Certain statements in this Management’s Discussion and Analysis of Financial Conditions and Results of Operations and the notes to our unaudited financial statements (Item 1) as well as statements made from time to time by our representatives may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward looking statements include (without limitation) statements regarding planned or expected studies and trials of oral formulations that utilize our eligen™ technology; the timing of the development and commercialization of our product candidates or potential products that may be developed using our eligen™ technology; the potential market size, advantages or therapeutic uses of our potential products; variation in actual savings and operating improvements resulting from restructurings; and the sufficiency of our available capital resources to meet our funding needs. We do not undertake any obligation to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise, except as required by law. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results or achievements expressed or implied by such forward-looking statements. Such factors include the factors described in our Annual Report on Form 10-K for the year ending December 31, 2003 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Factors” and the other factors discussed in connection with any forward-looking statements.
Emisphere is a biopharmaceutical company specializing in the oral delivery of therapeutic macromolecules and other compounds that are not currently deliverable by oral means. Since our inception in 1986, we have devoted substantially all of our efforts and resources to research and development conducted on our own behalf and through collaborations with corporate partners and academic research institutions. We have no product sales to date. Our major sources of working capital have been proceeds from various public and private equity and debt financings, reimbursement of expenses and other payments from corporate partners, and income earned on the investment of available funds. Neither inflation nor seasonality significantly affects our operations.
There were no reportable contract research revenues in the first quarter of 2004, as compared to contract research revenue of $26 thousand in the first quarter of 2003, which related to research and development expense reimbursement under our collaborative agreements with Eli Lilly and Company. Costs of contract research revenues approximate such revenues and are included in research and development expenses.
Total operating expenses were $8.7 million in the quarter ended March 31, 2004, a decrease of $331 thousand, or 4%, compared to the same period last year. The details of this decrease are as follows:
Research and development costs were $4.9 million in the quarter ended March 31, 2004, a decrease of $83 thousand or 2%, compared to the same period last year. The $83 thousand decrease reflects an increase of $59 thousand in Phase I clinical trial expense and $396 thousand in toxicology study expenses, and a decrease of $171 thousand in employee compensation, $180 thousand in professional fees and $187 thousand in occupancy costs.
General and administrative expenses were $2.6 million in the quarter ended March 31, 2004, an increase of $47 thousand, or 2%, compared to the same period last year. The $47 thousand increase reflects an increase of $303 thousand in professional fees, and a decrease of $214 thousand in employee compensation and related costs and $42 thousand in occupancy costs.
Depreciation and amortization costs were $1.2 million in the quarter ended March 31, 2004, a decrease of $291 thousand, or 19%, compared to the same period in 2003. This decrease primarily is the result of the surrender of a portion of the leased space at the Tarrytown facility and the resultant reduction in the cost basis of leasehold improvements.
In May 2002, we announced a plan for restructuring our operations, which included the discontinuation of our liquid oral heparin program and related initiatives, and a reduction of associated infrastructure. In the third quarter of 2002, we decided to dispose of the Farmington research facility. As a result of these events, we reduced our full-time work force by approximately 50%.
Upon initiation of these events, we recorded restructuring accruals for the Tarrytown and Farmington facilities and the reduction in force. The restructuring reserve as of January 1, 2004 was $25 thousand, representing $24 thousand of severance and accrued vacation and $1 thousand of employee benefits. During the first quarter of 2004, we made severance and accrued vacation payments of $6 thousand. Thus, the restructuring reserve as of March 31, 2004 is $19 thousand, representing $18 thousand of severance and accrued vacation and $1 thousand of employee benefits.
The restructuring reserve as of January 1, 2003 was $122 thousand, representing $48 thousand of severance and accrued vacation, $1 thousand of employee benefits, and $73 thousand of contract exit costs. We did not make any payments related to the restructuring plan during the first quarter of 2003. Thus, the restructuring reserve as of March 31, 2003 remained at $122 thousand.
As of March 31, 2004 and December 31, 2003, the remaining restructuring reserve is included in accounts payable and accrued expenses on the condensed consolidated balance sheets. It is anticipated that the remaining reserve will be paid out when we dispose of the Farmington facility.
As of March 31, 2004, we performed an evaluation of the recoverability of the purchased technology related to the solid forms of oral heparin. Since the studies related to this formulation are proceeding as planned, management estimates that future undiscounted cash flows from programs related to the solid forms of oral heparin are sufficient to realize the carrying value of the asset and, therefore, an impairment of the purchased technology has not been triggered as of March 31, 2004.
