000
shares; none issued and outstanding ......................... --- ---
Common stock, $0.0001 par value; authorized 75,000,000
shares; issued 48,729,626 shares............................. 5 5
Less common stock held in treasury (16,515 shares)............... (37) (37)
Additional paid-in capital....................................... 82,877 82,587
Deferred compensation............................................ (16) ---
Accumulated deficit.............................................. (70,925) (71,926)
------------- -------------
Total shareholders' equity .................................. 11,904 10,629
------------- -------------
Total liabilities and shareholders' equity................... $ 15,227 $ 13,297
============= =============
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 June 30, Six-Months Ended June 30,
--------------------------- -------------------------
2004 2003 2004 2003
------ ------ ------ ------
Product revenue.......................................... $4,891 $ 3,339 $9,241 $ 5,875
Other revenue............................................ 375 49 658 49
------ ------- ------ --------
Revenue............................................... 5,266 3,388 9,899 5,924
Cost of goods sold....................................... (652) (472) (1,143) (861)
------ ------- ------ --------
Gross profit.......................................... 4,614 2,916 8,756 5,063
Cost and expenses:
Research and development.............................. 1,036 448 1,958 789
Sales and marketing................................... 2,160 1,475 4,109 2,895
General and administrative............................ 692 735 1,477 1,248
Withdrawn public offering and litigation.............. (338) --- 229 ---
------ ------- ------ --------
Operating expenses.................................. 3,550 2,658 7,773 4,932
------ ------ ------ --------
Income from operations................................ 1,064 258 983 131
Interest income.......................................... 26 16 36 30
Interest expense......................................... (11) (293) (18) (644)
Debt conversion inducement, non-cash accretion and
non-cash premium...................................... --- (2,355) --- (2,822)
------ ------- ------ --------
Net income (loss)..................................... $1,079 $(2,374) $1,001 $ (3,305)
====== ======= ====== ========
Income (loss) per share- basic and diluted............ $ 0.02 $ (0.06) $ 0.02 $ (0.09)
====== ======= ====== ========
Weighted average shares outstanding:
Basic ............................................. 48,676 38,323 48,611 38,050
Diluted ........................................... 53,504 38,323 53,737 38,050
See accompanying notes to unaudited financial statements.
4
INKINE PHARMACEUTICAL COMPANY, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Six-Months Ended June 30,
-------------------------
2004 2003
------ ------
Operating activities:
Net income (loss) ................................................. $1,001 $(3,305)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation..................................................... 72 78
Amortization of deferred compensation............................ 16 35
Non-cash accretion and premium................................... --- 2,047
Changes in operating assets and liabilities:
(Increase) in accounts receivable................................ (582) (418)
(Increase) in inventory ......................................... (723) (295)
(Increase) decrease in prepaid expenses and other assets ........ 322 (318)
Increase (decrease) in accounts payable and accrued expenses .... 655 (785)
------- -------
Net cash provided by (used in) operating activities................... 761 (2,961)
Investing activities:
Capital expenditures............................................. (307) ---
------- -------
Net cash used in investing activities................................. (307) ---
Financing activities:
Proceeds from exercise of options and warrants - net of expenses 258 1,723
Borrowings, net of repayments on line of credit ................. --- (17)
------- -------
Net cash provided by financing activities ............................ 258 1,706
Net increase (decrease) in cash and cash equivalents ................. 712 (1,255)
Cash and cash equivalents - beginning of period ...................... 10,442 12,151
------- -------
Cash and cash equivalents - end of period ............................ $11,154 $10,896
======= =======
See accompanying notes to unaudited financial statements.
5
INKINE PHARMACEUTICAL COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
In this Quarterly Report, "InKine," "we," "us" and "our" refer to
InKine Pharmaceutical Company, Inc. and "Common Stock" refers to InKine's common
stock, par value $0.0001 per share.
1. Organization and Business Activities
We are a specialty pharmaceutical company focused on acquiring,
developing and commercializing pharmaceutical products for use to diagnose and
treat gastrointestinal disorders. Our development strategy has been to acquire
late-stage drug candidates with short expected time lines to commercialization.
We currently market and sell three pharmaceutical products, Visicol(R), VSL#3(R)
and IB-Stat(R). We are also studying Visicol(R) for the treatment of
constipation and for use prior to certain pre-operative gastrointestinal,
gynecological and urological surgical procedures. In addition to our marketed
products, we are studying INKP-102 as a new generation purgative product and
Colirest(TM) for the treatment of patients with Inflammatory Bowel Disease
(IBD).
2. Basis of Presentation
The accompanying financial statements are unaudited and have been
prepared by us in accordance with accounting principles generally accepted in
the United States of America.
Certain information and footnote disclosures normally included in our
audited annual financial statements have been condensed or omitted in our
interim financial statements. We believe that 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, 2003, which are contained
in our most recent Annual Report on Form 10-K.
3. Use of Estimates
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States of America
requires us 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.
4. Allowance for Sales Returns
We maintain 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 June 30, 2004, we had a
sales returns allowance of $159,000 that was included in accrued expenses on the
balance sheet. The following is an analysis of the sales returns allowance for
the six-month period ended June 30, 2004:
Allowance at December 31, 2003 $126,000
Provision for estimated sales returns 95,000
Actual sales returns (62,000)
--------
Allowance at June 30, 2004 $159,000
========
6
5. Deferred Revenue
For IB-Stat(R), we recognize 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, we have recorded deferred
revenue of $236,000 that was included in accrued expenses on the balance sheet
as of June 30, 2004.
6. Line of Credit
We maintain a $7,500,000 line of credit with a financial institution,
which expires January 31, 2005. Monthly interest-only payments are made at a
variable per annum rate of 2.20% plus the 30-day Dealer Commercial Paper Rate.
There was no outstanding balance on this line of credit at June 30, 2004.
