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 on behalf of corporate partners and academic research institutions. We have no product sales to date. Our major sources of working capital have been proceeds from 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.
Contract research revenue was $147 thousand in the second quarter of 2004 and related to research and development expense reimbursement primarily under feasibility agreements with pharmaceutical companies. Contract research revenue recorded in the second quarter of 2003 amounted to $246 thousand and primarily related to the completion of proof of concept Phase I clinical studies under a collaboration with Eli Lilly and Company. Costs of contract research revenue approximate such revenue and are included in research and development expenses.
Total operating expenses were $7.7 million in the quarter ended June 30, 2004 as compared to $10.7 million in the quarter ended June 30, 2003, a decrease of $3.0 million or 28%. The details of this decrease are as follows:
Research and development costs were $3.7 million in the quarter ended June 30, 2004, a decrease of $1.7 million or 31%, compared to the same period in 2003. The reduction includes a clinical trial expense decrease of $0.5 million primarily resulting from the final reconciliation of payments related to the PROTECT liquid oral heparin trials, a decrease in employee compensation and related costs of $0.4 million, a decrease in operating expenses of $0.6 million primarily due to the surrender of a portion of the leased space at the Tarrytown facility in late 2003 and the receipt of a credit from the landlord related to an audit of 2002 operating expenses. The remaining $0.2 million decrease related to research and development expenses in support of clinical trials.
General and administrative expenses were $2.7 million in the quarter ended June 30, 2004, a decrease of $34 thousand or 1% as compared to the quarter ended June 30, 2003.
Depreciation and amortization costs were $1.2 million in the quarter ended June 30, 2004, a decrease of $0.3 million, or 22%, 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.
At December 31, 2003, we performed an evaluation of the recoverability of the purchased technology related to oral heparin and concluded that no impairment loss had been incurred. No events occurred during the quarter ended June 30, 2004 that would require an impairment evaluation of the recoverability of the purchased technology related to the solid forms of oral heparin.
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 has the right to adjourn the closing date for six months after November 12, 2004 if governmental approvals have not been received by that date and provided that the purchaser shall pay the sum of $35 thousand per month to us for the six month period. Because the sale is contingent in part on certain governmental approvals, we cannot predict with certainty when, or if, the closing will take place. No events occurred during the quarter ended June 30, 2004 that would require an impairment evaluation of the land, building and equipment available for sale at the Farmington facility
During 2003, portable equipment with a net book value of $0.4 million was transferred from the Farmington facility for use at the Tarrytown facility and equipment with a net book value of $0.3 million was sold. The remaining equipment was then evaluated individually for potential impairment. The evaluations were based on the age and condition of the equipment, potential offers from third parties, quotes from scientific equipment resellers, and recent sales of similar equipment at auction or by us. Based on this evaluation, we recorded an impairment charge of $1.0 million for the quarter ended June 30, 2003. No events occurred during the quarter ended June 30, 2004 that would require an impairment evaluation of the equipment available for sale at the Farmington facility.
As a result of the above, the operating loss was $7.6 million in the quarter ended June 30, 2004, a decrease of $2.9 million, or 28%, compared to the same period last year.
Other expense and income increased to $1.2 million of expense, an increase of $0.3 million compared to $0.9 million of expense in the second quarter of 2003. The change is the result of a decrease in investment income of $0.3 million due to lower cash and investment balances and an increase in interest expense of $0.2 million, partially offset by a loss on the sale of fixed assets in the second quarter 2003 of $0.1 million which did not recur in 2004 and an increase in other income of $0.1 million due in part to the receipt of refunds of previous years’ operating expenses and to the rental income from the Tarrytown facility transaction.
Based on the above, we sustained a net loss of $8.8 million in the three months ended June 30, 2004 as compared to a net loss during the three months ended June 30, 2003 of $11.4 million.
Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003
Contract research revenue was $147 thousand in the first six months of 2004 and related to research and development expense reimbursement primarily under feasibility agreements with pharmaceutical companies. Revenue recorded in the first six months of 2003 was $272 thousand and primarily related to the completion of proof of concept Phase I clinical studies under a collaboration with Eli Lilly and Company. Costs of contract research revenue approximate such revenue and are included in research and development expenses.
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Operating expenses for the first six months of 2004 were $16.4 million, a decrease of $3.3 million or 17% as compared to the same period in 2003. The details of this decrease are as follows:
Research and development costs were $8.6 million for the six months ended June 30, 2004, a decrease of $1.8 million or 17%, as compared to the same period in 2003. The reduction includes a decrease in clinical trial expenses of $0.5 million primarily resulting from the final reconciliation of payments related to the PROTECT liquid oral heparin trials, a decrease in employee compensation and related costs of $0.6 million and a decrease in operating expenses of $0.8 million primarily due to the surrender of a portion of the leased space at the Tarrytown facility in late 2003. These decreases were partially offset by an increase of $0.1 million in other research and development operating expenses, due in part to the initiation of a toxicology study during the first quarter of 2004.