Farmington Facility Transaction. In December 2003, we entered into a contract of sale for the Farmington facility with a real estate developer. The purchaser’s obligations to close on the facility are contingent on receiving certain governmental approvals, including but not limited to zoning approvals in final form, wetlands approvals and state environmental approvals, by August 12, 2004. In the event that the purchaser has not terminated the contract by August 12, 2004 because of the failure to obtain governmental approvals, the purchaser is obligated to close on the premises by the earlier date of the thirtieth day after receipt of governmental approvals or November 12, 2004. The purchaser does have the right to adjourn the closing date for six months after November 12, 2004 if governmental approvals have not been received and provided the purchaser shall pay the sum of $35 thousand per month to Emisphere. As of March 31, 2004, we performed an evaluation of the land, building and equipment available for sale at the Farmington facility, which has a carrying value of $3.6 million. We evaluated the following two components of the facility: land, building and equipment that would most likely be transferred to the buyer when the sale is consummated (such as equipment which is attached to the structure and expensive to remove), and equipment that is portable and available for sale and would most likely be retained by us. We evaluated the land, building and attached equipment based on the sale price in the contract and determined that an impairment loss of the carrying value of the land, building and attached equipment had not been triggered as of March 31, 2004. In the event that we are not successful in closing the sale of the Farmington facility, we may need to write down the carrying value of the land, building and equipment further. Because the sale is contingent in part on certain governmental approvals, we cannot predict with certainty when, or if, the closing will take place.
As a result of the above, our operating loss was $8.7 million for the quarter ended March 31, 2004, a decrease of $305 thousand, or 3%, as compared to $9.0 million for the quarter ended March 31, 2003.
Other expense and income for the first quarter of 2004 was $1.2 million, compared to $866 thousand of net investment expense for the same period last year. The increase of $302 thousand reflects an increase of $206 thousand in interest expense, a decrease of $244 thousand in investment income and an increase of $148 thousand in rental and other income. The decrease in investment income resulted from reduced cash and investment balances, and reduced interest rates.
Based on the above, we sustained a net loss of $9.9 million for the quarter ended March 31, 2004, as compared to a net loss of $9.9 million for the same period in 2003.
13
Liquidity and Capital Resources
As of March 31, 2004, total cash, cash equivalents and investments were $36.4 million, a decrease of $6.6 million as compared to December 31, 2003.
Net cash used in operations was $7.2 million in the three month period ended March 31, 2004, as compared to $7.9 million in the three month period ended March 31, 2003. This $779 thousand decrease primarily was the result of our restructuring efforts, including the subsequent closing of our Farmington, Connecticut facility and the surrender of the leased space at our Tarrytown facility, all of which occurred prior to 2004.
Net cash provided by investing activities was $1.6 million in the three month period ended March 31, 2004, as compared to $4.1 million in the three month period ended March 31, 2003. During the three month period ended March 31, 2004, proceeds from matured investments totaled $3.8 million, of which $2.0 million was used to purchase other investments.
Capital expenditures amounted to $255 thousand in the three month period ended March 31, 2004, as compared to $210 thousand for the same period in 2003. Proceeds from the sale of fixed assets were $11 thousand in 2004, as compared to $36 thousand for the same period last year.
Since our inception in 1986, we have generated significant losses from operations and anticipate that we will continue to generate significant losses from operations for the foreseeable future. On March 31, 2004, our accumulated deficit was approximately $304.9 million. Operations to date have been funded with the proceeds from collaborative research agreements, public and private equity and debt financings and income earned on investments.
In the absence of additional financing, new collaborations, milestone payments and/or closing of the sale of the Farmington facility, our cash, cash equivalent and investment balances as of December 31, 2004 are expected to have decreased from December 31, 2003 by approximately $27 million, to end the year with total balances of approximately $16 million in cash, cash equivalents and investments. Reduced cash expenditures as a result of the surrender of a portion of the leased premises at the Tarrytown facility and closing on the sale of the Farmington facility, should it occur, will be partially offset by higher costs due to inflation and increases in employee compensation. We expect capital expenditures to be in the range of $400 thousand to $600 thousand in 2004. Capital purchases may be financed by lease arrangements.