7. Withdrawn Public Offering and Litigation
On March 15, 2004, we withdrew a public offering of six million shares
of our common stock. The decision to withdraw the offering was made when it came
to our attention that our certificate of incorporation did not contain any
provision exempting us from providing preemptive rights in connection with
certain securities offerings. On March 19, 2004, a purported class action
lawsuit was filed in the Court of Common Pleas, Philadelphia County, on behalf
of a putative class of holders of InKine equity shares who have purportedly been
denied certain claimed preemptive rights during the last six years. The lawsuit
names us as the defendant and seeks unspecified compensatory damages. In our
statement of operations, we have included the $341,000 in expenses related to
the withdrawn offering and $388,000 in legal costs related to preemptive rights
and the lawsuit offset by a $500,000 payment from a third-party as reimbursement
for these costs in the line item "Withdrawn public offering and litigation." Of
the legal costs related to preemptive rights and the lawsuit, $188,000 was
reimbursed as part of the $500,000 payment from the third-party. An additional
$200,000 was expensed for unreimbursed legal costs up to our insurance
deductible. We believe that we will continue to be entitled to reimbursement
from third-parties for any costs, expenses and liabilities incurred in
connection with the purported class action lawsuit. However, no assurance can be
given that we will obtain such additional reimbursement or that any liability
from the lawsuit will not be material.
8. Stock-Based Compensation
We apply 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. We record deferred
compensation for option grants to employees for the amount, if any, by which the
market price per share on the grant date exceeds the exercise price per share.
We generally grant our stock options with exercise prices equal to fair market
value on the grant date.
We have 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 our
net income (loss) and basic and diluted income (loss) per share if we had
recorded compensation expense for the estimated fair value of our stock-based
employee compensation, consistent with SFAS No. 123:
Three-Months Ended Six-Months Ended
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
------- ------ ------- -------
Net income (loss) - as reported......................... $ 1,079 $(2,374) $ 1,001 $ (3,305)
Deduct: Total stock-based employee compensation......... (728) (774) (1,464) (1,583)
------- ------- ------- -------
Net income (loss) - pro forma........................... $ 351 $(3,148) $ (463) $(4,888)
======= ======= ======= =======
Income (loss) per share:
Basis and diluted - as reported......................... $ 0.02 $(0.06) $ 0.02 $(0.09)
====== ====== ====== ======
Basis and diluted - pro forma........................... $ 0.01 $(0.08) $(0.01) $(0.13)
====== ====== ====== ======
7
9. Related Party
Robert A. Vukovich, Ph.D., one of our former directors is Chief
Executive Officer, Chairman of the Board and sole owner of Wellspring
Pharmaceutical Corporation ("Wellspring"). During 2003, we received an offer
from Wellspring to enter into an agreement whereby Wellspring would provide
manufacturing services for us. On January 28, 2004, we accepted the offer. Our
audit committee completed a review of the terms of the agreement, determined
that the agreement is in our and our shareholders best interests and approved
the agreement. Dr. Vukovich did not stand for re-election at the June 2004
Annual Meeting in light of this new agreement. During the six-months ended June
30, 2004, we paid Wellspring approximately $400,000 for services and equipment
in connection with this agreement.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
You should read the following discussion in conjunction with "Certain
Risks Related to Our Business" and our unaudited condensed financial statements
included elsewhere in this report. Some of the statements in the following
discussion are forward-looking statements. See "Special Note Regarding
Forward-Looking Statements."
General
We are a specialty pharmaceutical company focused on acquiring,
developing and commercializing pharmaceutical products for use to diagnose and
treat gastrointestinal disorders. Our development strategy has been to acquire
late-stage drug candidates with short expected time lines to commercialization.
We currently market and sell three pharmaceutical products, Visicol(R), VSL#3(R)
and IB-Stat(R). We are also studying Visicol(R) for the treatment of
constipation and for use prior to certain pre-operative gastrointestinal,
gynecological and urological surgical procedures. In addition to our marketed
products, we are studying INKP-102 as a new generation purgative product and
Colirest(TM) for the treatment of patients with Inflammatory Bowel Disease
(IBD).
The following table outlines our current product pipeline, on which we
have focused the majority of our research, development, marketing and sales
efforts since inception. The table also sets forth the current development
status of our products and product candidates in each targeted therapeutic
indication:
Product Therapeutic Indications Development Status
------- ----------------------- ------------------
Visicol o Colon cleansing prior to FDA approved; marketed product
colonoscopy
o Constipation Post-marketing study completed
Phase IV completed
o Pre-operative colonic surgical Phase IV expected to commence
procedures during 2004
INKP-102 o Colon cleansing prior to Phase II completed
(next generation purgative) colonoscopy Phase III expected to commence
during 2004
IB-Stat o Symptoms associated with Irritable Marketed product
Bowel Syndrome (IBS)
o Reduction of bowel motility during
certain diagnostic procedures
Colirest o Crohn's disease and ulcerative Phase II Crohn's disease complete
colitis, collectively IBD Phase II ulcerative colitis complete
Phase IIb Crohn's disease on-going
In September 2000, we received notification that our flagship product,
Visicol, was approved for marketing as a preparation for colonoscopy. Following
this notification, we immediately commenced marketing and sales efforts and in
January 2001, we began shipping Visicol to our customers. During 2001,
gastroenterologists reported the visualization of microcrystalline cellulose
(MCC) in some patients receiving Visicol tablets. MCC is a commonly used, inert,
but highly insoluble substance that binds and fills Visicol tablets. The
presence of MCC may lengthen the colonoscopy procedure and therefore deterred
some gastroenterologists from prescribing Visicol. As a result, 2001 revenues
were adversely affected.
We adopted three strategies for overcoming the issue of MCC
visualization during a colonoscopy. First, in October 2001, we conducted a Phase
IV clinical study, which showed that Visicol's efficacy at a reduced dosing
regimen (20% and 30% less tablets and clear liquid volume) was comparable to the
labeled dose, with significantly reduced MCC visualization. Secondly, in March
2002, the FDA approved a supplemental new drug application (SNDA), for a new
formulation of Visicol containing approximately 50% less MCC. In May 2002, we
began shipping this new formulation to customers, and since that time, we have
become the fastest growing bowel preparation for use in patients undergoing
colonoscopy. Finally, during 2003, we developed and filed a provisional patent
application with the U.S. Patent and Trademark office for an MCC-free new
generation purgative tablet (INKP-102).
