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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2002
or
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-12950
ALLIANCE PHARMACEUTICAL CORP.
(Exact name of Registrant as specified in its charter)
| New York (State or other jurisdiction of incorporation or organization) | 14-1644018 (I.R.S. Employer Identification Number) | |
3040 Science Park Road San Diego, California (Address of principal executive offices) | 92121 Zip Code | |
Registrant's telephone number, including area code: | 858/410-5200 |
Indicate by a check 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 filing requirements for the past 90 days.
Yes ý No o
As of May 10, 2002, Registrant had 17,307,673 shares of its Common Stock, $.01 par value, outstanding.
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
INDEX
| | Page No. | ||
|---|---|---|---|
| PART I—FINANCIAL INFORMATION | |||
Item 1. Financial Statements | |||
Condensed Consolidated Balance Sheets | 3 | ||
Condensed Consolidated Statements of Operations | 4 | ||
Condensed Consolidated Statements of Cash Flows | 5 | ||
Notes to Condensed Consolidated Financial Statements | 6 | ||
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 8 | ||
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 12 | ||
PART II—OTHER INFORMATION | |||
Item 6. Exhibits and Reports on Form 8-K | 14 | ||
2
Part I Financial Information:
Item 1. Financial Statements
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| | March 31, 2002 | June 30, 2001 | |||||||
|---|---|---|---|---|---|---|---|---|---|
| | (Unaudited) | (Note) | |||||||
| Assets | |||||||||
| Current assets: | |||||||||
| Cash and cash equivalents | $ | 6,957,000 | $ | 6,185,000 | |||||
| Short-term investments | — | 81,000 | |||||||
| Other current assets | 991,000 | 2,646,000 | |||||||
| Total current assets | 7,948,000 | 8,912,000 | |||||||
| Property, plant and equipment—net | 12,406,000 | 16,166,000 | |||||||
| Purchased technology—net | 11,110,000 | 12,820,000 | |||||||
| Restricted cash | 1,145,000 | 4,941,000 | |||||||
| Investment in joint venture | 5,000,000 | 5,000,000 | |||||||
| Other assets—net | 1,295,000 | 1,310,000 | |||||||
| $ | 38,904,000 | $ | 49,149,000 | ||||||
| Liabilities and Stockholders' Equity (Deficit) | |||||||||
| Current liabilities: | |||||||||
| Accounts payable | $ | 2,473,000 | $ | 4,270,000 | |||||
| Accrued expenses | 2,164,000 | 2,837,000 | |||||||
| Deferred revenue | 750,000 | — | |||||||
| Current portion of long-term debt | — | 2,667,000 | |||||||
| Total current liabilities | 5,387,000 | 9,774,000 | |||||||
| Deferred revenue | 10,000,000 | 10,000,000 | |||||||
| Long-term debt | 21,010,000 | 32,729,000 | |||||||
| Stockholders' equity (deficit): | |||||||||
| Preferred stock—$.01 par value; 5,000,000 shares authorized; 750,000 and 600,000 shares of Series F issued and outstanding at March 31, 2002 and June 30, 2001, respectively | 8,000 | 6,000 | |||||||
| Common stock—$.01 par value; 125,000,000 shares authorized; 17,307,673 and 9,908,214 shares issued and outstanding at March 31, 2002 and June 30, 2001, respectively | 173,000 | 99,000 | |||||||
| Additional paid-in capital | 459,823,000 | 430,627,000 | |||||||
| Accumulated comprehensive loss | — | (219,000 | ) | ||||||
| Accumulated deficit | (457,497,000 | ) | (433,867,000 | ) | |||||
| Total stockholders' equity (deficit) | 2,507,000 | (3,354,000 | ) | ||||||
| $ | 38,904,000 | $ | 49,149,000 | ||||||
| | | |
|---|---|---|
| Note: | The balance sheet at June 30, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. |
See Accompanying Notes to Condensed Consolidated Financial Statements
3
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| | Three months ended March 31, | Nine months ended March 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2002 | 2001 | ||||||||||
| | (Unaudited) | (Unaudited) | ||||||||||||
| Revenues: | ||||||||||||||
| License and research revenue | $ | 4,516,000 | $ | 1,211,000 | $ | 9,583,000 | $ | 1,621,000 | ||||||