General and administrative expenses were $5.3 million for the six months ended June 30, 2004, which is essentially equal to the same period in 2003.
Depreciation and amortization costs were $2.5 million for the six months ended June 30, 2004, a decrease of $0.6 million, or 20%, as 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.
At December 31, 2003, we performed an evaluation of the recoverability of the purchased technology related to oral heparin and concluded that no impairment loss had been incurred. No events occurred during the six months ended June 30, 2004 that would require an impairment evaluation of the recoverability of the purchased technology related to the solid forms of oral heparin.
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 has the right to adjourn the closing date for six months after November 12, 2004 if governmental approvals have not been received by that date and provided that the purchaser shall pay the sum of $35 thousand per month to Emisphere for the six month period. Because the sale is contingent in part on certain governmental approvals, we cannot predict with certainty when, or if, the closing will take place. No events occurred during the six months ended June 30, 2004 that would require an impairment evaluation of the land, building and equipment available for sale at the Farmington facility.
During 2003, portable equipment with a net book value of $0.4 million was transferred from the Farmington facility for use at the Tarrytown facility and equipment with a net book value of $ 0.3 million was sold. The remaining equipment was then evaluated individually for potential impairment. The evaluations were based on the age and condition of the equipment, potential offers from third parties, quotes from scientific equipment resellers, and recent sales of similar equipment at auction or by us. Based on this evaluation, we recorded an impairment charge of $1.0 million during the six months ended June 30, 2003. No events occurred during the six months ended June 30, 2004 that would require an impairment evaluation of the equipment available for sale at the Farmington facility.
As a result of the above, the operating loss was $16.3 million in the six months ended June 30, 2004, a decrease of $3.2 million or 17% compared to the same period last year.
Other expense and income increased to $2.4 million of expense, an increase of $0.6 million compared to $1.8 million of expense in the comparative period in 2003. The change is the result of a decrease in investment income of $0.5 million due to lower cash and investment balances and an increase in interest expense of $0.4 million, partially offset by a loss on the sale of fixed assets in the second quarter 2003 of $0.1 million which did not recur in 2004 and an increase in other income of $0.2 million due in part to the receipt of refunds of previous years’ operating expenses and to the rental income from the Tarrytown facility transaction.
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Based on the above, we sustained a net loss of $18.7 million in the six months ended June 30, 2004 as compared to a net loss of $21.3 million during the six months ended June 30, 2003.
Liquidity and Capital Resources
As of June 30, 2004, total cash, cash equivalents and investments were $ 30.2 million, a decrease of $12.8 million as compared to December 31, 2003.
Net cash used in operations was $13.2 million in the six month period ended June 30, 2004, as compared to $15.3 million in the six month period ended June 30, 2003. The decrease of $2.1 million primarily was the result of our restructuring efforts, including the closing of our Farmington, Connecticut facility and the surrender of the leased space at our Tarrytown facility, all of which occurred prior to 2004.
Cash provided by investing activities was $0.7 million in the six month period ended June 30, 2004, as compared to $11.4 million in the same period of 2003. During the six month period ended June 30, 2004, proceeds from matured investments totaled $5.1 million, which were partially offset by reinvestment of $4.0 million in securities. Capital expenditures, net of proceeds from the sale of fixed assets, amounted to $0.4 million in the six month period ended June 30, 2004, as compared to $0.7 million for the same period in 2003.
Since our inception in 1986, we have generated significant losses from operations and we anticipate that we will continue to generate significant losses from operations for the foreseeable future. On June 30, 2004, our accumulated deficit was $313.7 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, we expect that as of December 31, 2004, our cash, cash equivalent and investment balances will be $27 million less than such balances on December 31, 2003, to end the year with total balances of cash, cash equivalents and investments of approximately $16 million. We expect capital expenditures to be in the range of $0.5 million to $0.8 million in 2004. Capital purchases may be financed by lease arrangements.
We anticipate that our existing capital resources will enable us to continue operations through the third quarter of 2005. However, this expectation is based on the current operating plan that could change as a result of many factors and additional funding may be required sooner than anticipated. To the extent operating and capital resources are insufficient to meet future requirements, we will have to raise additional funds to continue the development and commercialization of our products or reduce spending. Historically, we have been able to implement cost reductions when necessary.
Future funding may not be available on favorable terms, or at all. If additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities could result in dilution to our existing stockholders. 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 any of our product candidates not currently licensed to a third party, 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 the third quarter of 2005. 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.