9
Special Note Regarding Forward-Looking Statements
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act, Section 21E of the Securities Exchange Act of 1934,
as amended and the Private Securities Litigation Reform Act of 1995 that are
subject to risks and uncertainties. You should not place undue reliance on those
statements because they are subject to numerous uncertainties and factors
relating to our operations and business environment, all of which are difficult
to predict and many of which are beyond our control. Forward-looking statements
included in this report relate to our beliefs regarding litigation exposure, the
timing and types of clinical trials we will need to conduct for our products and
product candidates, our expectation for gross profits for Visicol for 2004, the
adequacy of our financial resources, our capital expenditures for 2004, our
product development expenses, our investment portfolio, market risk exposure and
other statements regarding matters that are not historical facts. These
statements often include words such as "may," "believe," "expect," "anticipate,"
"intend," "plan," "estimate" or similar expressions. These statements are based
on assumptions that we have made in light of our industry experience as well as
our perceptions of historical trends, current conditions, expected future
developments and other factors we believe are appropriate under the
circumstances. As you read and consider this report, you should understand that
these statements are not guarantees of performance or results. They involve
risks, uncertainties and assumptions. Although we believe that these
forward-looking statements are based on reasonable assumptions, you should be
aware that many factors could affect our actual financial results or results of
operations and could cause actual results to differ materially from those in the
forward-looking statements. These factors include but are not limited to:
o our limited history of profitability;
o our dependence on Visicol;
o our ability to manage rapid growth;
o our limited sales and marketing experience;
o the high cost and uncertainties relating to clinical trials;
o market conditions and technological innovation;
o the unpredictability of the duration and results of clinical trials
and regulatory review;
o other risks and uncertainties discussed under the caption "Certain
Risks Related to Our Business" and elsewhere in this report; and
o other risks and uncertainties as may be detailed from time to time in
our public announcements and SEC filings.
You should keep in mind that any forward-looking statement made by us in this
report speak only as of the date of this report. Actual results could differ
materially from those currently anticipated as a result of a number of factors,
including, but not limited to, the risks and uncertainties discussed under the
caption "Certain Risks Related to Our Business." New risks and uncertainties
come up from time to time, and it is impossible for us to predict these events
or how they may affect us. We have no duty to, and do not intend to, update or
revise the forward-looking statements in this report after the date of this
report. In light of these risks and uncertainties, you should keep in mind that
any forward-looking statement made in this report or elsewhere might not occur.
Certain Risks Related to Our Business
Risks related to our business
- -----------------------------
We have achieved profitability for three of the last four quarters and were
profitable for the first half of 2004. If we do not maintain our profitability
or if we incur losses in the future, the price of our common stock is likely to
fall.
Our first sale of Visicol occurred in January 2001, our first sale of
IB-Stat occurred in June 2002, and we entered into a promotion agreement with
Sigma-Tau Pharmaceuticals in February 2004. We have a significant accumulated
deficit and have incurred losses and negative cash flow from operations in each
year since our inception on July 1, 1993. We achieved profitability and positive
cash flow from operations each of the quarters in the second half of 2003, as
well as for the six-months ended June 30, 2004. Visicol, INKP-102, IB-Stat and
Colirest are in various stages of marketing or development and require
significant research, development and testing. Visicol provides substantially
all of our revenues. Our continued success and growth is primarily dependent on
the performance of Visicol. If we are unsuccessful in achieving increased
revenues through the sale of Visicol or through the sale of newly acquired or
developed products or if we incur material costs related to our ongoing
litigation, we will not be able to operate profitably in the future. Our common
stock is likely to decrease in value if we fail to achieve and maintain profits
or if the market believes that we are unable to achieve and maintain profits.
10
Our success and revenue currently depend on Visicol; if we do not continue to
successfully market Visicol, our revenue might not grow, which could cause our
stock price to decline.
We market sodium phosphate tablets in the United States under the brand
name Visicol, and if approved by the FDA, we intend to market INKP-102 and
co-market Colirest in the United States. Our prospects over the next three to
five years are substantially dependent on the successful commercialization of
our products and product candidates. We expect to engage in expensive
advertising, educational programs and other means to market our future products.
The degree of market acceptance of our products among physicians, patients,
healthcare payors and the medical community will depend upon a number of factors
including:
o demonstration of their clinical efficacy and safety;
o successful introduction for new indications;
o their cost effectiveness;
o their potential advantages over alternative treatment methods;
o the marketing and distribution support they receive; and
o reimbursement policies of government and third-party payors.
Virtually all of our revenue to date has come from Visicol. Our ability
to increase revenue in the future will depend in part on our success in
in-licensing or acquiring additional pharmaceutical products. We currently
intend to in-license or acquire pharmaceutical products that have been developed
beyond the initial discovery phase and for which late-stage human clinical data
is already available or that have already received regulatory approval. These
kinds of pharmaceutical products might not be available to us on attractive
terms or at all. To the extent we acquire rights to additional products, we
might incur significant additional expense in connection with the development
and, if approved by the FDA, marketing of these products.
Failure to manage our growth could increase our expenses faster than our
revenue.
We have experienced significant growth in the number of our employees
and the scope of our operations. In support of the May 2002 re-launch of Visicol
in the United States, we have grown from 13 employees on May 31, 2002 to 64 on
June 30, 2004. This growth has placed a significant strain on our management and
operations. Our continued growth might place further strains on our management
and operations. Our ability to manage growth effectively will depend upon our
ability to broaden our management team and our ability to attract, hire and
retain skilled employees. Our success will also depend on the ability of our
officers and key employees to continue to implement and improve our operational,
management information and financial control systems and to expand, train and
manage our employee base.
If we make any acquisitions, we will incur a variety of costs and might never
successfully integrate the acquired product or business into ours.
We might attempt to acquire products or businesses that we believe are
a strategic complement to our business model. We might encounter operating
difficulties and expenditures relating to integrating an acquired product or
business. These acquisitions might require significant management attention that
would otherwise be available for ongoing development of our business. In
addition, we might never realize the anticipated benefits of any acquisition. We
might also make dilutive issuances of equity securities, incur debt or
experience a decrease in cash available for our operations, or incur contingent
liabilities and/or amortization expenses relating to goodwill and other
intangible assets, in connection with future acquisitions.
If third-party payors do not provide coverage or reimburse patients for our
products, then some patients may be unable or unwilling to purchase our products
and we will achieve less revenue from product sales.