Operating expenses: | ||||||||||||||
| Research and development | 8,234,000 | 16,310,000 | 25,260,000 | 44,101,000 | ||||||||||
| General and administrative | 2,258,000 | 2,138,000 | 6,803,000 | 6,819,000 | ||||||||||
| 10,492,000 | 18,448,000 | 32,063,000 | 50,920,000 | |||||||||||
| Loss from operations | (5,976,000 | ) | (17,237,000 | ) | (22,480,000 | ) | (49,299,000 | ) | ||||||
Imputed interest expense on convertible notes | — | — | — | (1,082,000 | ) | |||||||||
| Investment income | 45,000 | 442,000 | 228,000 | 5,187,000 | ||||||||||
| Interest expense | (282,000 | ) | (428,000 | ) | (1,378,000 | ) | (1,715,000 | ) | ||||||
| Net loss applicable to common shares | $ | (6,213,000 | ) | $ | (17,223,000 | ) | $ | (23,630,000 | ) | $ | (46,909,000 | ) | ||
| Net loss per common share: | ||||||||||||||
| Basic and diluted | $ | (0.36 | ) | $ | (1.74 | ) | $ | (1.75 | ) | $ | (4.84 | ) | ||
| Weighted average shares outstanding: | ||||||||||||||
| Basic and diluted | 17,282,000 | 9,898,000 | 13,471,000 | 9,697,000 | ||||||||||
See Accompanying Notes to Condensed Consolidated Financial Statements
4
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| | Nine months ended March 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | ||||||||
| | (Unaudited) | |||||||||
| Operating activities: | ||||||||||
| Net loss | $ | (23,630,000 | ) | $ | (46,909,000 | ) | ||||
| Adjustments to reconcile net loss to net cash used in operations: | ||||||||||
| Depreciation and amortization | 5,485,000 | 5,002,000 | ||||||||
| Imputed interest expense on convertible debentures | — | 1,082,000 | ||||||||
| Expense associated with warrant issuance | 126,000 | 360,000 | ||||||||
| Loss (gain) on sale of equity securities | 251,000 | (3,723,000 | ) | |||||||
| Non-cash compensation—net | 267,000 | 257,000 | ||||||||
| Changes in operating assets and liabilities: | ||||||||||
| Research revenue receivable | — | 146,000 | ||||||||
| Restricted cash and other assets | 5,466,000 | (152,000 | ) | |||||||
| Accounts payable, accrued expenses, deferred revenue and other | (1,986,000 | ) | (1,910,000 | ) | ||||||
| Net cash used in operating activities | (14,021,000 | ) | (45,847,000 | ) | ||||||
| Investing activities: | ||||||||||
| Sales and maturities of short-term investments | 49,000 | 4,588,000 | ||||||||
| Cash acquired from MBI acquisition | — | 7,951,000 | ||||||||
| Property, plant and equipment—net | (15,000 | ) | (2,716,000 | ) | ||||||
| Net cash provided by investing activities | 34,000 | 9,823,000 | ||||||||
| Financing activities: | ||||||||||
| Issuance of common stock | 13,666,000 | 3,822,000 | ||||||||
| Issuance of convertible preferred stock—net | 5,704,000 | — | ||||||||
| Proceeds from long-term debt | — | 19,000,000 | ||||||||
| Proceeds from option to purchase convertible notes | — | 1,500,000 | ||||||||
| Principal payments on long-term debt | (4,611,000 | ) | (3,522,000 | ) | ||||||
| Net cash provided by financing activities | 14,759,000 | 20,800,000 | ||||||||
| Increase (decrease) in cash and cash equivalents | 772,000 | (15,224,000 | ) | |||||||
| Cash and cash equivalents at beginning of period | 6,185,000 | 28,721,000 | ||||||||
| Cash and cash equivalents at end of period | $ | 6,957,000 | $ | 13,497,000 | ||||||
| Supplemental disclosure of cash flow information: | ||||||||||
| Interest paid | $ | 1,207,000 | $ | 1,166,000 | ||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||||
| Issuance of common stock related to MBI acquisition | $ | — | $ | 10,526,000 | ||||||
| Net liabilities acquired from MBI acquisition | $ | — | $ | 1,860,000 | ||||||
| Issuance of common stock upon conversion of notes | $ | 9,900,000 | $ | 6,100,000 | ||||||
See Accompanying Notes to Condensed Consolidated Financial Statements
5
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Alliance Pharmaceutical Corp. and its subsidiaries (collectively, the "Company" or "Alliance") are engaged in identifying, designing, and developing novel medical products.