This projection of cash usage and year end cash, cash equivalent and investment balances assumes that during 2004, we will not, among other things, enter into a partnership agreement for oral insulin, solid oral heparin or any other non-partnered program, receive any milestone payments on currently partnered programs, close on the sale of the Farmington facility, or take other actions through further restructuring to reduce overall expenditures. We cannot assure you that we will be able to generate sufficient revenue or raise sufficient funds to continue operations at current levels beyond 2004, and if we fail to generate sufficient revenue, raise additional funds or undergo further restructuring, the resultant reduction of our available cash resources would have a material adverse effect on our ability to continue as a going concern. If we are successful in securing a partner for either oral insulin or solid oral heparin, we may receive milestone payments, upfront fees, expense reimbursements and/or cash infusions. Such cash inflows could delay our need to raise additional funds to maintain operations beyond 2004. In the event that we are unable to achieve long-term profitability and/or obtain additional capital, future operations will need to be scaled back or discontinued.
Off-Balance Sheet Arrangements
As of March 31, 2004, we had no off-balance sheet arrangements, other than operating leases.
14
The following table summarizes our significant contractual obligations as of March 31, 2004:
| | | | | Amount Due in | |
| | | | |
| |
Type of Obligation | | Total
Obligation | | Less than
1 year | | 1 to 3
years | | 4 to 5
years | | More than 5
years | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | (in thousands) | |
Long-term debt (1) | | $ | 55,000 | | $ | — | | $ | 55,000 | | $ | — | | $ | — | |
Capital lease obligations | | | 609 | | | 194 | | | 415 | | | — | | | — | |
Operating lease obligations (2) | | | 6,019 | | | 1,735 | | | 3,512 | | | 772 | | | — | |
Clinical research organizations (3) | | | 526 | | | 526 | | | — | | | — | | | — | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total | | $ | 62,154 | | $ | 2,455 | | $ | 58,927 | | $ | 772 | | $ | — | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
(1) | In July 1999, we acquired from Elan our ownership interest in Ebbisham (a jointly owned entity created by Emisphere and Elan), in exchange for a seven year, $20 million zero coupon note due July 2006 carrying a 15% interest rate, compounding semi-annually (the “Note”), plus royalties on oral heparin product sales, subject to an annual maximum and certain milestone payments. In connection with any payment from us on the Note, we have the right to require Elan to purchase our common stock at the market price at an aggregate price equal to such payment made, subject to the following conditions: (i) the acceptance by the FDA of a new drug application from Emisphere involving any heparin product, (ii) our closing stock price remaining at or above $25.00 per share for the 20 consecutive trading days prior to the date we exercise this right and (iii) the exercise of this right would not require the application of the equity accounting method by Elan. At March 31, 2004, the balance on the Elan Note was $39.8 million. |
| |
(2) | The operating lease is related to the Tarrytown facility. Under the terms of the agreement with the landlord to surrender a portion of this space in 2003, we are contingently liable for the rent payments and will be required to re-let the space through August 31, 2007 if the subsequent tenant vacates the surrendered space before August 31, 2005. We have excluded such payments from the above table because we believe that the possibility of such an event occurring is remote. In the event that the subsequent tenant vacates the space, the maximum amount which we would be obligated to pay would be $3.5 million ($1.0 million in less than one year, $2.0 million in one to three years and $426 thousand in four to five years) for rent, real estate taxes and operating expenses. |
| |
(3) | We are obligated to make payments under certain contracts with third parties who provide clinical research services to support our ongoing research and development. |
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our primary investment objective is to preserve principal while maximizing yield without significantly increasing risk. Our investments consist of U.S. Treasuries, commercial paper and corporate notes. Our investments totaled $35.0 million at March 31, 2004. Of this total, $33.9 million had fixed interest rates, of which $27.1 million were short-term and $6.8 million were long-term investments, and $1.1 million had variable interest rates, all of which were short-term investments.
Due to the conservative nature of our short-term fixed interest rate investments (maturities in less than one year), we do not believe that we have a material exposure to interest rate risk. The value of our fixed interest rate long-term investments is sensitive to changes in interest rates. Interest rate changes would result in a change in the fair value of these investments due to differences between the current market interest rate and the rate prevailing at the date of original purchase of the investment. Reasonably expected changes in prevailing interest rates would not materially impact the value of our long term investments.