11
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 part of the cost of covered
pharmaceutical products. In fact, the majority of prescription drugs prescribed
to patients are ultimately paid for at the retail level by these organizations
and not by the patient. These 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 plan to
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
provide rebates to help offset the cost of covered medication. Visicol and
IB-Stat are premium priced compared to their competitors and we have not
specifically contracted with any third party to date to give rebates for their
use. We do not know what impact, if any at all, this will have on the coverage
of Visicol or IB-Stat by these third party payors, particularly if Visicol
continues to gain market share, thus increasing the cost to third party payors.
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;
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
products 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. Moreover, actual or alleged undesirable side effects or injuries
related to our products or product candidates may interfere with the
commercialization of our products and the development of our product candidates.
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, IB-Stat and any of our product candidates. We must contract
with manufacturers to produce Visicol, IB-Stat and our product candidates
according to government regulations. The future development and delivery of our
marketed products and our product candidates depends on the timely, profitable
and competitive performance of these manufacturers. There are only a limited
number of manufacturers 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. Our manufacturers must obtain FDA approval for their manufacturing
processes, and we have no control over this approval process.
We have contracted with Mallinckrodt, Inc. to supply us with active
pharmaceutical ingredients for Visicol. A significant portion of the Visicol
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. We are currently working towards submitting a Drug Master File with
the FDA for another Mallinckrodt facility in order to minimize this risk, but
there can be no assurance that this Drug Master File will be approved.
We have contracted with Pharmaceutical Manufacturing Research Services,
Inc. (PMRS), a manufacturing development company, to supply commercial
quantities of Visicol in a manner that meets FDA requirements. Our contract with
12
PMRS will expire at the end of 2004, subject to renewal for successive one year
periods unless terminated by either party. The FDA has approved the
manufacturing processes of PMRS. Any failure by PMRS to maintain compliance with
FDA standards could result in its loss of "approved status" and could
significantly harm our business because we do not have an approved secondary
manufacturer for Visicol. We are currently working with an appropriate secondary
manufacturer of Visicol to obtain FDA approval.
We have contracted with Cardinal Health Packaging Services to package
Visicol in a manner that meets FDA requirements. The FDA has approved this
facility for the packaging of Visicol. In the event that Cardinal Health
Packaging Services is unable to package Visicol for us, the FDA has also
approved Fisher Clinical Services, Inc. for packaging of Visicol.
If the owners of technology licensed to us terminate any of our license
agreements, these owners could prevent us from developing, manufacturing or
selling the product covered by this license.
We have acquired the worldwide exclusive right to market Visicol,
INKP-102 and Colirest 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, one of our licensing agreements requires us to spend
specific amounts for research and development of our product. If we do not
comply with the terms of this agreement, the owner 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 product 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 achieve and maintain our operations
at a profit.
We have products and product candidates that compete in three very
competitive segments of the pharmaceutical industry. These products and product
candidates include: (i) purgative and laxative agents for cleansing the colon or
relieving constipation, which includes Visicol and INKP-102; (ii)
antispasmodics, which includes IB-Stat; and (iii) products that treat patients
with IBD, which includes our product candidate Colirest. We are likely to
encounter significant competition with respect to Visicol, INKP-102, IB-Stat and
Colirest, including, but not limited to, competition from: (a) Braintree
Laboratories, Inc., Schwarz Pharma Inc., C.B. Fleet Company, Inc. and Novartis
Pharmaceuticals Corporation with respect to Visicol and INKP-102; (b) Schwarz
Pharma Inc., Eli Lily and Company and Bedford Laboratories with respect to
IB-Stat; and (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.
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
less expensive 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 target market, severely restricting our
ability to maintain a profitable level of product sales.
If we are unable to protect our intellectual property, 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 intellectual property
13
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 our products could be diminished.
In 1997, the U.S. Patent and Trademark Office issued a patent covering
the use of Visicol for inducing purgation of the colon. Patents claiming the use
of Visicol to induce purgation of the colon have been granted in Europe and
Canada. In December 2000, the U.S. Patent and Trademark Office issued to us a
patent for numerous solid-dose colonic purgative agents. A similar patent has
also been granted in Canada.
In 2003, we filed a provisional U.S. patent application for a new
generation of purgative products. The invention covers several highly soluble
colonic purgative formulations in solid dosage forms that can be used to soften
stool, promote laxation and/or induce complete purgation. There is no assurance
that this provisional patent will be issued.
IB-Stat is the combination of a marketed drug (hyoscyamine sulfate) and
a widely used delivery system. IB-Stat is therefore not patentable.
In 2003, the U.S. Patent and Trademark Office issued a patent covering
the treatment of inflammatory bowel conditions, including ulcerative colitis and
Crohn's disease with Colirest.
We have several pending foreign patent applications, 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 ensure that our products do not infringe on
patents issued to competitors.
Our employees and 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.
Certain academic institutions have funded the development of some of
our patented technologies. Although we have acquired the rights to use this
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.
Claims by others that we infringe their intellectual property could be costly to
us.
Our patent and other proprietary rights related to our products might
conflict with the current or future intellectual property rights of others. We
have not conducted a search to determine if there are any other patents that
could cover Visicol, INKP-102 and Colirest. Litigation or patent interference
proceedings, either of which could result in substantial cost to us, might be
necessary to defend any patents to which we have rights and our other
proprietary rights or to determine the scope and validity of other parties'
proprietary rights. The defense of patent and intellectual property claims is
both costly and time-consuming, even if the outcome is favorable to us. Any
adverse outcome could subject us to significant liabilities to third parties,
require disputed rights to be licensed from third parties or require us to cease
selling our product. We might not be able to obtain a license to any third-party
technology that we require to conduct our business, or, if obtainable, that
technology might not be available at a reasonable cost.
Our actual financial results might vary from what we anticipate.
Our actual financial results might vary from what we anticipate, and
these variations could be material. Our annual and quarterly reports contain
various forecasts. These forecasts reflect numerous assumptions concerning our
anticipated future performance and with respect to the prevailing market and
economic conditions that are beyond our control and which might not turn out to
have been correct. Although we believe that the assumptions underlying the
projections are reasonable, actual results could be materially different. Our
14
revenues and expenses are subject to numerous risks and uncertainties. Financial
results that are weaker than expectations may cause a significant and sudden
decline in our stock price.