Principles of Consolidation
The consolidated financial statements include the accounts of Alliance Pharmaceutical Corp., the accounts of its wholly owned subsidiary Molecular Biosystems, Inc. ("MBI") from the acquisition date of December 29, 2000, its wholly owned subsidiaries Astral, Inc., MDV Technologies, Inc., Alliance Pharmaceutical GmbH, and its majority-owned subsidiary Talco Pharmaceutical, Inc. All significant intercompany accounts and transactions have been eliminated. Certain amounts in fiscal 2001 have been reclassified to conform to the current year's presentation.
Interim Condensed Financial Statements
The condensed consolidated balance sheet as of March 31, 2002, the condensed consolidated statements of operations for the three and nine months ended March 31, 2002 and 2001, and the condensed consolidated statements of cash flows for the nine months ended March 31, 2002 and 2001 are unaudited. In the opinion of management, such unaudited financial statements include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the results for the periods presented. Interim results are not necessarily indicative of the results to be expected for the full year. The financial statements should be read in conjunction with the Company's consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended June 30, 2001.
Purchased Technology
The majority of the purchased technology was acquired as a result of the merger of Fluoromed Pharmaceutical, Inc. in 1989. The technology acquired is the Company's core perfluorochemical ("PFC") technology and was valued based on an analysis of the present value of future earnings anticipated from this technology at that time. The Company identified alternative future uses for the PFC technology, including theOxygent™ (temporary blood substitute) product. Purchased technology also includes $4.5 million for technology capitalized as a result of the acquisition of MBI in December 2000.
The PFC technology is the basis for the Company's main drug development programs and is being amortized over a 20-year life. The PFC technology has a net book value of $8.0 million and $8.9 million, and is reported net of accumulated amortization of $15.2 million and $14.3 million at March 31, 2002 and June 30, 2001, respectively. The technology acquired from MBI has a book value of $3.1 million and $3.9 million, net of accumulated amortization of $1.4 million and $559,000 at March 31, 2002 and June 30, 2001, respectively, and is being amortized over four years.
The carrying value of purchased technology is reviewed periodically based on the projected cash flows to be received from license fees, milestone payments, royalties and other product revenues. If such cash flows are less than the carrying value of the purchased technology, the difference will be charged to expense.
6
Comprehensive Income and Loss
Financial Accounting Standards Board's Statement No. 130, Comprehensive Income ("SFAS No. 130") establishes new rules for the reporting and display of comprehensive income and its components. SFAS No. 130 requires unrealized gains and losses on the Company's available-for-sale securities to be included in comprehensive income. During the three months ended March 31, 2002 and 2001, the total comprehensive loss, which includes the unrealized gain or loss on available-for-sale securities, was $6,213,000 and $17,546,000, respectively. During the nine months ended March 31, 2002 and 2001, the total comprehensive loss, which includes the unrealized gain or loss on available-for-sale securities, was $23,410,000 and $50,550,000, respectively.