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The following table summarizes our significant contractual obligations as of June 30, 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 | |
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| |
| |
| |
| |
| |
| | | | | (in thousands) | |
Long-term debt (1) | | $ | 55,000 | | $ | — | | $ | 55,000 | | $ | — | | $ | — | |
Capital lease obligations | | | 557 | | | 198 | | | 359 | | | — | | | — | |
Operating lease obligations (2) | | | 5,559 | | | 1,752 | | | 3,514 | | | 293 | | | — | |
Clinical research organizations (3) | | | 148 | | | 148 | | | — | | | — | | | — | |
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|
| |
|
| |
|
| |
|
| |
|
| |
Total | | $ | 61,264 | | $ | 2,098 | | $ | 58,873 | | $ | 293 | | $ | — | |
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(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 June 30, 2004, the balance on the Elan Note was $41.2 million. |
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(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 $3.2 million ($1.0 million in less than one year, $2.0 million in one to three years and $0.2 million in four to five years) for rent, real estate taxes and operating expenses. |
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(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. |
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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 $27.0 million at June 30, 2004. Of this total, $25.9 million had fixed interest rates, of which $22.0 million were short-term and $3.9 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.
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 our 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.
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PART II. OTHER INFORMATION
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. In its complaint Lilly is 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, we 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 our agreements with Lilly, 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. An adverse determination in this litigation concerning our claim that Lilly has infringed upon our patents could limit our future ability to realize the potential value of those patents.
Item 2. | CHANGES IN SECURITIES AND USE OF PROCEEDS |
During the second quarter of 2004, we amended the Stock Incentive Plan for Outside Directors to provide for the ability to grant nondiscretionary awards of restricted stock. Under the revised plan, each outside director will receive an award of restricted stock on the date of each regular annual stockholders’ meeting equivalent to 50% of the director’s annual cash board retainer fee. These restricted shares vest on the six month anniversary of the grant date, provided that the director continuously serves as a director from the grant date through the vesting date.
Item 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
Our Annual Meeting of Stockholders was held on May 20, 2004. The matters voted upon at the meeting were (i) election of four directors, (ii) approval and adoption of an amendment to our 2000 Stock Option Plan which provides for an increase in the maximum number of shares of Common Stock to be available for issuance thereunder by 900,000 shares, (iii) approval and adoption of an amendment to our Stock Directors which provides for the ability to grant nondiscretionary awards of restricted stock, and (iv) ratification of the Board of Director’s selection of PricewaterhouseCoopers LLP to serve as our independent accountants for the year ending December 31, 2004. The number of votes cast for and against or withheld with respect to each matter voted upon at the meeting and the number of abstentions and broker nonvotes are as follows:
| | Votes For | | Votes Against | | Withheld | | Abstentions | |
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Election of Directors: | | | | | | | | | | | | | |
Mr. Howard M. Pack | | | 15,530,493 | | | — | | | 2,268,307 | | | — | |
Mr. Arthur Dubroff | | | 17,126,773 | | | — | | | 672,027 | | | — | |
Mr. Michael E. Black | | | 16,982,640 | | | — | | | 816,160 | | | — | |
Dr. Stephen K. Carter, M.D. | | | 17,033,980 | | | — | | | 764,820 | | | — | |
Ratification of the selection of PricewaterhouseCoopers LLP | | | 17,630,518 | | | 137,202 | | | — | | | 31,080 | |
Approval and adoption of an amendment to the 2000 Stock Option Plan | | | 4,250,680 | | | 2,768,951 | | | — | | | 1,375,348 | |
Approval and adoption of an amendment to the Stock Option Plan for Outside Directors | | | 7,495,715 | | | 862,096 | | | — | | | 37,138 | |
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Item 6. | EXHIBITS AND REPORTS ON FORM 8-K |
| (a) Exhibits |
| | | |
| Exhibit
Number | | Description of Exhibit |
|
| |
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| 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). |
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| 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). |
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| 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). |
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| 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). |
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| (b) Reports on Form 8-K |
| | |
| | | On July 8, 2004, we furnished a Current Report on Form 8-K pursuant to Item 5 Other Events containing a copy of a press release announcing our filing of a shelf registration statement on Form S-3 with the Securities and Exchange Commission. |
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| | | On August 5, 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 quarterly period ended June 30, 2004. |
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| | | On August 9, 2004, we furnished a Current Report on Form 8-K pursuant to Item 5 Other Events containing a copy of a press release announcing the selection of a soft gelatin capsule formulation of unfractionated heparin that achieved clinically significant delivery of heparin. |
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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: August 9, 2004 | |
| EMISPHERE TECHNOLOGIES, INC. |
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| /S/MICHAEL M. GOLDBERG, M.D. |
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| Michael M. Goldberg, M.D.
Chairman and Chief Executive Officer |
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| /S/ELLIOT M. MAZA |
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| Elliot M. Maza
Chief Financial Officer |
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