Risks related to regulatory matters
- -----------------------------------
Regulatory approval of our products is time-consuming, expensive and uncertain,
and could result in unexpectedly high expenses and delay our ability to sell our
products.
Development, manufacturing and marketing of our products are subject to
extensive regulation by governmental authorities in the United States and other
countries. This regulation could require us to incur significant unexpected
expenses or delay or limit our ability to sell our products. Our clinical
studies of Visicol for constipation, INKP-102 for colon cleansing prior to
colonoscopy, Colirest for the treatment IBD or any other product might be
delayed or halted for various reasons, including:
o the drug is not effective;
o patients experience severe side effects during treatment;
o patients do not enroll in the studies at the rate we expect;
o drug supplies are not sufficient to treat the patients in the studies;
o we decide to modify the drug during testing; or
o we do not have adequate funds to continue the testing.
If the FDA approves new indications for Visicol, its approval will be
limited to those indications for which the product has been shown to be safe and
effective, as demonstrated to the FDA's satisfaction through clinical studies.
Approval might entail ongoing requirements for post-marketing studies. Even if
we obtain regulatory approval, labeling and promotional activities are subject
to continual scrutiny by the FDA and state regulatory agencies and, in some
circumstances, the Federal Trade Commission. FDA enforcement policy prohibits
the marketing of approved products for unapproved, or off-label, uses. Marketing
an approved product for a new use requires a separate approval by the FDA. These
regulations and the FDA's interpretation of them might impair our ability to
effectively market our products.
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 (NDA). The FDA has mandated
that all manufacturing facilities and processes comply with good manufacturing
practices, commonly known as GMP's. GMP's are 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 and
IB-Stat. The FDA may still, however, prevent us from continuing to market
Visicol or IB-Stat if we:
o do not continue to consistently manufacture appropriate amounts of
Visicol and IB-Stat; or
o cannot continue to repeat the manufacturing process used to
manufacture the validation batches of Visicol.
15
We currently have only one approved manufacturer of Visicol and one
manufacturer for IB-Stat. We have, however, initiated the process to obtain a
qualified secondary manufacturer of Visicol.
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.
Both Visicol and IB-Stat are products used in highly competitive
diagnostic and disease indications where substitution of competitive products is
common. Although both products have a good safety profile and history, any
negative change in our safety labeling could adversely affect the sale of our
products.
The FDA could prevent us from marketing IB-Stat.
IB-Stat is the combination of a marketed drug (hyoscyamine sulfate) and
a widely used delivery system. Hyoscyamine sulfate was a marketed product prior
to 1962. Although we have not obtained FDA approval for IB-Stat, 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 is not similar enough to the 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 most 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 the 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 and suspensions;
o operating restrictions;
o injunctions; and
o civil penalties and criminal prosecution.
Certain of the foregoing penalties could have an immediate negative
financial impact on our business, harm our reputation, have a material adverse
effect on our business operations and reduce our future sales and profits.
We are developing INKP-102 as a compound for colon cleansing prior to
colonoscopy. We have completed our Phase II study. We have reached an agreement
with the FDA on the design of our Phase III study. If results of the Phase II
16
study are supportive, then only one Phase III study would be required for the
approval of INKP-102. We may never receive FDA approval for INKP-102 and without
FDA approval, we cannot market or sell INKP-102.
We are developing Colirest as a compound for the treatment of 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 to a pivotal Phase IIb dose ranging study for Crohn's disease. We are
currently enrolling patients in this study. We may never receive FDA approval
for Colirest and without FDA approval, we cannot market or sell Colirest.
Risks related to our common stock outstanding
- ---------------------------------------------
If the holders of our outstanding options and warrants exercise them and
subsequently sell the common stock they receive upon exercise, the market price
of our common stock may drop.
At June 30, 2004, we had approximately 8,755,000 options and warrants
outstanding. Options and warrants give the holder the right to purchase shares
of our common stock in the future for a predetermined price which may or may not
be below the current market value of our common stock at the time the option or
warrant is exercised. In addition, as of June 30, 2004, we had an additional
2,686,000 options available for issuance to employees and consultants, pursuant
to our option plans. To date, option and warrant holders have exercised
approximately 10,501,000 options and warrants in the aggregate at prices ranging
from $.50 to $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. In
addition, the exercising of these options and warrants will increase the number
of shares outstanding and cause dilution to existing shareholders.
If our common stock continues to be volatile and thinly traded, 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 be able to sell
their shares when they desire because the stock price is highly volatile and the
stock is not widely traded. For example, as of June 30, 2004, the number of our
shares theoretically available for sale in any one day was approximately
48,713,000 shares and our average daily trading volume for the twelve-month
period ended June 30, 2004 was approximately 462,000 shares. If our stock
continues to trade thinly, our shareholders may not be able to sell their shares
when desired.
If the purported class action lawsuit for violation of preemptive rights is
settled or reaches a judgment for damages, and our claims against third-parties
or to our insurance carriers for reimbursement are unsuccessful or insufficient
to cover the amount of any settlement payment or judgment for damages, then the
market price of our common stock may drop.
On March 15, 2004, we withdrew a public offering of six million shares
of our common stock. The decision to withdraw the offering was made when it came
to our attention that our certificate of incorporation did not contain any
provision exempting us from providing preemptive rights in connection with
certain securities offerings. On March 19, 2004, a purported class action
lawsuit was filed in the Court of Common Pleas, Philadelphia County, on behalf
of a putative class of holders of InKine equity shares who have purportedly been
denied certain claimed preemptive rights during the last six years. The lawsuit
names us as the defendant and seeks unspecified compensatory damages. In our
statement of operations, we have included the $341,000 in expenses related to
the withdrawn offering and $388,000 in legal costs related to preemptive rights
and the lawsuit offset by a $500,000 payment from a third-party as reimbursement
for these costs in the line item "Withdrawn public offering and litigation." Of
the legal costs related to preemptive rights and the lawsuit, $188,000 was
17
reimbursed as part of the $500,000 payment from the third-party. An additional
$200,000 was expensed for unreimbursed legal costs up to our insurance
deductible. We believe that we will continue to be entitled to reimbursement
from third-parties for any costs, expenses and liabilities incurred in
connection with the purported class action lawsuit. However, no assurance can be
given that we will obtain such additional reimbursement or that any liability
from the lawsuit will not be material.