Net Loss Per Share
The Company computes net loss per common share in accordance with Financial Accounting Standards Board's Statement No. 128, Earnings Per Share ("SFAS No. 128"). SFAS No. 128 requires the presentation of basic and diluted earnings per share amounts. Basic earnings per share is calculated based upon the weighted average number of common shares outstanding during the period while diluted earnings per share also gives effect to all potential dilutive common shares outstanding during the period such as common shares underlying options, warrants, and convertible securities, and contingently issuable shares. All potential dilutive common shares have been excluded from the calculation of diluted earnings per share as their inclusion would be anti-dilutive.
Stockholders' Equity (Deficit)
On October 18, 2001, a 1:5 reverse stock split that had been approved at the Company's Annual Meeting of Shareholders became effective. All share and per share related data in the consolidated financial statements have been adjusted to reflect the reverse stock split for all periods presented.
New Accounting Requirements
In July 2001, the Financial Accounting Standards Board ("FASB") issued FASB Statements Nos. 141 and 142 (FAS 141 and FAS 142), "Business Combinations" and "Goodwill and Other Intangible Assets." FAS 141 replaces APB 16 and eliminates pooling-of-interests accounting prospectively. It also provides guidance on purchase accounting related to the recognition of intangible assets and accounting for negative goodwill. FAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Under FAS 142, goodwill will be tested annually and whenever events or circumstances occur indicating that goodwill might be impaired. FAS 141 and FAS 142 are effective for all business combinations completed after June 30, 2001. Upon adoption of FAS 142, amortization of goodwill recorded for business combinations consummated prior to July 1, 2001 will cease, and intangible assets acquired prior to July 1, 2001 that do not meet the criteria for recognition under FAS 141 will be reclassified to goodwill. Companies are required to adopt FAS 142 for fiscal years beginning after December 15, 2001, but early adoption is permitted under certain circumstances. The adoption of these standards is not expected to have a material impact on the Company's results of operations and financial position.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
(References to years are to the Company's fiscal years ended June 30.)
Since commencing operations in 1983, the Company has applied substantially all of its resources to research and development programs and to clinical trials. The Company has incurred losses since inception and, as of March 31, 2002, has an accumulated deficit of $457.5 million. The Company expects to incur significant losses over at least the next few years as the Company continues its research and product development efforts and attempts to commercialize its products.
The Company's revenues have come primarily from collaborations with corporate partners, including research and development and milestone payments. The Company's expenses have consisted primarily of research and development costs and administrative costs. To date, the Company's revenues from the sale of products have not been significant. The Company believes its future operating results may be subject to quarterly fluctuations due to a variety of factors, including the timing of future collaborations and the achievement of milestones under collaborative agreements, whether and when new products are successfully developed and introduced by the Company or its competitors, and market acceptance of products under development.
Liquidity and Capital Resources
Through March 2002, the Company financed its activities primarily from public and private sales of equity and funding from collaborations with corporate partners.
In March 2002, Alliance and Inhale Therapeutic Systems, Inc. ("Inhale") expanded their agreement regarding thePulmoSpheres® particle and particle processing technology, aspects of which Inhale initially acquired from Alliance in November 1999. ThePulmoSpheres technology is a particle formation method designed to enhance the performance of drugs delivered via the lung in propellant-based metered-dose inhalers and dry powder inhalers. As a result of the supplemental agreement, Inhale paid to Alliance $5.25 million in exchange for rights beyond inhaleable applications and other considerations. For the quarter ended March 31, 2002, the Company recorded revenue of $4.5 million for the transfer of technology and deferred revenue of $750,000, to properly reflect the shipment of chemical inventory to Inhale subsequent to quarter-end.
Under the terms of the supplemental agreement, Inhale has the right to use thePulmoSpheres technology for alternative methods of delivery in addition to inhaleable applications. Further, Alliance assigned five new patent applications covering methods of producing microparticles to Inhale. Alliance retains the rights to use the technology on products to be instilled directly into the lung, and obtains the rights to commercialize up to four products administered with inhalers, two of which will be royalty-free. Inhale will pay Alliance future milestone or royalty payments on a reduced number of products developed by Inhale or its licensees utilizing the technology. Inhale has also purchased chemicals from Alliance in accordance with the 1999 agreement and obtained an option to purchase additional such material through September 2003. These chemicals are used in the production of thePulmoSpheres technology, and this purchase will allow Inhale to accelerate its product development efforts.