15
Item 4. CONTROLS AND PROCEDURES
We conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. The evaluation was conducted under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer. Based upon this evaluation, each concluded that our disclosure controls and procedures are effective in alerting them on a timely basis to material information required to be included in our filings under the Securities Exchange Act of 1934. There has been no significant change in our internal controls over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met and cannot detect all deviations. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or deviations, if any, within the Company have been detected. While we believe that our disclosure controls and procedures have been effective, in light of the foregoing, we intend to continue to examine and refine our disclosure controls and procedures and monitor ongoing developments in this area.
16
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
There is currently pending in the United States District Court for the Southern District of Indiana, Indianapolis Division, a lawsuit with Eli Lilly and Company (“Lilly”). The suit involves disputes over research and collaboration agreements entered into with Lilly. On December 2, 2003, we were served with a complaint in an action brought by Lilly seeking (i) a declaratory judgment declaring that Lilly is not in breach of its agreements with us concerning oral formulations of recombinant parathyroid hormone, PTH 1-34, and (ii) an order preliminarily and permanently enjoining us from terminating those agreements. On February 12, 2004, Emisphere served Lilly with an amended counterclaim, alleging that Lilly filed certain patent applications relating to the use of our proprietary technology in combination with another drug, in violation of a License Agreement between the parties dated April 7, 1998, and a Research Collaboration and Option Agreement between the parties dated June 8, 2000, and that the activities disclosed in such applications infringe upon our patents. We are also alleging that Lilly has breached the agreements by failing to make a milestone payment, as required upon the completion of oral PTH 1-34 product Phase I studies. Lilly has denied these claims. On February 13, 2004, the court entered a case management plan and the parties commenced the exchange of discovery materials in March 2004. The case is currently set for trial on May 16, 2005.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements under the captions “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” (Item 2) and the notes to our unaudited financial statements (Item 1) as well as statements made from time to time by our representatives may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward looking statements include (without limitation) statements regarding planned or expected studies and trials of oral formulations that utilize our eligen™ technology; the timing of the development and commercialization of our product candidates or potential products that may be developed using our eligen™ technology; the potential market size, advantages or therapeutic uses of our potential products; variation in actual savings and operating improvements resulting from restructurings; and the sufficiency of our available capital resources to meet our funding needs. We do not undertake any obligation to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise, except as required by law. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results or achievements expressed or implied by such forward-looking statements. Such factors include the factors described in our Annual Report on Form 10-K for the year ending December 31, 2003 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Factors” and the other factors discussed in connection with any forward-looking statements.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
| Exhibit
Number | | Description of Exhibit |
|
| |
|
| 3.1 | | Restated Certificate of Incorporation of Emisphere, dated June 13, 1997, as amended by the Certificate of Amendment dated February 5, 1999 (filed as Exhibit 3(i) to the Quarterly Report on Form 10-Q for the quarterly period ended January 31, 1999, filed on March 16, 1999). |
| | | |
| 3.2 | | By-Laws of Emisphere, as amended December 7, 1998 (filed as Exhibit 3(ii) to the Quarterly Report on Form 10-Q for the quarterly period ended January 31, 1999, filed on March 16, 1999). |
| | | |
| 31.1 | | Certification pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to section 302 of the Sarbanes- Oxley Act of 2002 (filed herewith). |
17
| 31.2. | | Certification pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
| | | |
| 32.1 | | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). |
| | | |
| 32.2 | | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). |
| (b) | Reports on Form 8-K |
| | |
| | On January 27, 2004, we filed a Current Report on Form 8-K pursuant to Item 5 Other Events announcing an action brought against the Company by Eli Lilly and Company. |
| | |
| | On February 3, 2004, we filed a Current Report on Form 8-K pursuant to Item 5 Other Events announcing preliminary results from the first multiple-dose clinical study of an oral insulin tablet using its eligen(TM) technology. |
| | |
| | On February 25, 2004, we furnished a Current Report on Form 8-K pursuant to Item 12 Results of Operations and Financial Condition containing a copy of a press release announcing the Company’s financial results for the quarter and year ended December 31, 2003. |
| | |
| | On May 10, 2004, we furnished a Current Report on Form 8-K pursuant to Item 12 Results of Operations and Financial Condition containing a copy of a press release announcing our financial results for the quarter ended March 31, 2004. |
18
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 10, 2004 | EMISPHERE TECHNOLOGIES, INC. |
| |
| /S/MICHAEL M. GOLDBERG, M.D. |
|
|
| Michael M. Goldberg, M.D.
Chairman and Chief Executive Officer |
| |
| /S/ELLIOT M. MAZA |
|
|
| Elliot M. Maza
Chief Financial Officer |
19