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 is recognized when,
pursuant to Staff Accounting Bulletin No. 104, "Revenue Recognition,"
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, we recognize revenue based on prescription data, net of
estimated cash discounts. This practice will continue until such time
data becomes available that indicates that the product has achieved
adequate market acceptance and 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. 148, "Accounting for Stock-Based Compensation
- Transition and Disclosure." Had we applied SFAS No. 148, our net
income for the three and six-month periods ended June 30, 2004 would
have been less and our net loss for the three and six-month periods
ended June 30, 2003 would have been greater.
o Product returns. It is our policy to estimate and record an allowance
for future product returns in connection with our sales of Visicol. 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. 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 realizability of deferred tax assets,
we consider 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. We consider 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. The Tax Reform Act of
1986 contains provisions that may limit the net operating loss (NOL)
and research and experimentation credit carryforwards available to be
used in any given year upon the occurrence of certain events,
including significant changes in ownership interest. Generally, a
change in ownership of a company of greater than 50% within a
three-year period results in an annual limitation on that company's
ability to utilize its NOL carryforwards and tax credits from the tax
periods prior to the ownership change. The rules providing for the
definition of an ownership change are complex and we must perform a
study to determine if we have undergone a change in ownership. We
18
believe that we have undergone an ownership change and are subject to
an annual limitation on the use of our NOL carryforwards pursuant to
these provisions. At June 30, 2004, we have concluded that a full
valuation allowance is necessary for deferred tax assets given that we
have only been profitable for three of the last four quarters.
o Contingencies. During the three and six-months ended June 30, 2004, we
have incurred costs and received reimbursement related to our
withdrawn public offering and our ongoing litigation (See Note 7 of
accompanying financial statements). We believe that we will continue
to be entitled to reimbursement from third-parties for any costs,
expenses and liabilities incurred in connection with the withdrawn
public offering and our ongoing litigation. We recognize liabilities
for loss contingencies in accordance with Statement on Financial
Accounting Standards No. 5, "Accounting for Contingencies." This
statement requires accrual by a charge to income (and disclosure) for
an estimated loss from a loss contingency if two conditions are met:
(a) information available prior to issuance of the financial
statements indicates that it is probable that an asset had been
impaired or a liability had been incurred at the date of the financial
statements, and (b) the amount of loss can be reasonably estimated.
Gain contingencies (third-party reimbursement) are recognized when
realized in accordance with Accounting Research Bulletin No. 50,
"Contingencies."
Results of Operations
We generated net income of $1,079,000 or $0.02 per share and $1,001,000
or $0.02 per share for the three and six-month periods ended June 30, 2004,
compared to losses of ($2,374,000) or ($0.06) per share and ($3,305,000) or
($0.09) per share for the same periods a year ago.
Product revenue was $4,891,000 and $9,241,000 for the three and
six-month periods ended June 30, 2004, compared to $3,339,000 and $5,875,000 for
the three and six-month periods ended June 30, 2003. Our retail distribution and
prescription levels continue to increase, resulting in increased orders from
wholesalers and large retail chains. We believe the increased prescription
levels have been driven by increased market awareness and acceptance of Visicol.
Approximately 118,000 prescriptions were filled for Visicol(R) during the second
quarter of 2004, compared to approximately 105,000, 99,000, 96,000, and 89,000
during the four preceding quarters. In addition to our product revenue, we
realized $375,000 and $658,000 in other revenue, for the three and six-month
periods ended June 30, 2004, which was mostly attributable to our promotion
agreement with Sigma-Tau Pharmaceuticals.
Our gross profit was $4,614,000 and $8,756,000 for the three and
six-month periods ended June 30, 2004 compared to $2,916,000 and $5,063,000 for
the same period a year ago. Gross profit as a percentage of sales for product
revenue was 87% and 88% for the three and six-month periods ended June 30, 2004,
compared to 86% and 85% 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, driven by increased prescription levels,
increased sales price per unit, decreased manufacturing cost per unit and
decreased distribution costs for Visicol(R). We expect that gross profit as a
percent of product revenue will be approximately 85% to 86% for the 2004 year.
We incurred research and development expenses of $1,036,000 and
$1,958,000 for the three and six-month periods ended June 30, 2004, compared to
$448,000 and $789,000 for the same period a year ago. The increase was the
result of higher development costs associated with the MCC-free new generation
purgative tablet (INKP-102), along with higher personnel costs related to
managing an increased scale of development activity.
Sales and marketing costs of $2,160,000 and $4,109,000 were incurred
for the three and six-month periods ended June 30, 2004, compared to $1,475,000
and $2,895,000 for the same period a year ago. The increases were a result of
continued growth in the size of our internal sales force, along with increased
marketing campaigns related to Visicol. As of June 30, 2004, our internal sales
force covered 45 territories with four district managers, compared to 36
territories and three district managers as of June 30, 2003.
General and administrative expenses were $692,000 and $1,477,000 for
the three and six-month periods ended June 30, 2004 compared to $735,000 and
$1,248,000 for the same period a year ago. The increase for the six-month period
is the result of higher personnel, patent and insurance costs, along with an
increase in legal and accounting fees associated with Sarbanes-Oxley compliance.
19
On March 15, 2004, we withdrew a public offering of six million shares
of our common stock. The decision to withdraw the offering was made when it came
to our attention that our certificate of incorporation did not contain any
provision exempting us from providing preemptive rights in connection with
certain securities offerings. On March 19, 2004, a purported class action
lawsuit was filed in the Court of Common Pleas, Philadelphia County, on behalf
of a putative class of holders of InKine equity shares who have purportedly been
denied certain claimed preemptive rights during the last six years. The lawsuit
names us as the defendant and seeks unspecified compensatory damages. In our
statement of operations, we have included the $341,000 in expenses related to
the withdrawn offering and $388,000 in legal costs related to preemptive rights
and the lawsuit offset by a $500,000 payment from a third-party as reimbursement
for these costs in the line item "Withdrawn public offering and litigation." Of
the legal costs related to preemptive rights and the lawsuit, $188,000 was
reimbursed as part of the $500,000 payment from the third-party. An additional
$200,000 was expensed for unreimbursed legal costs up to our insurance
deductible. We believe that we will continue to be entitled to reimbursement
from third-parties for any costs, expenses and liabilities incurred in
connection with the purported class action lawsuit. However, no assurance can be
given that we will obtain such additional reimbursement or that any liability
from the lawsuit will not be material.