A private placement financing was completed on October 31, 2001, pursuant to which Alliance received proceeds of $15,100,150 and issued 4,314,329 shares of its common stock at $3.50 per share and warrants to purchase 4,334,329 shares of its common stock at $4.20 per share to a group of institutional investors. In November 2001, the Company issued an additional 153,174 shares of its common stock to the investors and reduced the warrant exercise price to $4.06 per share. Pursuant to the terms of the purchase agreement and the warrants, the number of shares issued to the investors and the warrant exercise price were both subject to adjustment based on the volume weighted average price of Alliance's common stock during the 10 trading days beginning November 15, 2001, which was $3.38.
8
In October 2001, the Company entered into a Contribution Agreement with certain holders of its Four-Year, 5% Subordinated Convertible Debentures (the "Debentures"), pursuant to which the Debenture holders agreed to exchange $9.5 million principal amount of their Debentures for shares of Alliance's common stock. The number of shares issued to the Debenture holders was based on the volume weighted average price of Alliance's common stock during the 10 days trading beginning November 15, 2001. Accordingly, on November 30, 2001, Alliance issued 2,810,651 shares of its common stock to the Debenture holders in exchange for their Debentures, which Debentures were canceled by Alliance.
In June 1998, the Company entered into a loan and security agreement with a bank to provide up to $15 million at the bank's prime rate plus 0.5%. Amounts borrowed were secured by a $3.2 million restricted certificate of deposit and certain fixed assets and patents, and were scheduled to be repaid over three years. In October 2001, the certificate of deposit was liquidated and the loan was paid in full.
In August 2001, the Company announced the amendment of theOptison® Product Rights Agreement ("OPRA") dated May 9, 2000 between Mallinckrodt, a unit of Tyco Healthcare, and the Company's subsidiary, MBI.Optison, an intravenous ultrasound contrast agent, was developed by MBI and has been marketed by Mallinckrodt in the U.S. and Europe. Under the original terms of OPRA, Mallinckrodt was to pay MBI a royalty of 5% of net sales ofOptison in the U.S. and Europe for as long as Mallinckrodt was marketing the product. MBI has received royalties of approximately $200,000 per quarter from Mallinckrodt this year. Under the modified agreement, MBI received $5 million in cash and is entitled to potential royalties for two years in lieu of any further payments.
In March 2002, the Company announced that it has entered into a partnership with Schering AG, Germany ("Schering") and Cardinal Health, Inc. ("Cardinal") for the marketing ofImavist™, an ultrasound contrast agent. Schering licensed worldwide marketing rights forImavist from Alliance in September 1997. The companies agreed to modify this agreement to allow Alliance to increase its participation in the marketing of the product. Under the terms of the modified agreement, Alliance will have exclusive marketing rights toImavist for cardiology indications in the U.S. for five years, and Schering will receive a royalty on product sales. Schering retains marketing rights for other indications in the U.S. and all indications in the rest of the world, subject to Alliance's option to obtain additional indications and territories. Under certain circumstances, Schering would co-market the product at the end of five years. Concurrently, Alliance entered into a five-year exclusive agreement with Cardinal Health, Inc. to assist in the marketing ofImavist. Under the agreement, Cardinal Health will perform certain packaging, distribution, and sales services for Alliance under a fee-for-service arrangement. Cardinal will extend to Alliance a revolving line of credit, which will be repaid from product revenues.