Interest and other expense was minimal for the three and six-months
ended June 30, 2004 due to the June 2003 conversion of our long-term debt into
shares of our common stock. Interest and other expense was $293,000 and $644,000
for the three and six-months ended June 30, 2003.
During the three and six-month periods ended June 30, 2003, we incurred
non-cash charges of $2,355,000 and $2,822,000, respectively, related to our
previously outstanding June 2005 convertible notes.
Liquidity and Capital Resources
At June 30, 2004, we had cash and cash equivalents of $11,154,000. At
June 30, 2004, we had no balance outstanding on our line of credit.
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. However, in the
future we may seek additional capital to fund the possible acquisition or the
in-licensing of additional products; the possible acquisition of businesses
related to gastrointestinal pharmaceuticals; the marketing and, if necessary,
continued development of acquired products; the development and
commercialization of new indications for Visicol; research and development
related to enhancements of existing products; and general corporate purposes,
including working capital.
Our future short and long-term capital requirements will depend on
numerous factors, including continued marketplace acceptance of our products. To
achieve operating profits, we, alone or with others, must successfully market
and sell our products. In addition to continued marketplace acceptance of our
products, other factors which cannot be quantified and many of which we cannot
control will also impact our short and long-term capital requirements,
including: continued commercial costs of Visicol, continued progress in our
research and development activities, progress with pre-clinical studies and
clinical trials, defending shareholder claims related to alleged violations of
preemptive rights, 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 developing a new generation purgative (INKP-102) for
cleansing the colon prior to colonoscopy, conducting a clinical trial of
Colirest for the treatment of Crohn's disease, continuing to study the use of
Visicol for constipation, commencing a study for the use of Visicol in
pre-operative colonic surgical procedures, and continuing to market and sell
Visicol and IB-Stat to distributors and drug store chains. During 2004, we
expect to spend up to $1,600,000 on INKP-102, $100,000 on the Visicol studies
and Visicol product development, $200,000 on the Colirest study, and $8,100,000
on Visicol 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
20
available when required, we may have to delay, scale-back or eliminate our
research, drug discovery or development activities or other aspects of our
operations. Our business could be materially and adversely affected as a result.
Net Cash Provided By (Used in) Operating Activities. Net operating cash
outflows for the six-month period ended June 30, 2004 resulted primarily from
research and development expenditures associated with our product candidates,
including clinical development and manufacturing costs for INKP-102, sales and
marketing costs related to Visicol, compensation of our employees and other
administrative costs and costs related to our withdrawn public offering and a
purported class action lawsuit. Net operating cash inflows were principally
attributable to product sales, revenue from our Sigma-Tau Pharmaceutical
("Sigma-Tau") promotion of VSL#3 and payment from a third-party for
reimbursement of costs related to our withdrawn public offering and legal costs
related to preemptive rights and the lawsuit.
Net Cash Used in Investing Activities. Cash used in investing
activities for the six-month period ended June 30, 2004 related to the purchase
of manufacturing equipment for use in the production of clinical and commercial
quantities of INKP-102. We do not expect to make any significant additional
capital expenditures during 2004, but we may, from time to time, purchase
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.
Net Cash Provided By Financing Activities. Cash provided by financing
activities for the six-month period ended June 30, 2004 related to net proceeds
from the exercise of warrants and stock options. We have no immediate plans,
arrangements, commitments or understandings to raise capital and issue stock.
From time to time however, we consider various methods to raise capital in light
of our expansion strategies, product opportunities and market conditions.
Research and Development Programs
We currently have three significant research and development projects,
relating to Visicol, INKP-102 and Colirest.
Visicol. We have focused our Visicol research and development on
cleansing of the colon prior to colonoscopy and are presently marketing Visicol
for that indication. In addition, we are also developing Visicol for cleansing
the colon prior to pre-operative colonic surgical procedures and for treating
constipation. The current status of these projects is as follows: (i) for
cleansing of 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 during the second
half of 2004; and (iii) for treating constipation, we have completed a post
marketing study and a Phase IV study. As of June 30, 2004 we have incurred total
costs of approximately $11,858,000 in connection with our Visicol research and
development. During the quarter ended June 30, 2004, we incurred an aggregate of
$1,036,000 in research and development expenses, approximately $75,000 of which
was attributable to Visicol.
INKP-102. During 2003, we developed a next generation purgative for
cleansing the colon prior to colonoscopy. Clinical batches of this new product
have been manufactured and formulated to yield smaller tablets that may be
easier to ingest. Additionally, the new product does not contain any MCC, which
is a common inert, but highly insoluble substance. We are currently conducting
clinical studies and intend to apply for FDA approval of this new product using
alternative dosing regimens that utilize fewer tablets and allow for single-day
administration. We have completed a Phase II study and plan to commence a Phase
III study during the second half of 2004. As of June 30, 2004, we have incurred
total costs of approximately $1,223,000 in connection with our INKP-102 research
and development. During the quarter ended June 30, 2004, we incurred an
aggregate of $1,036,000 in research and development expenses, approximately
$492,000 of which was attributable to INKP-102.
Colirest. We are developing Colirest for treatment of IBD and have
completed a Phase II study of Colirest for the treatment of Crohn's disease and
a Phase II study of Colirest for the treatment of ulcerative colitis. In June
2001, we began a Colirest clinical Phase IIb study of Crohn's disease. We
anticipate an interim analysis later this year. As of June 30, 2004, we have
incurred total costs of approximately $6,970,000 in connection with the
development of Colirest and related compounds. During the quarter ended June 30,
2004, we incurred an aggregate of $1,036,000 in research and development
expenses, approximately $56,000 of which was attributable to Colirest.
21
Indirect Costs. In addition to the direct costs related to the
development of our products and product candidates, we incurred indirect
non-technology specific overhead costs. These expenses include the salaries and
administrative costs of managing our research and development projects, which
for the quarter ended June 30, 2004, equaled approximately $413,000.
Recently Issued Accounting Pronouncements
None.
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 2005. The interest rate on our line
of credit has fluctuated from 3.17% to 3.53% over the past three-months. There
was no outstanding balance on this line of credit at June 30, 2004.
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 is expected 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
exposure in 2004. We do not hold or issue any derivatives.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. Our management, with
the participation of our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness our disclosure controls and procedures as of the end
of the period covered by this report. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures as of the end of the period covered by this report have
been designed and are functioning effectively to provide reasonable assurance
that the information required to be disclosed by us in reports filed under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms. We believe that
a controls system, no matter how well designed and operated, cannot provide
absolute assurance that the objectives of the controls system are met, and no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within a company have been detected.
Changes in internal controls. No change in our internal control over
financial reporting occurred during our most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
..
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
On March 15, 2004, we withdrew a public offering of six million shares
of our common stock. The decision to withdraw the offering was made when it came
to our attention that our certificate of incorporation did not contain any
provision exempting us from providing preemptive rights in connection with
certain securities offerings. On March 19, 2004, a purported class action
lawsuit was filed in the Court of Common Pleas, Philadelphia County, on behalf
of a putative class of holders of InKine equity shares who have purportedly been
22
denied certain claimed preemptive rights during the last six years. The lawsuit
names us as the defendant and seeks unspecified compensatory damages. In our
statement of operations, we have included the $341,000 in expenses related to
the withdrawn offering and $388,000 in legal costs related to preemptive rights
and the lawsuit offset by a $500,000 payment from a third-party as reimbursement
for these costs in the line item "Withdrawn public offering and litigation." Of
the legal costs related to preemptive rights and the lawsuit, $188,000 was
reimbursed as part of the $500,000 payment from the third-party. An additional
$200,000 was expensed for unreimbursed legal costs up to our insurance
deductible. We believe that we will continue to be entitled to reimbursement
from third-parties for any costs, expenses and liabilities incurred in
connection with the purported class action lawsuit. However, no assurance can be
given that we will obtain such additional reimbursement or that any liability
from the lawsuit will not be material.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities.
On June 7, 2004, at our 2004 Annual Meeting of Shareholders,
shareholders voted in favor by an affirmative vote of a majority of the shares
of common stock (par value $0.0001 per share) outstanding to amend our
Certificate of Incorporation to remove any and all shareholder preemptive
rights. Accordingly, on June 17, 2004, we filed a certificate of amendment with
the Department of State of New York to affect the amendment of our certificate
of incorporation. The amendment to our certificate of incorporation eliminates
shareholder rights to participate in any and all potential future securities
offerings.
During the second quarter of 2004, we granted an aggregate of 175,000
options to purchase our common stock at a weighted average exercise price of
4.20 per share pursuant to our 2004 Equity Compensation Plan, which was approved
by our shareholders at our annual meeting of shareholders held on June 7, 2004.
Such options were not registered under the Securities Act of 1933, as amended
(the "Securities Act"). All of such option grants were granted at the then
current fair value of the common stock and all recipients had adequate access to
information about us. We did not engage an underwriter in connection with the
option grants. We believe that the issuance of the options was exempt from
registration under either:
o Section 4(2) of the Securities Act as transactions not involving any
public offering and such securities having been acquired for investment
and not with a view to distribution, or
o Rule 701 under the Securities Act as transactions made pursuant to a
written compensatory benefit plan or pursuant to a written contract
relating to compensation.
Item 4. Submission of Matters to a Vote of Security Holders.
Our annual meeting of shareholders was held on June 7, 2004. At this
meeting, our shareholders:
(i) Approved the election of six (6) directors.
The number of votes cast for, and withheld from, each nominee is set
forth below.
For Withheld
--- --------
Leonard S. Jacob, M.D., Ph.D. 43,063,223 4,171,699
Robert F. Apple 43,059,561 4,175,361
J.R. LeShufy 43,030,435 4,204,487
Steven B. Ratoff 46,195,791 1,309,131
Norman D. Schellenger 46,652,234 582,688
Thomas P. Stagnaro 46,653,734 581,188
(ii) Amended our certificate of incorporation to remove any and all
shareholder preemptive rights.
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
24,995,602 2,030,622 397,441 19,811,257
23
(iii) Adopted the InKine Pharmaceutical Company, Inc. 2004 Equity
Compensation Plan.
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
23,504,968 3,350,119 568,578 19,811,257
(iv) Ratified the election of KPMG, LLP as our independent auditors for
the year ending December 31, 2004.
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
46,672,197 298,840 263,885 263,885
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
3.1 Certificate of Incorporation, as amended. (Exhibit 3.1)(1)
3.2* Certificate of Amendment of Certificate of Incorporation
3.3* Certificate of Correction of Certificate of Incorporation
10.1* InKine Pharmaceutical Company, Inc. 2004 Equity
Compensation Plan
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
- -----------------------
* Filed herewith.
(1) Filed as an Exhibit to InKine's Quarterly Report on Form
10-Q for the quarter ended June 30, 2001, with the
Securities and Exchange Commission (SEC File No.
000-25572).
(b) Reports on Form 8-K.
None.
24
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: August 5, 2004 By: LEONARD S. JACOB M.D.,PH.D.
---------------------------
Leonard S. Jacob, M.D., Ph.D.
Chairman of the Board and
Chief Executive Officer
Date: August 5, 2004 By: ROBERT F. APPLE
--------------------------------
Robert F. Apple
Chief Operating and Financial Officer,
(Authorized Officer and Principal
Financial Officer)
25
Exhibits Index
3.1 Certificate of Incorporation, as amended. (Exhibit 3.1)(1)
3.2* Certificate of Amendment of Certificate of Incorporation
3.3* Certificate of Correction of Certificate of Incorporation
10.1* InKine Pharmaceutical Company, Inc. 2004 Equity Compensation Plan
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
- -----------------------
* Filed herewith.
(1) Filed as an Exhibit to InKine's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001, with the Securities and Exchange Commission (SEC
File No. 000-25572).
27