In May 2000, Alliance and Baxter Healthcare Corporation ("Baxter") entered into a joint venture for the manufacture, marketing, sales and distribution ofOxygent in the United States, Canada and countries in the European Union (the "Baxter Territory"). The companies formed PFC Therapeutics, LLC ("PFC Therapeutics") to oversee the further development, manufacture, marketing, sales and distribution ofOxygent; and each party invested $5 million in PFC Therapeutics. In connection with the transaction, PFC Therapeutics obtained an exclusive license from Alliance in the Baxter Territory, to manufacture and market all of the Company's injectable perfluorochemical emulsions capable of transporting oxygen in therapeutic effective amounts in the bloodstream, includingOxygent. PFC Therapeutics paid Alliance a prepaid royalty of $10 million, which has been recorded as deferred revenue. Alliance and Baxter will also share in the distribution of PFC Therapeutics' future cash flows. Under the arrangement, Alliance will continue to fund the current development plan forOxygent's initial approval in the Baxter Territory. PFC Therapeutics has a right of first offer to licenseOxygent in one or more countries outside the Baxter Territory. Pursuant to a manufacturing and supplier agreement between Alliance and PFC Therapeutics, Alliance will initially manufactureOxygent for distribution in the Baxter Territory. Under separate agreements between Baxter and PFC Therapeutics,
9
Baxter will have the exclusive right to promote, market, distribute and sellOxygent in the Baxter Territory, and Baxter has the right to take over the manufacturing responsibility forOxygent. In connection with this arrangement, Baxter purchased 500,000 shares of the Company's convertible Series F Preferred Stock for $20 million. Initially, in order for Baxter to maintain its rights to commercialize the product, Baxter was required to purchase an additional $30 million of convertible redeemable preferred stock through September 2001. In May 2001, because of a revised product development schedule, the Company and Baxter modified the expected payments, and Baxter purchased an additional $4 million of Series F Preferred Stock and $3 million of certainOxygent related equipment in lieu of purchasing the same amount of preferred stock, in a transaction accounted for as a sale and lease-back. In August 2001, Baxter purchased another $4 million of the Company's Series F Preferred Stock and the companies agreed to restructure the remaining $19 million stock purchases originally scheduled for 2001 in order to reflect the timeline revisions in the clinical and regulatory plans, and in order for Baxter to maintain its rights to the product. In January 2002, Baxter made an additional investment of $2 million in Alliance convertible preferred stock. The remaining $17 million obligation will be paid to the Company if certain milestones are reached during the development of the new pivotal Phase 3 trial protocol and the conduct of the study.
The Company had net working capital of $2.6 million at March 31, 2002, compared to a deficit ($862,000) at June 30, 2001. The Company's cash, cash equivalents, and short-term investments increased to $7 million at March 31, 2002, from $6.3 million at June 30, 2001. The increase resulted primarily from net proceeds of $13.7 million from the October 2001 private placement financing and by net proceeds of $5.7 million from the sale of preferred stock, partially offset by net cash used in operations of $14 million and principal payments (paid with restricted and unrestricted cash) on long-term debt of $4.6 million. The Company's operations to date have consumed substantial amounts of cash and are expected to continue to do so for the foreseeable future.
The Company continually reviews its product development activities in an effort to allocate its resources to those product candidates that the Company believes have the greatest commercial potential. Factors considered by the Company in determining the products to pursue include projected markets and need, potential for regulatory approval and reimbursement under the existing healthcare system, status of its proprietary rights, technical feasibility, expected and known product attributes, and estimated costs to bring the product to market. Based on these and other factors, the Company may from time to time reallocate its resources among its product development activities. Additions to products under development or changes in products being pursued can substantially and rapidly change the Company's funding requirements.
The Company expects to incur substantial expenditures associated with product development, particularly forOxygent andImavist™. The Company may seek additional collaborative research and development relationships with suitable corporate partners for its non-licensed products. There can be no assurance that such relationships, if any, will successfully reduce the Company's funding requirements. Additional equity or debt financing may be required, and there can be no assurance that such financing will be available on reasonable terms, if at all. If adequate funds are not available, the Company may be required to delay, scale back, or eliminate one or more of its product development programs, or obtain funds through arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, product candidates, or products that the Company would not otherwise relinquish.
Alliance anticipates that its current capital resources, expected milestone payments by Baxter and expected revenue from investments will be adequate to satisfy its capital requirements through at least fiscal 2002. The Company's future capital requirements will depend on many factors, including, but not limited to, continued scientific progress in its research and development programs, progress with preclinical testing and clinical trials, the time and cost involved in obtaining regulatory approvals, patent costs, competing technological and market developments, changes in existing collaborative
10
relationships, the ability of the Company to establish additional collaborative relationships, and the cost of manufacturing scale-up.
While the Company believes that it can produce materials for clinical trials and the initial market launch forOxygent andImavist at its existing San Diego, California facilities, it may need to expand its commercial manufacturing capabilities for its products in the future. Any expansion for any of its products may occur in stages, each of which would require regulatory approval, and product demand could at times exceed supply capacity. The Company has not selected a site for such expanded facilities and cannot predict the amount it will expend for the construction of such facilities. There can be no assurance as to when or whether the U.S. Food and Drug Administration ("FDA") will determine that such facilities comply with Good Manufacturing Practices. The projected location and construction of such facilities will depend on regulatory approvals, product development, and capital resources, among other factors. The Company has not obtained any regulatory approvals for its production facilities for these products, nor can there be any assurance that it will be able to do so. The Company currently has responsibility for manufacturingOxygent; however, Baxter has the right to take over responsibility for manufacturing the product for sale in the Baxter Territory. The Company sold its facility in Otisville, New York in June 2001.
Except for historical information, the statements made herein and elsewhere are forward-looking. The Company wishes to caution readers that these statements are only predictions and that the Company's business is subject to significant risks. The factors discussed herein and other important factors, in some cases have affected, and in the future could affect, the Company's actual results and could cause the Company's actual consolidated results for 2002, and beyond, to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. These risks include, but are not limited to, the inability to obtain adequate financing for the Company's development efforts; the inability to enter into collaborative relationships to further develop and commercialize the Company's products; changes in any such relationships, or the inability of any collaborative partner to adequately commercialize any of the Company's products; the uncertainties associated with the lengthy regulatory approval process, including uncertainties associated with FDA decisions and timing on product development or approval; and the uncertainties associated with obtaining and enforcing patents important to the Company's business; and possible competition from other products. Furthermore, even if the Company's products appear promising at an early stage of development, they may not reach the market for a number of important reasons. Such reasons include, but are not limited to, the possibilities that the potential products will be found ineffective during clinical trials; failure to receive necessary regulatory approvals; difficulties in manufacturing on a large scale; failure to obtain market acceptance; and the inability to commercialize because of proprietary rights of third parties. The research, development, and market introduction of new products will require the application of considerable technical and financial resources, while revenues generated from such products, assuming they are developed successfully, may not be realized for several years. Other material and unpredictable factors which could affect operating results include, without limitation, the uncertainty of the timing of product approvals and introductions and of sales growth; the ability to obtain necessary raw materials at cost-effective prices or at all; the effect of possible technology and/or other business acquisitions or transactions; and the increasing emphasis on controlling healthcare costs and potential legislation or regulation of healthcare pricing. Further cautionary information is contained in documents the Company files with the Securities and Exchange Commission from time to time, including the last Form 10-K, and those risk factors set forth in the most recent registration statement on Form S-3 (File No. 333-72844) and Form S-4 (File No. 333-49676).
11
Results of Operations
Nine Months ended March 31, 2002 as Compared with Nine Months ended March 31, 2001
The Company's license and research revenue increased by $8 million to $9.6 million for the nine months ended March 31, 2002, compared to $1.6 million for the nine months ended March 31, 2001. The increase was primarily a result of the $4.5 million in revenue recorded in connection with the Inhale supplemental agreement forPulmoSpheres technology in March 2002 and the $5 million received from Mallinckrodt in connection with the amendment of theOptison Product Rights Agreement in August 2001.
Research and development expenses decreased by 43% to $25.3 million for the nine months ended March 31, 2002, compared to $44.1 million for the nine months ended March 31, 2001. The decrease in expenses was primarily due to a $13.6 million decrease in payments to outside researchers for clinical trials and other product development work, a $3.8 million decrease in staffing costs for employees engaged in research and development activities, a $1 million decrease in utility expenses, as well as other decreases related to the Company's research and development activities.
General and administrative expenses were $6.8 million for the nine months ended March 31, 2002, compared to $6.8 million for the nine months ended March 31, 2001.
Investment income was $228,000 for the nine months ended March 31, 2002, compared to $5.2 million for the nine months ended March 31, 2001. The decrease was primarily a result of a decrease in realized gains from the sale of short-term investments.
Interest expense was $1.4 million for the nine months ended March 31, 2002, compared to $1.7 million for the nine months ended March 31, 2001. The decrease was primarily a result of lower average long-term debt balances.
For the nine months ended March 31, 2001, the Company recorded imputed interest expense of $1.1 million related to the beneficial conversion feature on the $12 million subordinated convertible debentures.
Three Months ended March 31, 2002 as Compared with Three Months ended March 31, 2001
The Company's license and research revenue increased to $4.5 million for the three months ended March 31, 2002, compared to $1.2 million for the three months ended March 31, 2001. The increase was a result of the $4.5 million in revenue recorded in connection with the Inhale supplemental agreement forPulmoSpheres technology in March 2002.
Research and development expenses decreased by 50% to $8.2 million for the three months ended March 31, 2002, compared to $16.3 million for the three months ended March 31, 2001. The decrease in expenses was primarily due to a $5.8 million decrease in payments to outside researchers for clinical trials and other product development work, a $1.3 million decrease in staffing costs for employees engaged in research and development activities, a $400,000 decrease in utility expenses, as well as other decreases related to the Company's research and development activities.
General and administrative expenses were $2.3 million for the three months ended March 31, 2002, compared to $2.1 million for the three months ended March 31, 2001. The increase in general and administrative expenses was primarily due to increased professional fees related to partnering and financing activities.
Investment income and other was $45,000 for the three months ended March 31, 2002, compared to $442,000 for the three months ended March 31, 2001. The decrease was primarily a result of decrease in realized gains from the sale of short-term investments.
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Interest expense was $282,000 for the three months ended March 31, 2002, compared to $428,000 for the three months ended March 31, 2001. The decrease was primarily a result of lower average long-term debt balances.
Alliance expects to continue to incur substantial expenses associated with its research and development programs. Operating losses may fluctuate from quarter to quarter as a result of differences in the timing of revenues earned and expenses incurred and such fluctuations may be substantial. The Company's historical results are not necessarily indicative of future results.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is or has been exposed to changes in interest rates primarily from its long-term debt arrangements and, secondarily, its investments in certain securities. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. The Company believes that a hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of the Company's interest sensitive financial instruments at March 31, 2002.
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Item 6. Exhibits and Reports on Form 8-K
| | | | | ||
|---|---|---|---|---|---|
| (a) | Exhibits | ||||
10(a) | Agreement dated as of February 28, 2002 between the Company and RedKey, Inc., dba Cardinal Health Sales and Marketing Services * | ||||
10(b) | Amended and Restated License Agreement dated as of February 22, 2002 between the Company and Schering Aktiengesellschaft * | ||||
* A request for confidential treatment of certain portions of this exhibit has been filed with the Securities and Exchange Commission. | |||||
(b) | Reports on Form 8-K | ||||
The Company filed a current report on Form 8-K dated April 1, 2002, stating that the Company and Inhale Therapeutic Systems have entered into a Supplemental Agreement which amended certain terms of the Original Agreements.
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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.
| ALLIANCE PHARMACEUTICAL CORP. (Registrant) | ||
/s/ TIM T. HART Tim T. Hart Chief Financial Officer and Treasurer |
Date: May 15, 2002
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ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS