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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
DECEMBER 31, 1999 0-23490
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VIVUS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3136179
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (IRS EMPLOYER IDENTIFICATION NUMBER)
ORGANIZATION)
1172 CASTRO STREET, MOUNTAIN VIEW, CALIFORNIA 94040
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(650) 934-5200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
PREFERRED SHARE PURCHASE RIGHTS
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 3, 2000, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $246,787,416 (based upon the closing sales
price of such stock as reported by The Nasdaq Stock Market on such date). Shares
of Common Stock held by each officer, director, and holder of 5 percent or more
of the outstanding Common Stock on that date have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of March 3, 2000, the number of outstanding shares of the Registrant's
Common Stock was 32,219,353.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Items 10, 11, 12 and 13 of Form 10-K is
incorporated by reference from the Registrant's proxy statement for the 2000
Annual Stockholders' Meeting (the "Proxy Statement"), which will be filed with
the Securities and Exchange Commission within 120 days after the close of the
Registrant's fiscal year ended December 31, 1999.
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VIVUS, INC.
FISCAL 1999 FORM 10-K
INDEX
PAGE
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PART I
Item 1: Business.................................................... 3
Item 2: Properties.................................................. 18
Item 3: Legal Proceedings........................................... 18
Item 4: Submission of Matters to a Vote of Security Holders......... 19
PART II
Item 5: Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 20
Item 6: Selected Financial Data..................................... 20
Item 7: Management's Discussion and Analysis of Financial Conditions
and Results of Operations................................... 21
Item 8: Financial Statements and Supplementary Data................. 26
Item 9: Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 46
PART III
Item 10: Executive Officers and Directors of the Registrant.......... 46
Item 11: Executive Compensation...................................... 46
Item 12: Security Ownership of Certain Beneficial Owners and
Management.................................................. 46
Item 13: Certain Relationships and Related Transactions.............. 46
Item 14: Exhibits, Financial Statements Schedules and Reports on Form
8-K......................................................... 46
Signatures............................................................. 50
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This Form 10-K contains "forward-looking" statements about future financial
results, future products and other events that have not yet occurred. For
example, statements like we "expect," we "anticipate" or we "believe" are
forward-looking statements. Investors should be aware that actual results may
differ materially from our expressed expectations because of risks and
uncertainties about the future. We will not necessarily update the information
in this Form 10-K if any forward-looking statement later turns out to be
inaccurate. Details about risks affecting various aspects of our business are
discussed throughout this Form 10-K. Investors should read all of these risks
carefully, and should pay particular attention to risks affecting the following
areas: future capital needs and uncertainty of additional financing (page 12);
history of losses and limited operating history (pages 12 and 13); limited sales
and marketing experience (page 10); dependence on third parties (pages 11 and
12); intense competition (page 11); dependence on key personnel (page 12); and
other risk factors as stated (pages 10 through 18).
PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
VIVUS, Inc. ("VIVUS" or the "Company") is the developer and manufacturer of
MUSE(R) (alprostadil) and ACTIS(R), two advancements in the treatment of men
with erectile dysfunction ("ED"), also known as impotence. The Company's
objective is to become a global leader in the development and commercialization
of innovative therapies for the treatment of sexual dysfunction and urologic
disorders in men and women. VIVUS has on-going research and development ("R&D")
programs in male ED, female sexual dysfunction ("FSD"), male premature
ejaculation ("PE"), and intends to pursue targeted technology acquisitions to
expand its R&D pipeline. The Company intends to market and sell its products
through distribution, co-promotion or license agreements with corporate
partners. In December 1999, the company filed a New Drug Application ("NDA")
with the U.S. Food and Drug Administration ("FDA") for ALIBRA(R), its
second-generation male ED treatment.
VIVUS STRATEGY
The Company's objective is to become a global leader in the development and
commercialization of innovative therapies for the treatment of sexual
dysfunction and other urologic disorders in men and women. The Company is
pursuing this objective through the following strategies:
Targeted Research and Development (R&D) Efforts
The Company will exploit its expertise and patent portfolio by focusing its
R&D activities on sexual dysfunction, premature ejaculation and other urologic
disorders. In order to expand its R&D pipeline, the Company also intends to
pursue targeted acquisitions of technologies that are well suited to its core
expertise in drug development.
Focus on Development and Regulatory Review
The Company will continue to focus its R&D efforts on developing new
patentable uses of known pharmacologic agents for which significant safety data
already exists. The Company believes that such agents present a lower
development risk profile and may progress more rapidly through the clinical
development and regulatory process than agents without pre-existing data.
Maintain Proprietary Technology
The Company will continue to invest in building its patent portfolio.
Currently, VIVUS has been awarded 13 patents and has 19 patent applications
pending in the United States. The Company also has 44 patents granted and 22
patents pending internationally.
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Partnering Strategy
VIVUS is seeking a marketing partner(s) for MUSE and ALIBRA in the United
States, Europe, Japan and South America. The Company has entered into an
international marketing agreement for its products with Janssen Pharmaceutica
("Janssen") that includes multiple Pacific Rim countries (excluding Japan),
Canada, Mexico and South Africa.
1999 HIGHLIGHTS
First Quarter 1999
The Company achieved profitability for the second consecutive quarter after
restructuring in the third quarter of 1998, earning $0.12 per share. Cash, cash
equivalents and available-for-sale securities increased by $12 million from
December 31, 1998, to $36 million.
The Company was granted a new patent for the "Treatment of Female Sexual
Dysfunction" by the U.S. Patent Office, providing broad patent protection for
the commercialization of topical formulations of vasodilating agents and steroid
hormones for the treatment of sexual dysfunction affecting women.
The Company was granted a new patent for the "Method and Composition for
Treating Erectile Dysfunction" by the U.S. Patent Office, providing broad patent
protection for the commercialization of ALIBRA, its second-generation
transurethral treatment for male ED.
The Company appointed Richard Walliser as its Chief Financial Officer, and
named Mario Rosati, a partner at Wilson, Sonsini, Goodrich & Rosati, and Mark
Logan, Chairman, President and Chief Executive Officer of VISX, Inc. to the
Company's Board of Directors.
The Company announced that its abstract "Does Renewed Sexual Activity
Increase Cardiac Morbidity? A Meta-Analysis of the Safety Profile with
Transurethral Alprostadil (MUSE)" was selected by the XIVth Congress of the
European Association of Urology for highlight during a press conference on April
10, 1999 in Stockholm, Sweden. The abstract was presented by co-author Gordon
Williams, MD, Consultant Urologist at the Hammersmith Hospital, London.
The Company received $4 million in milestone payments for the approval of
MUSE marketing licenses in France and Germany.
Second quarter 1999
The Company achieved profitability for the third consecutive quarter after
restructuring in 1998, earning $0.01 per share.
The Company reached a settlement of the shareholder class action lawsuits.
The settlement for $6 million was funded by insurance proceeds of $5.4 million
and by the Company contributing 120,000 shares of common stock.
Linda M. Dairiki Shortliffe, M.D., Professor at Stanford University School
of Medicine and Chair of the Urology Department, was elected to the Company's
Board of Directors at the annual meeting of stockholders.
Tulane University School of Medicine reported data at the 94th annual
meeting of the American Urologic Association confirming the safety and efficacy
of MUSE for patients who were unsuccessful with Viagra(R) (sildenafil citrate)
due to lack of efficacy or side effects of treatment.
The Company established a limited U.S. sales organization targeting major
accounts.
Third Quarter 1999
The Company achieved profitability for the fourth consecutive quarter after
restructuring in 1998, earning $0.03 per share.
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The Company received a $2 million milestone payment for the MUSE marketing
license approval in Spain.
The Company terminated its license agreement with Albert Einstein College
of Medicine of Yeshiva University for the development of gene therapy for the
treatment of ED, a strategic decision based on the development risks involved
and the amount of funding and time required to potentially bring a product to
market.
Fourth Quarter 1999
The Company achieved profitability for the fifth consecutive quarter after
restructuring in 1998, earning $0.43 per share. Cash, cash equivalents and
available-for-sale securities at December 31, 1999 increased $16.5 million from
December 31, 1998, while total liabilities decreased $5.1 million during the
same period.
The Company reached agreement with AstraZeneca regarding the financial
obligations related to the return of marketing and distribution rights for MUSE
in Europe, South America, Central America, Australia, and New Zealand. This
resulted in the Company recording $20 million in revenue in the fourth quarter
1999.
The Company filed an NDA for ALIBRA with the FDA.
The Company initiated a proof-of-concept, Phase II clinical study for the
evaluation of "on-demand" oral compounds for the treatment of premature
ejaculation in men.
The Company entered into a binding Memorandum of Understanding to further
solidify its FSD intellectual property position through an exclusive agreement
with AndroSolutions, Inc., a privately held biomedical corporation. Definitive
agreements were executed in March 2000. The Company and AndroSolutions have
jointly formed ASIVI, LLC, a Delaware limited liability corporation, into which
VIVUS has contributed its issued U.S. FSD patent and European application and
into which AndroSolutions has contributed its U.S. and European FSD patent
applications. In turn, ASIVI has granted the Company exclusive global rights to
develop and commercialize FSD technologies based on this intellectual property,
in return for certain milestone payments and royalties on FSD products developed
by VIVUS. The Company and AndroSolutions will each own 50% of ASIVI, LLC. The
Company intends to account for their interest in ASIVI, LLC. through the equity
method of accounting.
VIVUS' TRANSURETHRAL SYSTEM FOR ERECTION
Administration. Administration of the transurethral system for erection is
an easy and painless procedure. The end of the applicator is less than half the
diameter of a man's urine stream and is inserted approximately three centimeters
into the urethra. To use the transurethral system for erection, a patient
urinates, shakes the penis to remove excess urine, inserts the transurethral
system for erection into the urethra, releases the medication, and then massages
the penis between the hands for 10 seconds to distribute the medication.
The application process takes less than a minute. Once administered, the
pharmacologic agent dissolves in the small amount of urine that remains in the
urethra, is absorbed across the urethral mucosa, and is transferred via local
vasculature to the tissues of the erectile bodies. When successful, an erection
is produced within 15 minutes of administration and lasts approximately 30 - 60
minutes. Many patients experience transient penile pain and/or local aching
after administration and during intercourse.
Alprostadil is the first pharmacologic agent used in the transurethral
system for erection. Alprostadil is the generic name for the synthetic version
of prostaglandin E1, a naturally occurring vasodilator present throughout the
body and at high levels in seminal fluid. There are four dosage strengths of
alprostadil utilized in MUSE: 125 mcg, 250 mcg, 500 mcg, and 1000 mcg. It is
recommended that patients initiating therapy with MUSE be titrated to the lowest
effective dose under the supervision of a physician.
The Company's second transurethral product for the treatment of ED, ALIBRA
utilizes a low 125 mcg dose of alprostadil administered in combination with 500
mcg of prazosin hydrochloride. Because alprostadil and prazosin effect
vasodilation by complimentary mechanisms, this low-dose combination product
appears to
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have efficacy similar to higher doses of single-agent alprostadil and adequate
safety for use as an initial starting dose. Since it is not necessary for
patients to titrate among multiple doses, ALIBRA may provide patients with the
advantage of initiating therapy at home, as opposed to titrating in the
physician's office.
ADVANTAGES OF TRANSURETHRAL THERAPY
The Company's transurethral system for erection is designed to overcome the
limitations of other available therapies through its unique product attributes
that include:
Safety. The Company's transurethral system for erection is a safe local
treatment for patients. Because therapeutic levels of drug are delivered locally
to the erectile tissues with minimal systemic drug exposure, the opportunity for
systemic drug-drug and drug-disease interactions is minimized. Transurethral
therapy, therefore, offers an alternative to oral treatments that are delivered
to the erectile tissues via the systemic circulation and may be more susceptible
to these types of interactions.
Ease of Administration. The Company's transurethral system for erection is
easy to use with minimal instruction, unlike needle injection therapy that
requires precise injection into the penis.
Minimally-invasive. The Company's transurethral system for erection
utilizes urethral delivery, permitting topical application to the urethral
lining.
Discreet. The Company's transurethral system for erection utilizes a small,
single-use disposable applicator that can be discreetly applied and is easily
integrated into the normal sexual life of the patient. Administration takes less
than a minute.
Quality of Erection. The Company's transurethral system for erection
therapy mimics the normal vasoactive process, producing an erection that is more
natural than those resulting from needle injection therapy, vacuum constriction
devices or penile implants.
CURRENT THERAPIES
In addition to MUSE, the primary physiological therapies currently utilized
for the treatment of ED are:
Oral Medications. In 1998, Pfizer Inc. received clearance from the FDA to
market its oral treatment for ED, sildenafil. Commercial introduction of this
new competitive product has adversely affected the Company's business, financial
condition and results of operations. Yohimbine is another oral medication
currently prescribed in the United States for the treatment of ED. Other large
pharmaceutical companies are also actively engaged in the development of
therapies for the treatment of ED. See "Risk Factors -- Intense Competition" on
page 10.
Needle Injection Therapy. This form of treatment involves the needle
injection of pharmacologic agents directly into the penis. These agents are
generally vasoactive compounds such as alprostadil alone or in combination with
phentolamine and papaverine. This form of treatment requires a prescription from
a physician and instruction on self-injection. Side effects may include pain
associated with injection, local pain and aching, priapism (persistent prolonged
erections), fibrosis (build-up of scar tissue) and bleeding.
Vacuum Constriction Devices. This form of treatment involves the use of a
mechanical system that creates a vacuum around the penis, causing the erectile
bodies to fill with blood. A constriction band is then placed around the base of
the penis to impede blood drainage and maintain the erection. Vacuum
constriction devices are large, mechanical devices that can be unwieldy and
somewhat difficult to use. In addition, the erection may not seem natural since
only the part of the penis beyond the constriction band is rigid, and the penis
can become cold and discolored due to the constriction of blood flow.
Complications encountered by some users of vacuum constriction devices include
pain and difficulty ejaculating.
Penile Implants. This therapy involves the surgical implantation of a
semi-rigid, rigid or inflatable device into the penile structure to mechanically
simulate an erection. In addition to the risks associated with surgical
procedures, there is a significant rate of complication with implants such as
infection and mechanical failure of the device. This may necessitate a second
surgical procedure to remove or reposition the device. In addition,
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due to the scarring associated with the implant procedure, the patient may no
longer be a viable candidate for less radical therapies.
SALES AND MARKETING
The Company intends to market and sell its products worldwide through
distribution, co-promotion or license agreements with corporate partners. The
Company has entered into a marketing agreement with Janssen for certain
international markets. The Company is currently seeking a pharmaceutical
partner(s) to market, distribute and sell its products in Europe, Japan, South
America and the United States.
Domestic
The Company supports MUSE sales in the United States with a small focused
sales team calling on targeted physicians. VIVUS also participates in national
urologic and sexual dysfunction forums and conferences such as the American
Urologic Association annual meeting and the International Society for Impotence
Research. In addition, the Company supports ongoing research and clinical
investigation of MUSE and the publication of data in peer-reviewed journals.
International
The Company signed an international marketing agreement with Janssen in
January 1997, a subsidiary of Johnson & Johnson. Janssen purchases the Company's
products for resale in multiple Pacific Rim countries (excluding Japan), Canada,
Mexico and South Africa. In October 1997, the Company signed an agreement that
expanded Janssen's territories to include the Middle East, Russia, the Indian
sub-continent, and Africa. To date, Janssen has launched MUSE in several
countries, including Canada, South Korea and Mexico.
The Company entered into an international marketing agreement with ASTRA AB
(now "Astra-Zeneca") in May 1996 to purchase the Company's products for resale
in Europe, South America, Central America, Australia and New Zealand. In October
1999, the marketing and distribution rights in these countries were returned to
the Company by AstraZeneca. AstraZeneca will continue to support MUSE in
countries where they have launched MUSE during a transition period. The Company
is currently evaluating alternative strategic options regarding distribution of
its products in these countries.
As of March 2000, approved/licensed countries include:
APPROVAL
COUNTRY DATE
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USA Nov-96
Argentina Nov-97
Australia Dec-98
Austria (EU) Mar-99
Bahrain Sep-98
Belgium (EU) May-99
Brazil Jan-98
Canada Aug-98
Chile Dec-98
Columbia Feb-99
Cyprus Nov-98
Czech Republic Dec-99
Denmark (EU) Dec-98
Finland (EU) Dec-98
France (EU) Mar-99
Germany (EU) Feb-99
Greece (EU) Apr-99
Hong Kong Jul-98
APPROVAL
COUNTRY DATE
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Iceland Oct-99
Ireland (EU) Feb-99
Israel Oct-99
Italy (EU) Oct-99
Jamaica Nov-98
Kazachstan Aug-99
Kuwait Jan-99
Lithuania Dec-98
Luxembourg (EU) Dec-98
Macau Sep-98
Malaysia May-99
Malta Jun-98
Mexico May-98
Netherlands (EU) Feb-99
New Zealand Jul-98
Norway Dec-98
Philippines Jun-98
Portugal (EU) Feb-99
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APPROVAL
COUNTRY DATE
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Russia Feb-99
Singapore Jul-98
South Africa Jun-98
South Korea Jan-98
Spain (EU) Aug-99
Sweden (EU) Apr-98
APPROVAL
COUNTRY DATE
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Switzerland Feb-98
Thailand May-98
Trinidad Nov-98
UK (EU) Nov-97
United Arab Emirates Jun-98
Uruguay Mar-99
RESEARCH & DEVELOPMENT
VIVUS' objective is to become a global leader in the development and
commercialization of innovative therapies for the treatment of sexual
dysfunction and other urologic disorders in men and women. To this end, the
Company utilizes its expertise and patent portfolio by focusing its R&D
activities on male and female sexual dysfunction, premature ejaculation, and
other urologic disorders. The Company also investigates novel patentable uses of
pharmacologic agents for which significant safety data already exists. The
Company believes that such agents present a lower development risk profile and
may progress more rapidly through the clinical development and regulatory
process than agents without pre-existing data.
DEVELOPMENT PROJECTS CURRENTLY INCLUDE:
DEVELOPMENT AREA PRODUCT/TECHNOLOGY STATUS
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Male Erectile Dysfunction ALIBRA(R) (Alprostadil and NDA filed
Prazosin)
Male Erectile Dysfunction Third-generation male ED Preclinical
treatment
Female Sexual Dysfunction ALISTA(TM) Topical Application of Preclinical
Vasodilator
Male Premature On-Demand Oral Compound Preclinical
Ejaculation
The Company will continue to assess the feasibility and relevance of these
and other R&D projects, as determined by the Company's management and Board of
Directors.
CLINICAL STUDIES
In 1999, the Company completed a 19-site confirmatory Phase III study of
ALIBRA for the treatment of men with ED. This study demonstrated that ALIBRA
enabled patients to achieve erections sufficient for successful sexual
intercourse significantly more often than did placebo, and it was well
tolerated. In this study, ALIBRA demonstrated significant efficacy regardless of
patient age, primary etiology of ED, or duration of the complaint. Additionally,
the majority of patients treated had ED that was classified as "severe" by
baseline scores on the Erectile Function domain of the International Index of
Erectile Function Questionnaire. During 1999, the Company also performed an
interim analysis on an ongoing long-term (1-year) evaluation of ALIBRA and
initiated and completed a pharmacokinetic study evaluating the commercial
formulation of ALIBRA. These studies enabled the filing of an NDA for ALIBRA
during the fourth quarter of 1999.
During the fourth quarter of 1999, the Company initiated a proof of concept
trial in patients with premature ejaculation to evaluate the feasibility of
on-demand dosing with several classes of agents for the treatment of this
disorder. The Company hopes that this study provides data that will allow the
Company to make strategic decisions on various options for the further
development of its intellectual property for this indication.
MANUFACTURING AND RAW MATERIALS
The Company has limited experience in manufacturing and selling MUSE in
commercial quantities. The Company leases 90,000 square feet of space in New
Jersey in which it has constructed manufacturing and testing facilities. The FDA
and MCA authorized the Company to begin commercial production and shipment
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of MUSE from its new facility in June and March 1998, respectively. In September
1998, the Company closed its contract manufacturing site within PACO
Pharmaceutical Services, Inc. and significantly scaled back its manufacturing
operations in the New Jersey facility, as a result of lower domestic and
international demand for MUSE. Production is currently significantly below
capacity for the plant resulting in a higher per unit cost.
The Company has obtained its supply of alprostadil from two sources. The
first is Spolana Chemical Works a.s. in Neratovice, Czech Republic ("Spolana")
pursuant to a supply agreement that was executed in May 1997. In January 1996,
the Company entered into an alprostadil supply agreement with CHINOIN
Pharmaceutical and Chemical Works Co., Ltd. ("Chinoin"). Chinoin is the
Hungarian subsidiary of the French pharmaceutical company Sanofi Winthrop. Both
agreements were amended in December 1998, as a result of excess inventory on
hand to reduce future commitments for alprostadil purchases.
The Company relies on a single injection molding company, The Kipp Group
("Kipp"), for its supply of plastic applicator components. In turn, Kipp obtains
its supply of resin, a key ingredient of the applicator, from a single source,
Huntsman Corporation. The Company also relies on a single source, E-Beam
Services, Inc. ("E-Beam"), for sterilization of its product. There can be no
assurance that the Company will be able to identify and qualify additional
sources of plastic components and an additional sterilization facility. See
"Risk Factors -- Dependence on Single Source of Supply" on page 11.
GOVERNMENT REGULATION
The Company's research, pre-clinical development, clinical trials,
manufacturing and marketing of its products are subject to extensive regulation
by numerous governmental authorities in the United States and other countries.
Clinical trials, manufacturing and marketing of the Company's products will be
subject to the rigorous testing and approval processes of the FDA and equivalent
foreign regulatory agencies. The process of obtaining FDA and other required
regulatory approvals is lengthy and expensive. In November 1996, the Company
received final marketing clearance from the FDA for MUSE. In November 1997, the
Company obtained regulatory marketing clearance by the MCA to market MUSE in the
United Kingdom. MUSE has also been approved in 48 countries around the globe.
After regulatory approval is obtained, the Company's products are subject to
continual review. In December 1999, the Company submitted an NDA for its second-
generation product ALIBRA to the FDA. The approval process could take as long as
12 months for the FDA to review. See "Risk Factors -- Government Regulation and
Uncertainty of Product Approvals" on pages 14 and 15.
In 1998, the Company leased 90,000 square feet of manufacturing space in
Lakewood, New Jersey in which it has constructed manufacturing and testing
facilities for the production of MUSE. The FDA and MCA authorized the Company to
begin commercial production and shipment of MUSE from its new facility in June
and March 1998, respectively.
EMPLOYEES
As of March 3, 2000, the Company employed 140 persons. Of these employees,
101 are located at the manufacturing facility in Lakewood, New Jersey; and 39
are located at the Company's corporate headquarters in Mountain View, CA and
other U.S. and international locations. None of the Company's current employees
are represented by a labor union or are the subject of a collective bargaining
agreement. The Company believes that it maintains good relations with its
employees.
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This Form 10-K contains "forward-looking" statements about future financial
results, future products and other events that have not yet occurred. For
example, statements like we "expect," we "anticipate" or we "believe" are
forward-looking statements. Investors should be aware that actual results may
differ materially from our expressed expectations because of risks and
uncertainties about the future. We will not necessarily update the information
in this Form 10-K if any forward-looking statement later turns out to be
inaccurate. Details about risks affecting various aspects of our business are
discussed throughout this Form 10-K. Investors should read all of these risks
carefully, and should pay particular attention to risks affecting the following
areas: future capital needs and uncertainty of additional financing (page 12);
history of losses and limited operating history (pages 12 and 13); limited sales
and marketing experience (page 10); dependence on third parties (pages 11 and
12); intense competition (page 11); dependence on key personnel (page 12); and
other risk factors as stated (pages 10 through 18).
RISK FACTORS
LIMITED SALES AND MARKETING EXPERIENCE
The Company supports MUSE sales in the U.S. through physician and patient
information/help lines, sales support for major accounts, product education
newsletters and participation in national urologic and sexual dysfunction forums
and conferences, such as the American Urological Association annual and regional
meetings and the International Society for Impotence Research. In addition, the
Company supports ongoing research and clinical investigation of MUSE and the
publication of data in peer-reviewed journals. The Company is currently
evaluating alternative strategic options regarding the U.S. market. There can be
no assurance that the options are viable, or that the Company will be able to
successfully implement those options.
The Company entered into an international marketing agreement with Janssen
to purchase the Company's products for resale in multiple Pacific Rim countries
(excluding Japan), Canada, Mexico, South Africa, the Middle East, Russia, the
Indian sub-continent, and Africa. The marketing agreement does not have minimum
purchase commitments and the Company is dependent on Janssen's efforts to
distribute and sell the Company's products effectively in the above-mentioned
markets. Janssen may take up to twelve months to introduce a product in a given
country following regulatory approval in such country. There can be no assurance
that such efforts will be successful or that Janssen will continue to support
the product.
The Company entered into an international marketing agreement with ASTRA AB
(now "AstraZeneca") to purchase the Company's products for resale in Europe,
South America, Central America, Australia and New Zealand. In October 1999, the
marketing and distribution rights in these countries were returned to the
Company by AstraZeneca. The Company is currently evaluating alternative
strategic options regarding distribution of its products in these countries.
There can be no assurance that the Company's options are viable, or that the
Company will be able to successfully implement those options.
INTENSE COMPETITION
Competition in the pharmaceutical and medical products industries is
intense and is characterized by extensive research efforts and rapid
technological progress. Certain treatments for ED exist, such as oral
medications, needle injection therapy, vacuum constriction devices and penile
implants, and the manufacturers of these products will continue to improve these
therapies. The most significant competitive therapy is sildenafil, an oral
medication marketed by Pfizer, which received regulatory approvals in the U.S.
in March 1998 and in the European Union in September 1998. The commercial launch
of sildenafil in the U.S. in April 1998 dramatically increased the number of men
seeking treatment for impotence and significantly decreased demand for MUSE.
Additional competitive products in the erectile dysfunction market include
needle injection therapy products from Pharmacia Upjohn and Schwartz Pharma,
which were approved by the FDA in July 1995 and June 1997, respectively. Other
large pharmaceutical companies are also actively engaged in the development of
therapies for the treatment of ED. These companies have substantially greater
research and development
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capabilities as well as substantially greater marketing, financial and human
resources than the Company. In addition, many of these companies have
significantly greater experience than the Company in undertaking pre-clinical
testing, human clinical trials and other regulatory approval procedures. There
are also small companies, academic institutions, governmental agencies and other
research organizations that are conducting research in the area of ED. For
instance, Zonagen, Inc. has filed for FDA approval of its oral treatment and has
received approval in Mexico; TAP Pharmaceuticals, Inc. has submitted an
application to the FDA for approval of its sub-lingual treatment; ICOS
Corporation has an oral medication in clinical testing; and Senetek has a needle
injection therapy product approved recently in Denmark and has filed for
approval in other countries. These entities may market commercial products
either on their own or through collaborative efforts. For example, Zonagen, Inc.
announced a worldwide marketing agreement with Schering-Plough in November 1997;
and ICOS Corporation formed a joint venture with Eli Lilly in October 1998 to
jointly develop and market its oral treatment. The Company's competitors may
develop technologies and products that are more effective than those currently
marketed or being developed by the Company. Such developments would render the
Company's products less competitive or possibly obsolete. The Company is also
competing with respect to marketing capabilities and manufacturing efficiency,
areas in which it has limited experience.
DEPENDENCE ON SINGLE SOURCE OF SUPPLY
The Company relies on a single source, E-Beam Services, Inc., for
sterilization of its product. There can be no assurance that the Company will be
able to identify and qualify additional sterilization sources. The Company is
required to receive FDA approval for suppliers. The FDA may require additional
clinical studies or other testing prior to accepting a new supplier. Until the
Company secures and qualifies additional sources of sterilization facilities, it
is entirely dependent on E-Beam. If interruption in this service were to occur
for any reason, including a decision by E-Beam to discontinue service, political
unrest, labor disputes or a failure of E-Beam to follow regulatory guidelines,
the development and commercial marketing of MUSE and other potential products
could be delayed or prevented. An interruption in sterilization services would
have a material adverse effect on the Company's business, financial condition
and results of operations.
NEW PRODUCT DEVELOPMENT
The Company's future operating results may be adversely affected if the
Company is unable to continue to develop, manufacture and bring to market
pharmacological products rapidly. The process of developing new drugs and/or
therapeutic solutions is inherently complex and uncertain. The Company must make
long-term investments and commit significant resources before knowing whether
its predictions will eventually result in products that will receive FDA
approval and achieve market acceptance. After the FDA approves a product, the
Company must quickly manufacture sufficient volumes to meet market demand. This
is a process that requires accurate forecasting of market demand. Given the
alternative treatments and the number of products introduced in the market each
year, the drug development process becomes increasingly difficult and risky.
In December 1999, the Company submitted an NDA for ALIBRA to the FDA. The
FDA may take up to 12 months to review the Company's submission, and may (1) ask
the Company to provide more data; (2) ask the Company to perform additional
clinical trials; or (3) not give the Company the approval. Even if ALIBRA is
approved, there can be no assurances that there will be a market for this
transurethral system to treat ED.
DEPENDENCE ON THIRD PARTIES
In 1996, the Company entered into a distribution agreement with CORD
Logistics, Inc. ("CORD"), a wholly owned subsidiary of Cardinal Health, Inc.
Under this agreement, CORD warehouses the Company's finished goods for U.S.
distribution, takes customer orders; picks, packs and ships its product;
invoices customers, and collects related receivables. As a result of this
distribution agreement with CORD, the Company is heavily dependent on CORD's
efforts to fulfill orders and warehouse its products effectively in the U.S.
There can be no assurance that such efforts will be successful.
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In 1996, the Company entered into a distribution agreement with Integrated
Commercialization Services ("ICS"), a subsidiary of Bergen Brunswig Corporation.
ICS provides "direct-to-physician" distribution capabilities in support of U.S.
marketing and sales efforts. ICS also stores and ships various promotional
materials to sales personnel, including MUSE patient and in-office instructional
videos and brochures. As a result of this distribution agreement with ICS, the
Company is dependent on ICS's efforts to distribute product samples effectively.
There can be no assurance that such efforts will be successful.
In 1996, the Company entered into an agreement with WRB Communications
("WRB") to handle patient and healthcare professional hotlines for the Company.
WRB maintains a staff of healthcare professionals to handle questions and
inquires about MUSE and ACTIS. These calls may include complaints about the
Company's product due to efficacy or quality, as well as reporting of adverse
events. As a result of this agreement, the Company is dependent on WRB to
effectively handle these hotline calls. There can be no assurance that such
effort will be successful.
DEPENDENCE ON KEY PERSONNEL
The Company's success is highly dependent upon the skills of a limited
number of key management personnel. To reach its business objectives, the
Company will need to retain and hire qualified personnel in the areas of
manufacturing, research and development, clinical trial management and
pre-clinical testing. There can be no assurance that the Company will be able to
retain or hire such personnel, as the Company must compete with other companies,
academic institutions, government entities and other agencies. The loss of any
of the Company's key personnel or the failure to attract or retain necessary new
employees could have an adverse effect on the Company's research, product
development and business operations.
FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FINANCING
The Company anticipates that its existing capital resources combined with
anticipated future revenues may not be sufficient to support the commercial
introduction of any additional future products. The Company is currently seeking
other sources of financing, which may include joint venture, co-development, or
licensing agreement to support the development of its R&D pipeline.
The Company expects that it will be required to issue additional equity or
debt securities or use other financing sources including, but not limited to,
corporate alliances to fund the development and possible commercial launch of
its future products. The sale of additional equity securities would result in
additional dilution to the Company's stockholders. The Company's working capital
and additional funding requirements will depend upon numerous factors,
including: (i) results of operations; (ii) demand for MUSE; (iii) the activities
of competitors; (iv) the progress of the Company's research and development
programs; (v) the timing and results of pre-clinical testing and clinical
trials; (vi) technological advances; and (vii) the level of resources that the
Company devotes to sales and marketing capabilities.
HISTORY OF LOSSES AND LIMITED OPERATING HISTORY
The Company has generated a cumulative net loss of $91.0 million for the
period from its inception through December 31, 1999. In order to sustain
profitable operations, the Company must successfully manufacture and market MUSE
and keep its expenditures in line with lower product revenues. The Company is
subject to a number of risks including its ability to successfully market,
distribute and sell its product, intense competition, and its reliance on a
single therapeutic approach to erectile dysfunction and its ability to secure
additional operating capital. There can be no assurance that the Company will be
able to continue to achieve profitability on a sustained basis. Accordingly,
there can be no assurance of the Company's future success.
During 1998, the Company took significant steps to restructure its
operations in an attempt to bring the cost structure of the business in line
with current demand for MUSE. These steps included significant reductions in
personnel, closing the contract-manufacturing site located in PACO
Pharmaceutical Services, Inc., the termination of the lease for the Company's
leased corporate offices, and recorded significant write-
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down of property, equipment and inventory. As a result of these and other
factors, the Company experienced an operating loss of $80.3 million, or $2.52
per share, in the year ended December 31, 1998.
In September 1998, the Company significantly scaled back its manufacturing
operations as a result of lower demand domestically and internationally for
MUSE. Current production is significantly below capacity for the plant,
resulting in a higher unit cost, and the Company expects that the gross margin
from the sale of MUSE will be less predictable in future periods, which may
cause greater volatility in the Company's results of operations and financial
condition.
Management believes that these restructuring measures were adequate in
bringing the cost structure in line with current and projected revenues;
however, there can be no assurance that product demand will not weaken further
or that these measures will result in sustained profitability in future periods.
LIMITED MANUFACTURING EXPERIENCE
The Company has limited experience in manufacturing and selling MUSE in
commercial quantities. The Company initially experienced product shortages due
to higher than expected demand and difficulties encountered in scaling up
production of MUSE. The Company leases 90,000 square feet of space in New Jersey
in which it has constructed manufacturing and testing facilities. The FDA and
European Medicine Controls Agency ("MCA") authorized the Company to begin
commercial production and shipment of MUSE from its new facility in June and
March 1998, respectively. In September 1998, the Company closed its contract
manufacturing site within PACO Pharmaceutical Services, Inc. and significantly
scaled back its manufacturing operations in the New Jersey facility, as a result
of lower domestic and international demand for MUSE. Production is currently
significantly below capacity for the plant.
DEPENDENCE ON THE COMPANY'S TRANSURETHRAL SYSTEM FOR ERECTION
The Company currently relies on a single therapeutic approach to treat ED,
its transurethral system for erection. Certain side effects have been found to
occur with the use of MUSE. MUSE is applied into the urinary opening and is not
for men with sickle cell trait, disease, or other blood disorders. One third of
men reported genital pain, causing some to stop use. A few men reported
dizziness and, less commonly, fainting. To date, the incidence of post-launch
adverse side effects is consistent with that experienced in clinical trials. As
a result of the Company's single therapeutic approach, the failure to
successfully commercialize the product will have a material adverse effect to
the Company's business.
The existence of side effects or dissatisfaction with product results may
impact a patient's decision to use or continue to use or a physician's decision
to recommend MUSE as a therapy for the treatment of ED, thereby affecting the
commercial viability of MUSE.
In addition, technological changes or medical advancements could diminish
or eliminate the commercial viability of the Company's product.
RISKS RELATING TO INTERNATIONAL OPERATIONS
The Company's product is currently marketed internationally. Changes in
overseas economic and political conditions, currency exchange rates, foreign tax
laws or tariffs or other trade regulations could have a material adverse effect
on the Company's business, financial condition and results of operations. The
international nature of the Company's business is also expected to subject it
and its representatives, agents and distributors to laws and regulations of the
foreign jurisdictions in which they operate or where the Company's product is
sold. The regulation of drug therapies in a number of such jurisdictions,
particularly in the European Union, continues to develop, and there can be no
assurance that new laws or regulations will not have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, the laws of certain foreign countries do not protect the Company's
intellectual property rights to the same extent, as do the laws of the United
States.
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GOVERNMENT REGULATION AND UNCERTAINTY OF PRODUCT APPROVALS
The Company's research, pre-clinical development, clinical studies,
manufacturing and marketing of its products are subject to extensive regulation,
rigorous testing and approval processes of the Food and Drug Administration
("FDA") and equivalent foreign regulatory agencies. The Company's product MUSE
has received marketing clearance in 48 countries to date.
After regulatory approval is obtained, the Company's products are subject
to continual review. Manufacturing, labeling and promotional activities are
continually regulated by the FDA and equivalent foreign regulatory agencies, and
the Company must also report certain adverse events involving its drugs to these
agencies. Previously unidentified adverse events or an increased frequency of
adverse events that occur post-approval could result in labeling modifications
of approved products, which could adversely affect future marketing of a drug.
Finally, approvals may be withdrawn if compliance with regulatory standards is
not maintained or if problems occur following initial marketing. The
restriction, suspension or revocation of regulatory approvals or any other
failure to comply with regulatory requirements would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company's clinical studies for future products will generate safety
data as well as efficacy data and will require substantial time and significant
funding. There is no assurance that clinical studies related to future products
would be completed successfully within any specified time period, if at all.
Furthermore, the FDA could suspend clinical studies at any time if it is
believed that the subjects participating in such studies are being exposed to
unacceptable health risks.
Failure to comply with the applicable regulatory requirements can, among
other things, result in fines, suspensions of regulatory approvals, product
recalls, operating restrictions and criminal prosecution. In addition, the
marketing and manufacturing of pharmaceutical products are subject to continuing
FDA and other regulatory review, and later discovery of previously unknown
problems with a product, manufacturer or facility may result in the FDA and
other regulatory agencies requiring further clinical research or restrictions on
the product or the manufacturer, including withdrawal of the product from the
market. The restriction, suspension or revocation of regulatory approvals or any
other failure to comply with regulatory requirements would have a material
adverse effect on the Company's business, financial condition and results of
operations.
In connection with routine inspection of the Company's New Jersey
manufacturing facility at 745 Airport Road, the FDA issued to the Company an FDA
Form 483 containing two observations. The observations identified specific areas
where the FDA viewed the Company's operations not to be in explicit compliance
with Current Good Manufacturing Practices ("cGMP") requirements. A detailed
response to the observations was submitted to the FDA on November 24, 1999.
Failure to maintain satisfactory cGMP compliance would have a material
adverse effect on the Company's ability to continue to market and distribute its
products and, in the most serious cases, could result in the issuance of
additional Warning Letters, seizure or recall of products, civil fines or
closure of the Company's manufacturing facility until such cGMP compliance is
achieved.
The Company obtains the necessary raw materials and components for the
manufacture of MUSE as well as certain services, such as testing and
sterilization, from third parties. The Company currently contracts with
suppliers and service providers, including foreign manufacturers that are
required to comply with strict standards established by the Company. Certain
suppliers and service providers are required by the Federal Food, Drug, and
Cosmetic Act, as amended, and by FDA regulations to follow cGMP requirements and
are subject to routine periodic inspections by the FDA and certain state and
foreign regulatory agencies for compliance with cGMP and other applicable
regulations. Certain of the Company's suppliers were inspected for cGMP
compliance as part of the approval process. However, upon routine re-inspection
of these facilities, there can be no assurance that the FDA and other regulatory
agencies will find the manufacturing process or facilities to be in compliance
with cGMP and other regulations. Failure to achieve satisfactory cGMP compliance
as confirmed by routine inspections could have a material adverse effect on the
Company's ability to continue to manufacture and distribute its products and, in
the most serious case, result in the issuance of a
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regulatory Warning Letter or seizure or recall of products, injunction and/or
civil fines or closure of the Company's manufacturing facility until cGMP
compliance is achieved.
PATENTS AND PROPRIETARY RIGHTS
The Company's policy is to aggressively maintain its patent position and to
enforce all of its intellectual property rights.
The Company is the exclusive licensee of United States and Canadian patents
originally filed in the name of Dr. Gene Voss. These patents claim methods of
treating ED with a vasodilator-containing ointment that is administered either
topically or transurethrally.
The Company is also the exclusive licensee of patents and patent
applications filed in the name of Dr. Nils G. Kock, in numerous countries. Four
United States patents have issued directed to methods and compositions for
treating ED by transurethrally administering an active agent. Patents have also
been granted in Australia, Austria, Belgium, Canada, Finland, France, Germany,
Great Britain, Greece, Ireland, Italy, Japan, Luxembourg, the Netherlands, New
Zealand, Norway, Spain, Sweden and South Africa. Patent applications are pending
in Denmark and Romania. The foreign patents and applications, like the U.S.
patents and applications, are directed to the treatment of ED by transurethral
administration of certain active substances including alpha-receptor blockers,
vasoactive polypeptides, prostaglandins or nitroglycerin dispersed in a
hydrophilic vehicle.
The Company is the sole assignee of three United States patents, one
divisional patent application and two continuation applications all deriving
from patent applications originally filed by Alza, covering inventions of Dr.
Virgil Place made while he was an employee of Alza. The patents and patent
applications are directed to dosage forms for administering a therapeutic agent
to the urethra, methods for treating erectile dysfunction and specific drug
formulations that can be delivered transurethrally for the treatment of erectile
dysfunction. The divisional and continuation applications were filed in the
United States on June 7, 1995. All patents issuing on applications filed before
June 8, 1995 will automatically have a term that is the greater of twenty years
from the patent's effective filing date or seventeen years from the date of
patent grant. Foreign patents have been granted in Australia, Europe (including
Austria, Belgium, Denmark, Finland, France, Germany, Great Britain, Greece,
Ireland, Italy, Luxembourg, Norway, the Netherlands, Portugal, Spain, Sweden and
Switzerland), New Zealand, South Africa and South Korea, and foreign
applications are pending in Canada, Finland, Ireland, Mexico, and Japan.
The Company's license and assignment agreements for these patents and
patent applications are royalty bearing and do not expire until the licensed
patents expire. These license and assignment agreements provide that the Company
may assume responsibility for the maintenance and prosecution of the patents and
bring infringement actions.
In addition to the Voss, Kock, and Place patents and applications
identified above, the Company has twelve issued United States patents, nine
pending United States patent applications, three Patent Cooperation Treaty
("PCT") applications, two granted foreign patents, and seven pending foreign
patent applications. Several of these patents and applications further address
the prevention, treatment and diagnosis of ED, while others are directed to
prevention and/or treatment of other types of sexual dysfunction, including
premature ejaculation in men, and female sexual dysfunction. One of the
Company's issued patents covers the Company's ACTIS(R) venous flow control
device. Other issued patents and pending patent applications focus on prevention
and/or treatment of conditions other than sexual dysfunction, including vascular
disorders such as peripheral vascular disease ("PVD"), hormone replacement
therapy, and contraception.
The Company has recently entered into an agreement with AndroSolutions,
Inc., a privately held biomedical corporation based in Knoxville, Tennessee,
that owns patents and applications complementary to the Company's patents and
applications directed to the treatment of FSD. Both the Company and
AndroSolutions have contributed their FSD patents and applications into a
jointly formed limited liability company, ASIVI, LLC, which exclusively licenses
to VIVUS worldwide rights to the common patents and applications, and will work
to further develop FSD products of interest to the Company.
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The Company's success will depend in large part on the strength of its
current and future patent position relating to the transurethral delivery of
pharmacologic agents for the treatment of erectile dysfunction. The Company's
patent position, like that of other pharmaceutical companies, is highly
uncertain and involves complex legal and factual questions. The claims of a U.S.
or foreign patent application may be denied or significantly narrowed, and
patents that ultimately issue may not provide significant commercial protection
to the Company. The Company could incur substantial costs in proceedings before
the United States Patent and Trademark Office, including interference
proceedings. These proceedings could also result in adverse decisions as to the
priority of the Company's licensed or assigned inventions. There is no assurance
that the Company's patents will not be successfully challenged or designed
around by others.
The Company is presently involved in an opposition proceeding that was
instigated by the Pharmedic Company against a European patent, inventors Nils G.
Kock et al., that is exclusively licensed to VIVUS. As a result of the
opposition proceeding, certain pharmaceutical composition claims in the European
patent were held unpatentable by the Opposition Division of the EPO. The
patentability of all other claims in the patent was confirmed, i.e., those
claims directed to the use of active agents in the treatment of ED, and to a
pharmaceutical composition claim for prazosin. The Company appealed the EPO's
decision with respect to the pharmaceutical composition claims that were held
unpatentable. The Pharmedic Company appealed the EPO's decision with respect to
the claims that were held patentable, but has since withdrawn the appeal.
Despite the withdrawal of the Pharmedic Company from the appeal process, the
Company has continued with its own appeal in an attempt to reinstate the
composition claims. The EPO Appeals Board must make its own finding whether the
claims that were deemed unpatentable by the Opposition Division are indeed
patentable before it can reverse the Opposition Division's decision. There can
be no assurance that the appeal will be successful or that further challenges to
the Company's European patent will not occur should the Company try to enforce
the patent in the various European courts.
The Company was also the first to file a Notice of Opposition to Pfizer's
European patent application claiming the use of phosphodiesterase inhibitors to
treat erectile dysfunction. Numerous other companies have also opposed the
patent, and the Company will support these other entities in their oppositions
as necessary.
There can be no assurance that the Company's products do not or will not
infringe on the patent or proprietary rights of others. The Company may be
required to obtain additional licenses to the patents, patent applications or
other proprietary rights of others. There can be no assurance that any such
licenses would be made available on terms acceptable to the Company, if at all.
If the Company does not obtain such licenses, it could encounter delays in
product introductions while it attempts to design around such patents, or the
development, manufacture or sale of products requiring such licenses could be
precluded. The Company believes there will continue to be significant litigation
in the pharmaceutical industry regarding patent and other intellectual property
rights.
In addition to its patent portfolio, the Company also relies on trade
secrets and other unpatented proprietary technology. No assurance can be given
that the Company can meaningfully protect its rights in such unpatented
proprietary technology or that others will not independently develop
substantially equivalent proprietary products and processes or otherwise gain
access to the Company's proprietary technology. The Company seeks to protect its
trade secrets and proprietary know-how, in part, with confidentiality agreements
with employees and consultants. There can be no assurance that the agreements
will not be breached or that the Company will have adequate remedies for any
breach, or that the Company's trade secrets will not otherwise become known or
be independently developed by competitors. In addition, protracted and costly
litigation may be necessary to enforce and determine the scope and validity of
the Company's proprietary rights.
UNCERTAINTY OF PHARMACEUTICAL PRICING AND REIMBURSEMENT
In the U.S. and elsewhere, sales of pharmaceutical products are dependent,
in part, on the availability of reimbursement to the consumer from third party
payors, such as government and private insurance plans. Third party payors are
increasingly challenging the prices charged for medical products and services.
With the introduction of sildenafil, third party payors have begun to restrict
or eliminate reimbursement for erectile
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dysfunction treatments. While a large percent of prescriptions in the U.S. for
MUSE have been reimbursed by third party payors since its commercial launch in
January 1997, there can be no assurance that the Company's products will be
considered cost effective and that reimbursement to the consumer will continue
to be available or sufficient to allow the Company to sell its products on a
competitive basis.
In addition, certain healthcare providers are moving towards a managed care
system in which such providers contract to provide comprehensive healthcare
services, including prescription drugs, for a fixed cost per person. The Company
hopes to further qualify MUSE for reimbursement in the managed care environment.
However, the Company is unable to predict the reimbursement policies employed by
third party healthcare payors. Furthermore, reimbursement for MUSE could be
adversely affected by changes in reimbursement policies of governmental or
private healthcare payors.
PRODUCT LIABILITY AND AVAILABILITY OF INSURANCE
The commercial launch of MUSE exposes the Company to a significant risk of
product liability claims due to its availability to a large population of
patients. In addition, pharmaceutical products are subject to heightened risk
for product liability claims due to inherent side effects. The Company details
potential side effects in the patient package insert and the physician package
insert, both of which are distributed with MUSE, and the Company maintains
product liability insurance coverage. However, the Company's product liability
coverage is limited and may not be adequate to cover potential product liability
exposure. Product liability insurance is expensive, difficult to maintain, and
current or increased coverage may not be available on acceptable terms, if at
all. Product liability claims brought against the Company in excess of its
insurance coverage, if any, could have a material adverse effect upon the
Company's business, financial condition and results of operations.
UNCERTAINTY AND POSSIBLE NEGATIVE EFFECTS OF HEALTHCARE REFORM
The healthcare industry is undergoing fundamental changes that are the
result of political, economic and regulatory influences. The levels of revenue
and profitability of pharmaceutical companies may be affected by the continuing
efforts of governmental and third party payors to contain or reduce healthcare
costs through various means. Reforms that have been and may be considered
include mandated basic healthcare benefits, controls on healthcare spending
through limitations on the increase in private health insurance premiums and
Medicare and Medicaid spending, the creation of large insurance purchasing
groups and fundamental changes to the healthcare delivery system. Due to
uncertainties regarding the outcome of healthcare reform initiatives and their
enactment and implementation, the Company cannot predict which, if any, of the
reform proposals will be adopted or the effect such adoption may have on the
Company. There can be no assurance that future healthcare legislation or other
changes in the administration or interpretation of government healthcare or
third party reimbursement programs will not have a material adverse effect on
the Company. Healthcare reform is also under consideration in some other
countries.
POTENTIAL VOLATILITY OF STOCK PRICE
The stock market has experienced significant price and volume fluctuations
unrelated to the operating performance of particular companies. In addition, the
market price of the Company's Common Stock has been highly volatile and is
likely to continue to be so. Factors such as the Company's ability to increase
demand for its product in the U.S., the Company's ability to successfully sell
its product in the U.S. and internationally, variations in the Company's
financial results and its ability to obtain needed financing, announcements of
technological innovations or new products by the Company or its competition,
comments by security analysts, adverse regulatory actions or decisions, any loss
of key management, the results of the Company's clinical trials or those of its
competition, changing governmental regulations, patents or other proprietary
rights, product or patent litigation or public concern as to the safety of
products developed by the Company, may have a significant effect on the market
price of the Company's Common Stock.
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ANTI-TAKEOVER EFFECT OF PREFERRED SHARES RIGHTS PLAN AND CERTAIN CHARTER AND
BYLAW PROVISIONS
In February 1996, the Company's Board of Directors authorized its
reincorporation in the State of Delaware (the "Reincorporation") and adopted a
Preferred Shares Rights Plan. The Company's Reincorporation into the State of
Delaware was approved by its stockholders and became effective in May 1996. The
Preferred Shares Rights Plan provides for a dividend distribution of one
Preferred Shares Purchase Right (a "Right") on each outstanding share of the
Company's Common Stock. The Rights will become exercisable following the tenth
day after a person or group announces acquisition of 20 percent or more of the
Company's Common Stock, or announces commencement of a tender offer, the
consummation of which would result in ownership by the person or group of 20
percent or more of the Company's Common Stock. The Company will be entitled to
redeem the Rights at $0.01 per Right at any time on or before the tenth day
following acquisition by a person or group of 20 percent or more of the
Company's Common Stock.
The Preferred Shares Rights Plan and certain provisions of the Company's
Certificate of Incorporation and Bylaws may have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, control of the Company. The Company's Certificate of
Incorporation allows the Company to issue Preferred Stock without any vote or
further action by the stockholders, and certain provisions of the Company's
Certificate of Incorporation and Bylaws eliminate the right of stockholders to
act by written consent without a meeting, specify procedures for director
nominations by stockholders and submission of other proposals for consideration
at stockholder meetings, and eliminate cumulative voting in the election of
directors. Certain provisions of Delaware law could also delay or make more
difficult a merger, tender offer or proxy contest involving the Company,
including Section 203, which prohibits a Delaware corporation from engaging in
any business combination with any interested stockholder for a period of three
years unless certain conditions are met. The Preferred Shares Rights Plan, the
possible issuance of Preferred Stock, the procedures required for director
nominations and stockholder proposals and Delaware law could have the effect of
delaying, deferring or preventing a change in control of the Company, including
without limitation, discouraging a proxy contest or making more difficult the
acquisition of a substantial block of the Company's common stock. These
provisions could also limit the price that investors might be willing to pay in
the future for shares of the Company's Common Stock.
ITEM 2. PROPERTIES
The Company leases 90,000 square feet of space in New Jersey in which it
has constructed manufacturing and testing facilities. The FDA and MCA authorized
the Company to begin commercial production and shipment of MUSE from its new
facility in June and March 1998, respectively. In September 1998, the Company
closed its contract manufacturing site within PACO Pharmaceutical Services, Inc.
and significantly scaled back its manufacturing operations in the New Jersey
facility, as a result of lower demand domestically and internationally for MUSE.
In January 2000, the Company leased 14,237 square feet of space in Mountain
View, California, which serves as the principal site for administration,
clinical trial management, regulatory affairs and monitoring of product
production and quality control, as well as its research and development. The
Company's lease covering premises consisting of 6,000 square feet of space in a
different building in Mountain View, California expired in January 2000.
ITEM 3. LEGAL PROCEEDINGS
On October 5, 1998, the Company was named in a civil action filed in the
Superior Court of New Jersey. This complaint seeks specific performance and
other relief in connection with the Company's leased manufacturing facilities,
located in Lakewood, New Jersey. The Company's lease agreement requires that the
Company provide a removal security deposit in the form of cash or a letter of
credit. The Company and lessor ("plaintiff") have reached a tentative agreement
whereby the Company will provide an irrevocable standby letter of credit in the
amount of $3.3 million for such security deposit.
On February 18, 1998, a purported shareholder class action entitled Crain
et al. v. VIVUS, Inc. et al. was filed in Superior Court of the State of
California for the County of San Mateo. Five identical complaints were
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subsequently filed in the same court. These complaints were filed on behalf of a
purported class of persons who purchased stock between May 15, 1997 and December
9, 1997. The complaints alleged that the Company and certain current and former
officers or directors artificially inflated the Company's stock price by issuing
false and misleading statements concerning the Company's prospects and issuing
false financial statements. On March 16, 1998, a purported shareholder class
action entitled Cramblit et al. v. VIVUS Inc. et al. was filed in the United
States District Court for the Northern District of California. Five additional
complaints were subsequently filed in the same court. The federal complaints
were filed on behalf of a purported class of persons who purchased stock between
May 2, 1997 and December 9, 1997. The federal complaints asserted the same
factual allegations as the state court complaints, but asserted legal claims
under the Federal Securities Laws. The federal court cases were consolidated,
and a lead plaintiff was appointed and the plaintiff filed a consolidated and
amended complaint in 1998.
On May 4, 1999 the Company reached a settlement with plaintiffs of the
shareholder class action lawsuits described above. The aggregate settlement
amount is $6 million. The settlement is funded by insurance proceeds of $5.4
million and by the Company contributing 120,000 shares of VIVUS Common Stock to
the settlement fund.
On November 3, 1999, VIVUS International Limited ("VINTL") filed a demand
for arbitration against Janssen Pharmaceutica International ("Janssen") with the
American Arbitration Association pursuant to the terms of the Distribution
Agreement entered into between VINTL and Janssen on January 22, 1997. VINTL
seeks compensation for inventory manufactured by VINTL in 1998 in reliance on
contractual forecasts and orders submitted by Janssen. VINTL also seeks
compensation for forecasts and order shortfalls attributed to Janssen in 1998,
pursuant to the terms of the Distribution Agreement. VINTL seeks an award of
$3.9 million plus costs and interest. On December 3, 1999, Janssen submitted its
response to VINTL's arbitration demand denying liability. On January 3, 2000,
each party designated an independent arbitrator. The designated arbitrators will
select a third neutral arbitrator. An arbitration hearing is expected to occur
in the second quarter of 2000.
During the first quarter of 2000, the Company reached agreement with Oxford
Asymmetry International, plc. ("Oxford") to terminate a long-term supply
agreement for prostaglandin E(1)("alprostadil") that was executed on August 29,
1997, following the receipt of a notice of demand for arbitration from Oxford.
As a part of this agreement, the Company paid $500 thousand for a non-exclusive
license to use analytical and stability data related to alprostadil that was
provided by Oxford to the Company. The payment to Oxford will not impact the
Company's earnings, as this amount was fully reserved for by the Company as part
of its 1998 restructuring.
In the normal course of business, the Company receives and makes inquiries
regarding patent infringement and other legal matters. The Company believes that
it has meritorious claims and defenses and intends to pursue any such matters
vigorously. The Company is not aware of any asserted or unasserted claims
against it where the resolution would have an adverse material impact on the
operations or financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during
the quarter ended December 31, 1999.
19
20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades publicly on the Nasdaq Stock Market under
the symbol "VVUS." The following table sets forth for the periods indicated the
quarterly high and low closing sales prices of the Common Stock on the Nasdaq
Stock Market.
THREE MONTHS ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
1999
High................................. $ 4.81 $ 5.31 $ 4.72 $5.69
Low.................................. 2.06 2.63 2.88 2.00
1998
High................................. $15.50 $14.25 $10.25 $4.00
Low.................................. 9.63 5.81 2.06 2.19
As of March 3, 2000, there were no outstanding shares of Preferred Stock
and 746 holders of record of 32,219,353 shares of outstanding Common Stock. The
Company has not paid any dividends since its inception and does not intend to
pay any dividends on its Common Stock in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND EMPLOYEE DATA)
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ENDED,
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
1999
Net income......................... $ 3,792 $ 292 $ 897 $13,820
Net income per diluted share....... $ 0.12 $ 0.01 $ 0.03 $ 0.43
1998
Net income (loss).................. $(2,389) $(24,179) $(54,725) $ 1,040
Net income (loss) per diluted
share........................... $ (0.07) $ (0.76) $ (1.72) $ 0.03
20
21
SELECTED ANNUAL FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
-------- --------- -------- -------- --------
Income Statement Data:
Product revenue -- U.S. ................... $ 21,168 $ 39,041 $128,320 $ -- $ --
Product revenue -- International........... 19,996 32,658 1,017 -- --
Milestone Revenue.......................... 8,000 3,000 9,000 20,000 --
Other Revenue.............................. 3,142 -- -- -- --
Returns.................................... (9,118) -- -- -- --
-------- --------- -------- -------- --------
Total revenue.................... 43,188 74,699 138,337 20,000 --
Gross margin............................. 30,819 19,083 100,049 20,000 --
Operating expenses:
Research and development................. 7,884 16,178 12,123 28,279 21,313
Selling, general and administrative...... 6,332 40,477 47,931 11,733 4,389
Write-offs and other charges............. (1,193) 44,653 5,050 -- --
-------- --------- -------- -------- --------
Total operating expenses......... 13,023 101,308 65,104 40,012 25,702
-------- --------- -------- -------- --------
Income (loss) from operations.............. 17,796 (82,225) 34,945 (20,012) (25,702)
Interest and other income.................. 1,994 1,972 4,856 3,485 2,891
-------- --------- -------- -------- --------
Income (loss) before taxes............ 19,790 (80,253) 39,801 (16,527) (22,811)
-------- --------- -------- -------- --------
Net income (loss)..................... $ 18,801 $ (80,253) $ 36,617 $(16,527) $(22,811)
======== ========= ======== ======== ========
Net income (loss) per diluted share...... $ 0.58 $ (2.52) $ 1.03 $ (0.55) $ (0.85)
Shares used in per share computation..... 32,507 31,876 35,559 29,833 26,914
Financial position at year end:
Working capital.......................... $ 26,616 $ 10,324 $ 54,888 $ 60,388 $ 19,878
Total assets............................. $ 68,760 $ 54,108 $150,669 $ 96,532 $ 44,049
Accumulated deficit...................... $(90,989) $(109,790) $(29,537) $(66,154) $(49,627)
Stockholders' equity..................... $ 41,496 $ 21,677 $123,930 $ 89,780 $ 41,181
Additional information:
Common shares outstanding................ 32,211 31,890 33,168 32,454 26,952
Number of employees...................... 134 101 215 95 38
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
In the Management Discussion and Analysis section of the 10-K we are
providing more detailed information about our operating results and changes in
financial position over the past three years. This section should be read in
conjunction with the Consolidated Financial Statements and related Notes
beginning on page 26.
VIVUS, Inc. ("VIVUS" or the "Company") is the developer and manufacturer of
MUSE(R) (alprostadil) and ACTIS(R), two advancements in the treatment of men
with erectile dysfunction ("ED"), also known as impotence. The Company's
objective is to become a global leader in the development and commercialization
of innovative therapies for the treatment of sexual dysfunction and urologic
disorders in men and women. VIVUS has ongoing research and development ("R&D")
programs in male ED, female sexual dysfunction ("FSD"), and male premature
ejaculation ("PE"), and intends to pursue targeted technology acquisitions to
expand its R&D pipeline. The Company intends to market and sell its products
through distribution, co-promotion or license agreements with corporate
partners. In December 1999, the company filed a New Drug Application ("NDA")
with the U.S. Food and Drug Administration ("FDA") for ALIBRA(R), its
second-generation male ED treatment.
21
22
In November 1996, the Company obtained marketing clearance by the FDA to
manufacture and market its first product, MUSE, and commercially introduced MUSE
in the United States beginning in January 1997. The launch of MUSE went on to
become one of the top 25 most successful drug launches in the U.S., and the
Company recorded a net profit of $36.6 million and product revenue of $129.3
million for the year ended December 31, 1997.
During 1998, the Company experienced a significant decline in market demand
for MUSE as the result of the introduction of a competitor's product in April
1998. During the second and third quarters of 1998, the Company took significant
steps to restructure its operations in an attempt to bring the cost structure in
line with current and projected revenues. As a result, the Company recorded a
net loss of $80.3 million for the year ended December 31, 1998.
In 1999, the Company focused its efforts on building a solid foundation for
future growth. The Company achieved profitable quarters throughout 1999 and
recorded net income of $18.8 million for the year. We successfully completed our
ALIBRA Phase III clinical trials and filed an NDA in the fourth quarter with the
FDA. We completed enrollment of our premature ejaculation Phase II
proof-of-concept study, and we have strengthened our financial position,
increasing our cash position from $24 million at December 31, 1998 to $40
million at December 31, 1999, while decreasing total liabilities by $5 million
during the same period.
The Company supports MUSE sales in the U.S. through physician and patient
information/help lines, sales support for major accounts, product education
newsletters and participation in national urologic and sexual dysfunction forums
and conferences, such as the American Urological Association annual and regional
meetings and the International Society for Impotence Research. In addition, the
Company supports ongoing research and clinical investigation of MUSE and the
publication of data in peer-reviewed journals. Internationally, the Company has
entered into a licensing and distribution agreement with Janssen Pharmaceutical
("Janssen") for certain international markets, including multiple Pacific Rim
countries (excluding Japan), Canada, Mexico, South Africa and Australia. The
Company is seeking a partner(s) to market and sell its products through
distribution, co-promotion or license agreements in the United States, Europe,
Japan and South America.
1999 HIGHLIGHTS
The Company was granted a new patent for the "Treatment of Female Sexual
Dysfunction" by the U.S. Patent Office, providing broad patent protection for
the commercialization of topical formulations of vasodilating agents and steroid
hormones for the treatment of sexual dysfunction affecting women. The Company
entered into a binding Memorandum of Understanding to further solidify its FSD
intellectual property position through an exclusive agreement with
AndroSolutions, Inc., a privately held biomedical corporation. Definitive
agreements were executed in March 2000. The Company and AndroSolutions have
jointly formed ASIVI, LLC, a Delaware limited liability corporation, into which
VIVUS contributed its issued U.S. FSD patent and European application and into
which AndroSolutions has contributed its U.S. and European FSD patent
applications. In turn, ASIVI has granted the Company exclusive global rights to
develop and commercialize FSD technologies based on this intellectual property,
in return for certain milestone payments and royalties on FSD products developed
by VIVUS. The Company and AndroSolutions will each own 50% of ASIVI, LLC. The
Company intends to account for their interest in ASIVI, LLC. through the equity
method of accounting. The Company began development for its product for the
treatment of FSD, ALISTA(TM) and expects to enter clinical testing during year
2000.
The Company was granted a new patent for the "Method and Composition for
Treating Erectile Dysfunction" by the U.S. Patent Office, providing broad patent
protection for the commercialization of ALIBRA, its second-generation
transurethral treatment for male ED. The Company filed an NDA for ALIBRA with
the FDA in the fourth quarter of 1999.
The Company initiated a proof-of-concept, Phase II clinical study for the
evaluation of "on-demand" oral compounds for the treatment of premature
ejaculation in men.
22
23
The Company received $8 million in milestone payments for the approval of
MUSE marketing licenses in France, Germany, Spain and Italy.
The Company reached a settlement of the shareholder class action lawsuits.
The settlement for $6 million was funded by insurance proceeds of $5.4 million
and by the Company contributing 120,000 shares of common stock.
The Company terminated its license agreement with Albert Einstein College
of Medicine of Yeshiva University for the development of gene therapy for the
treatment of ED, a strategic decision based on the development risks involved
and the amount of funding and time required to potentially bring a product to
market.
The marketing and distribution rights in Europe, Australia, New Zealand,
Central and South America were returned to the Company by AstraZeneca. This
resulted in the Company recording $20 million in revenue in the fourth quarter
of 1999, consisting of $14.9 million in product revenue associated with
shipments that occurred throughout 1998 and 1999, $2 million in milestone
revenue associated with marketing clearance in Italy, and $3.1 million in other
revenue.
RESULTS OF OPERATIONS
Years Ended December 31, 1999 and 1998
Product revenues for year ended December 31, 1999 were $21.2 million in the
U.S. and $20.0 million internationally, compared to $39.0 million in the U.S.
and $32.7 internationally for the same period in 1998. The significant decline
in U.S. product revenue is due to lower demand for the Company's product MUSE,
which resulted from the launch of sildenafil, a competitive oral treatment for
erectile dysfunction. Internationally, revenues decreased to $20.0 million in
1999, compared to $32.7 million in 1998. The revenue decrease from 1998 is
mainly attributable to reduced orders from both AstraZeneca and Janssen.
For the year ended December 31, 1999, the Company recorded $8 million in
milestone revenue from AstraZeneca related to regulatory approvals of MUSE in
France, Germany, Italy and Spain. For the year ended December 31, 1998, the
Company recorded $3 million milestone revenue from Janssen related to regulatory
approvals of MUSE in South Korea and Canada.
Total revenue in 1999 also includes $3.1 million in other revenue
associated with the return of marketing and distribution rights for MUSE from
AstraZeneca. Additionally the Company recorded a $9.1 million charge for the
actual and anticipated return of expired product in the U.S. These returns are
primarily the result of shipments made during the fourth quarter of 1997 and
first quarter of 1998. Demand for MUSE declined following the launch of a
competitive product in April 1998, resulting in excess inventories of
wholesalers and retailers.
Cost of goods sold for the year ended December 31, 1999 were $12.4 million,
compared to $55.6 million for the same period in 1998. The decrease was
primarily a result of lower unit shipments in 1999. In addition, an inventory
valuation reserve of $16.0 million was recorded in 1998 as part of the Company's
restructuring of its operations.
Research and development (R&D) expenses for the year ended December 31,
1999 were $7.9 million, compared to $16.2 million in the year ended December 31,
1998. Lower spending in 1999 was primarily a result of the Company's effort to
bring overall cost levels in line with the Company's projected current and
projected revenues. Higher spending in 1998 was mainly associated with a
significantly larger R&D organization.
Selling, general and administrative expenses for the year ended December
31, 1999 were $6.3 million, compared to $40.5 million in the year ended December
31, 1998. The lower expenses in 1999 were primarily a result of the Company's
effort to bring overall cost levels in line with the Company's projected future
demand for MUSE. Included in selling, general and administration expenses for
1998 were significant expenses for a direct-to-consumer advertising campaign as
well as a direct sales force, which are not included in 1999.
23
24
Operating expenses for the year ended December 31, 1999 include a non-cash
charge of $600,000 for the issuance of 120,000 share of common stock toward the
settlement of shareholders class action lawsuits. In addition, the Company
reclassified $1.8 million from other restructuring costs during the fourth
quarter to allowance for product returns during earlier quarters. (SEE NOTE 6 on
page 38). Operating expenses for the year ended December 31, 1998 include a
restructuring charge of $12.5 million, primarily associated with the sales force
and other personnel reductions; and a $32.2 million write-down of property and
equipment. The write-down was calculated in accordance with the provisions of
Statement of Financial Accounting Standards No. 121 and represents the excess of
the carrying values of property and equipment over the projected future
discounted cash flows for the Company.
The Company recorded a tax provision of five percent of net income before
taxes for 1999. The effective tax rate calculation includes the effect of NOLs
carried forward from prior periods. The tax rate would have been substantially
higher if the NOLs were not available to offset current income. The Company had
no tax provision for 1998 as a result of the loss recorded for this year.
Years Ended December 31, 1998 and 1997
During fiscal 1998, the Company took significant steps to restructure its
operations in an attempt to bring the cost structure of the business in line
with current revenue projections. These steps included significant reductions in
headcount in all departments, as well as the closing of VIVUS' contract
manufacturing site located within PACO Pharmaceutical Services, Inc., and the
consolidation of employees at the Company's corporate headquarters into a
smaller space within its current building. As a result, the Company recorded
$60.7 million of costs and write-downs during fiscal 1998.
Product revenues for year ended December 31, 1998 were $39.0 million in the
U.S. and $32.7 million internationally, compared to $128.3 million in the U.S.
and $1.0 million internationally for the same period in 1997. The significant
decline in U.S. product revenue is due to lower demand for the Company's product
MUSE, which resulted from the U.S. launch of sildenafil, a competitive oral
treatment for erectile dysfunction. Underlying demand for MUSE domestically, as
measured by retail prescriptions, declined approximately 80% following the
commercial launch of sildenafil in April 1998. Internationally, revenues
increased to $32.7 million in 1998 as Janssen and AstraZeneca were preparing to
launch MUSE in various countries.
For the year ended December 31, 1998, the Company recorded $3 million
milestone revenue from Janssen related to regulatory approvals of MUSE in South
Korea and Canada. For the year ended December 31, 1997, the Company recorded $7
million milestone revenue; $5 million from Janssen for signing the initial and
expanded distribution agreements and $2 million from AstraZeneca for regulatory
approval in the United Kingdom.
Cost of goods sold for the year ended December 31, 1998 were $55.6 million,
compared to $38.3 million for the same period in 1997. The increase was
primarily a result of an inventory valuation reserve of $16.0 million, primarily
related to excess raw materials and future inventory purchase commitments for
raw materials in excess of anticipated future demand recorded as a part of the
Company's restructuring in the third quarter of 1998.
Research and development (R&D) expenses for the year ended December 31,
1998 were $16.2 million, compared to $12.1 million in the year ended December
31, 1997. The increase was mainly due to increased spending associated with new
product development.
Selling, general and administrative expenses for the year ended December
31, 1998 were $40.5 million, compared to $47.9 million in the year ended
December 31, 1997. The decrease was primarily the result of lower marketing and
advertising expenses in addition to personnel reductions in administration,
sales and marketing. During 1998, the Company discontinued its
direct-to-consumer-advertising, terminated its sales force services agreement
with Innovex, and agreed to facilitate the transition of its direct sales force
to Alza Corporation. The Company also announced its decision to seek a major
pharmaceutical partner to market, distribute and sell MUSE in the U.S. and its
comprehensive effort to reduce expenses.
24
25
Interest and other income for the year ended December 31, 1998 was $2.0
million, compared with $4.9 million for the same period in 1997. The decrease
was primarily the result of lower average invested cash balances.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed operations primarily from the
sale of preferred and common stock. Through December 31, 1999, VIVUS has raised
$153.8 million from financing activities and has an accumulated deficit of $91.0
million at December 31, 1999.
Cash, cash equivalents and available-for-sale securities totaled $40.4
million at December 31, 1999, compared with $23.9 million at December 31, 1998.
The $16.5 million increase during 1999 was primarily the result of net income of
$18.8 million and collection of accounts receivable of $3.1 million. These
increases were partially offset by payments made related to the restructuring
reserve established in 1998 of $5.4 million.
Accounts receivable at December 31, 1999 were $4.4 million, compared with
$5.2 million at December 31, 1998, a decrease of $715 thousand due primarily to
lower sales and improved collections.
Total liabilities were $27.3 million at December 31, 1999, compared with
$32.4 million at December 31, 1998, a decrease of $5.1 million. This decrease
relates primarily to the payments made related to the restructuring reserve of
$5.4 million and recognition of unearned revenue of $3.1 million. These
decreases are partially offset by and increase in the reserve for product
returns of $4.3 million.
On October 5, 1998, the Company was named in a civil action filed in the
Superior Court of New Jersey. This complaint seeks specific performance and
other relief in connection with the Company's leased manufacturing facilities
located in Lakewood, New Jersey. The Company's lease agreement requires that the
Company provide a removal security deposit in the form of cash or a letter of
credit. The Company and lessor ("plaintiff") have reached a tentative agreement
whereby the Company will provide an irrevocable standby letter of credit in the
amount of $3.3 million for such security deposit.
The Company believes that current cash, investments, and future cash flows
will be sufficient to support the Company's operating needs through 12/31/00.
The Company expects that it will be required to issue additional equity or debt
securities or use other financing source to fund the development and possible
commercial launch of its future products.
This Form 10-K contains "forward-looking" statements about future financial
results, future products and other events that have not yet occurred. For
example, statements like we "expect," we "anticipate" or we "believe" are
forward-looking statements. Investors should be aware that actual results may
differ materially from our expressed expectations because of risks and
uncertainties about the future. We will not necessarily update the information
in this Form 10-K if any forward-looking statement later turns out to be
inaccurate. Details about risks affecting various aspects of our business are
discussed throughout this Form 10-K. Investors should read all of these risks
carefully, and should pay particular attention to risks affecting the following
areas: future capital needs and uncertainty of additional financing (page 12);
history of losses and limited operating history (pages 12 and 13); limited sales
and marketing experience (page 10); dependence on third parties (pages 11 and
12); intense competition (page 11); dependence on key personnel (page 12); and
other risk factors as stated (pages 10 through 18).
25
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
VIVUS, INC.
1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following financial statements are filed as part of this Report:
PAGE
----
Report of Arthur Andersen LLP, independent public
accountants............................................... 27
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... 28
Consolidated Statements of Operations for the three years
ended December 31, 1999, 1998
and 1997.................................................. 29
Consolidated Statements of Comprehensive Income (loss) for
the three years ended December 31, 1999, 1998 and 1997.... 30
Consolidated Statements of Stockholders' Equity for the
three years ended December 31, 1999, 1998 and 1997........ 31
Consolidated Statements of Cash Flows for the three years
ended December 31, 1999, 1998
and 1997.................................................. 32
Notes to Consolidated Financial Statements.................. 33
26
27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of VIVUS, Inc.:
We have audited the accompanying consolidated balance sheets of VIVUS, Inc.
(a Delaware corporation) and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of operations, comprehensive income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of VIVUS, Inc. and subsidiaries
at December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
San Jose, California
January 21, 2000
27
28
VIVUS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
ASSETS
DECEMBER 31,
---------------------
1999 1998
-------- ---------
Current assets:
Cash and cash equivalents................................. $ 8,785 $ 2,989
Available-for-sale securities............................. 27,049 20,903
Accounts receivable (net of allowance for doubtful
accounts of $147 and $341 at December 31, 1999 and
1998).................................................. 4,432 5,197
Inventories............................................... 3,527 5,272
Prepaid expenses and other assets......................... 4,338 534
-------- ---------
Total current assets.............................. 48,131 34,895
Property and equipment...................................... 16,071 19,213
Available-for-sale securities, non-current.................. 4,558 --
-------- ---------
Total............................................. $ 68,760 $ 54,108
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,453 $ 3,277
Accrued and other liabilities............................. 19,062 21,294
-------- ---------
Total current liabilities......................... 21,515 24,571
Accrued and other long-term liabilities................... 5,749 7,860
-------- ---------
Total liabilities................................. 27,264 32,431
-------- ---------
Commitments (Note 10)
Stockholders' equity:
Common stock; $.001 par value; shares
authorized -- 200,000 at December 31, 1999 and 1998;
shares outstanding -- December 31, 1999, 32,211,
December 31, 1998, 31,890.............................. 32 32
Paid in capital........................................... 132,643 131,466
Accumulated other comprehensive income.................... (190) (31)
Accumulated deficit....................................... (90,989) (109,790)
-------- ---------
Total stockholders' equity........................ 41,496 21,677
-------- ---------
Total............................................. $ 68,760 $ 54,108
======== =========
See notes to consolidated financial statements.
28
29
VIVUS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
------- -------- --------
Revenue
US product................................................ $21,168 $ 39,041 $128,320
International product..................................... 19,996 32,658 1,017
Milestone................................................. 8,000 3,000 9,000
Other Revenue............................................. 3,142 -- --
Returns................................................... (9,118) -- --
------- -------- --------
Total revenue..................................... 43,188 74,699 138,337
Operating expenses:
Cost of goods sold........................................ 12,369 55,616 38,288
Research and development.................................. 7,884 16,178 12,123
Selling, general and administrative....................... 6,332 40,477 47,931
Settlement of lawsuits.................................... 600 -- 5,050
Write-down of property.................................... -- 32,163 --
Other restructuring costs................................. (1,793) 12,490 --
------- -------- --------
Total operating expenses.......................... 25,392 156,924 103,392
------- -------- --------
Income (loss) from operations............................... 17,796 (82,225) 34,945
Interest and other income................................... 1,994 1,972 4,856
Income (loss) before taxes.................................. 19,790 (80,253) 39,801
Provision for income taxes.................................. 989 -- 3,184
------- -------- --------
Net income (loss)........................................... $18,801 $(80,253) $ 36,617
======= ======== ========
Net income (loss) per share:
Basic..................................................... $ 0.59 $ (2.52) $ 1.11
Diluted................................................... $ 0.58 $ (2.52) $ 1.03
Shares used in per share computation:
Basic..................................................... 32,085 31,876 32,996
Diluted................................................... 32,507 31,876 35,559
See notes to consolidated financial statements.
29
30
VIVUS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
TWELVE MONTHS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
Net Income (loss)........................................ $18,801 $(80,253) 36,617
Other comprehensive income:
Unrealized gain (loss) on securities................... (143) (129) 21
Income tax expense (benefit)........................... 7 -- (4)
------- -------- -------
(136) (129) 17
------- -------- -------
Comprehensive income (loss).............................. $18,665 $(80,382) $36,634
======= ======== =======
See notes to consolidated financial statements.
30
31
VIVUS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK AND UNREALIZED
PAID IN CAPITAL GAIN
----------------- (LOSS) ON DEFERRED ACCUMULATED
SHARES AMOUNT SECURITIES COMPENSATION DEFICIT
------ -------- ----------- ------------ -----------
Balances, December 31, 1996............... 32,454 $156,205 $ 77 $(348) $ (66,154)
Warrants exercised, net................. 166 --
Sale of common stock through employee
stock purchase plan.................. 34 486
Exercise of common stock options for
cash................................. 851 4,254
Repurchase of common stock for cash..... (337) (7,716)
Stock compensation costs................ 140 348
Unrealized gain on securities........... 21
Net income.............................. 36,617
------ -------- ----- ----- ---------
Balances, December 31, 1997............... 33,168 153,369 98 -- (29,537)
Sale of common stock through employee
stock purchase plan.................. 77 489
Exercise of common stock options for
cash................................. 288 576
Repurchase of common stock for cash..... (1,663) (23,584)
Stock compensation costs................ 20 648
Unrealized gain on securities........... (129)
Net (loss).............................. (80,253)
------ -------- ----- ----- ---------
Balances, December 31, 1998............... 31,890 131,498 (31) -- (109,790)
Sale of common stock through employee
stock purchase plan.................. 97 208
Exercise of common stock options for
cash................................. 104 188
Lawsuit settlement...................... 120 600
Stock compensation costs................ 181
Unrealized gain on securities........... (159)
Net income.............................. 18,801
------ -------- ----- ----- ---------
Balances, December 31, 1999............... 32,211 $132,675 $(190) $ -- $ 90,989
====== ======== ===== ===== =========
See notes to consolidated financial statements.
31
32
VIVUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
--------- -------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................................... $ 18,801 $(80,253) $ 36,617
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization....................... 3,316 3,688 2,138
Property write-down................................. -- 32,163 --
Inventory write-down................................ -- 16,083 --
Stock compensation costs............................ 181 648 488
Issuance of common stock for patent rights.......... 600 -- --
Changes in assets and liabilities:
Accounts receivable................................. 765 6,594 (11,791)
Inventories......................................... 1,745 (12,271) (4,544)
Prepaid expenses and other assets................... (3,804) 1,102 (301)
Accounts payable.................................... (824) (3,297) 3,250
Accrued and other liabilities....................... (4,344) 8,989 16,737
--------- -------- ---------
Net cash provided by (used for) operating
activities................................... 16,436 (26,554) 42,594
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment purchases....................... (173) (18,602) (32,268)
Investment purchases................................... (134,860) (180,791) (323,609)
Proceeds from sale/maturity of securities.............. 123,997 245,294 321,865
--------- -------- ---------
Net cash provided by (used for) investing
activities................................... (11,036) 45,901 (34,012)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of common stock options....................... 188 576 4,254
Sale of common stock through employee stock purchase
plan................................................ 208 489 486
Repurchase of common stock............................. -- (23,584) (7,716)
--------- -------- ---------
Net cash provided by (used for) financing
activities................................... 396 (22,519) (2,976)
--------- -------- ---------
NET INCREASE (DECREASE) IN CASH.......................... 5,796 (3,172) 5,606
CASH:
Beginning of year...................................... 2,989 6,161 555
--------- -------- ---------
End of year............................................ $ 8,785 $ 2,989 $ 6,161
========= ======== =========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Unrealized gain (loss) on securities................... $ (143) $ (129) $ 21
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Income taxes paid...................................... $ 36 $ 71 $ 1,653
See notes to consolidated financial statements.
32
33
VIVUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
VIVUS, Inc. was incorporated in California in 1991 to develop products for
the treatment of erectile dysfunction. The Company was reincorporated in
Delaware in 1996. The classification of the capital accounts reflects the effect
of the reincorporation for all periods presented.
The Company obtained clearance from the U.S. Food and Drug Administration
("FDA") to manufacture and market MUSE in the U.S. in November 1996. The Company
received approval to market MUSE in the United Kingdom from the Medicines
Control Agency ("MCA") in November 1997, and is now approved in all European
Union Countries. The Company commercially introduced MUSE in the U.S. in January
1997, and MUSE went on to become one of the top 25 most successful drug launches
in the U.S., and the Company recorded a net profit of $36.6 million and product
revenue of $129.3 million for the year ended December 31, 1997.
During 1998, the Company experienced a significant decline in market demand
for MUSE as the result of the introduction of a competitor's product in April
1998. During the second and third quarters of 1998, the Company took significant
steps to restructure its operations in an attempt to bring the cost structure in
line with current and projected revenues.
In 1999, the Company focused its efforts on building a solid foundation for
future growth. We successfully completed our ALIBRA Phase III clinical trials
and filed an NDA in the fourth quarter with the FDA. We completed enrollment of
our premature ejaculation Phase II proof-of-concept study, and we have
strengthened our financial position, increasing our cash position from $24
million at December 31, 1998 to $40 million at December 31, 1999, while
decreasing total liabilities by $5 million during the same period.
SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Product revenue is generally recognized upon shipment. The Company
primarily sells its products through the wholesale channel in the United States.
Product shipments are generally to distribution centers throughout the United
States for the larger wholesalers.
The Company recognized revenues of $8 million, $3 million, and $9 million
in the years ended December 31, 1999, 1998, and 1997, respectively, as a result
of achieving certain milestones related to its international marketing
agreements. The amounts are not refundable and do not involve any significant
future performance obligations.
The marketing and distribution rights in Europe, Australia, New Zealand,
Central and South America were returned to the Company by AstraZenica during the
fourth quarter of 1999. This resulted in the Company recording $20 million in
revenue in the fourth quarter of 1999, consisting of $14.9 million in product
revenue associated with shipments that occurred throughout 1998 and 1999, $2
million in milestone revenue associated with marketing clearance in Italy, and
$3.1 million in other revenue.
Principles of Consolidation
The consolidated financial statements include VIVUS, Inc., VIVUS
International Limited, a wholly-owned subsidiary, and VIVUS Ireland Limited,
VIVUS UK Limited and VIVUS BV Limited, wholly-owned subsidiaries of VIVUS
International Limited. All significant intercompany transactions and balances
have been eliminated.
33
34
VIVUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of 90 days or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or
market. Cost includes material and conversion costs. Pending FDA marketing
clearance, which was obtained in November 1996, the Company expensed to research
and development all raw material purchases prior to October 1, 1996. Certain of
these expensed raw material costs benefited 1997 and 1998 by reducing cost of
sales by $4.7 million and $2.7 million, respectively. During the quarter ended
September 30, 1998, the Company wrote down its inventory to align with new
estimates of expected future demand for MUSE. The Company had built up its
inventory level prior to and after Pfizer's launch of sildenafil and had not
anticipated the impact that this competing product would have on the demand for
MUSE. The Company had anticipated sales to ultimately increase as a result of an
expanding impotence market. Given the protracted decline in demand for MUSE, the
Company recorded a valuation reserve of $16.0 million, primarily related to
excess raw materials and future inventory purchase commitments for raw
materials. This write-down is included in "Cost of Sales" in 1998 as part of the
Company's restructuring.
Available-for-Sale Securities
The Company accounts for available-for-sale securities in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Available-for-sale securities
represent debt securities that are stated at fair value. The difference between
amortized cost (cost adjusted for amortization of premiums and accretion of
discounts which are recognized as adjustments to interest income) and fair
value, representing unrealized holding gains or losses, are recorded in
"Accumulated Other Comprehensive Income," a separate component of stockholders'
equity until realized. The Company's policy is to record debt securities as
available-for-sale because the sale of such securities may be required prior to
maturity. Any gains and losses on the sale of debt securities are determined on
a specific identification basis.
Prepaid Expenses and Other Assets
Prepaid expense and other assets generally consist of deposits, prepayments
for future services and other assets. Prepayments are expensed when the services
are received. At December 31, 1999, the prepaid expenses and other assets
include a $3.1 million receivable of other revenue due from AstraZeneca in
connection with the return of marketing and distribution rights to MUSE.
Property
Property and equipment are stated at cost. For financial reporting,
depreciation and amortization are computed using the straight-line method over
estimated useful lives of three to seven years. Leasehold improvements are
amortized using the straight-line method over the lesser of the estimated useful
lives on remaining lease term. During 1998, the Company took multiple steps to
restructure the operations of the Company to bring the cost structure in line
with current and anticipated future revenues. These steps included the closing
of the Company's contract manufacturing facility within PACO Pharmaceutical
Services, Inc., and the termination of the Company's leased corporate offices.
The Company recorded a $32.2 million write-down of property and equipment. This
write-down was calculated in accordance with the provisions of SFAS No. 121 and
represents the excess of the carrying values of, property and equipment,
primarily the Company's New Jersey manufacturing leaseholds and equipment, over
the projected future discounted cash flows for the Company.
34
35
VIVUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires an asset and liability approach for financial reporting of income
taxes.
License Agreements
The Company has obtained rights to patented technologies related to its
initial product MUSE under several licensing agreements. These agreements
generally required milestone payments during the development period and
royalties on product sales. Royalties on product sales are included in cost of
goods sold. Milestone payments were included in research and development
expenses in 1998, 1997 and years prior to 1997.
Net Income (Loss) Per Share
Basic earnings per share is computed using the weighted average number of
common shares outstanding during the periods. Diluted earnings per share is
based on the weighted average number of common and common equivalent shares,
which represent shares that may be issued in the future upon the exercise of
outstanding stock options and warrants under the treasury stock method. The
computation of basic and diluted earnings per share for the years ended December
31, 1999, 1998 and 1997 are as follows:
1999 1998 1997
---------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss).................................... $18,801 $(80,253) $36,617
======= ======== =======
Net income (loss) per share -- Basic................. $ .59 $ (2.52) $ 1.11
Common equivalent shares:
Options............................................ (0.01) -- (0.07)
Warrants........................................... -- -- (0.01)
------- -------- -------
Net income (loss) per share -- Diluted............... $ .58 $ (2.52) $ 1.03
======= ======== =======
Shares used in the computation of net income (loss)
per share -- Basic................................. 32,085 31,876 32,996
Common equivalent shares:
Options............................................ 422 -- 2,215
Warrants........................................... -- -- 348
------- -------- -------
Diluted shares....................................... 32,507 31,876 35,559
======= ======== =======
Options to purchase 286,500 shares at prices ranging from $24.81 to $37.38
which were outstanding at December 31, 1997 are not included in the computation
of diluted EPS for 1997 because the option prices were greater than the average
market price of common shares. Options to purchase 964,879 shares at prices
ranging from $3.25 to $25.88 which were outstanding at December 31, 1999 are not
included in the computation of diluted EPS for 1999 because the option prices
were greater than the average market price of common shares. Warrants to
purchase 325,000 shares with an exercise price of $4.31 expired on July 12,
1999.
Foreign Currency
Assets and liabilities recorded in foreign currencies are translated at the
exchange rate on the balance sheet date. Revenue, cost and expenses are
translated at average rates of exchange in effect during the year. Net gains and
losses resulting from foreign exchange transactions were not material in all
periods.
35
36
VIVUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities. In June 1998,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards "SFAS No. 133," "Accounting for Derivative Instruments and
Hedging Activities." This statement, as amended in June 1999, will require
companies to recognize all derivatives, including those used for hedging foreign
currency exposures, on the balance sheet at fair value and is effective for all
fiscal years beginning after June 15, 2000. We believe the adoption of this
statement will not have a significant effect on the results of operations.
Revenue Recognition in Financial Statements. In December 1999, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 "SAB
101," "Revenue Recognition in Financial Statements." SAB 101 provides guidance
on applying generally accepted accounting principles to revenue recognition
issues in financial statements. We will adopt SAB 101 as required in the first
quarter of 2000. We do not expect the adoption of SAB 101 to have a material
impact on our consolidated results of operations and financial position.
Reclassifications
Reclassifications have been made to the prior years' Consolidated Financial
Statements to conform to the fiscal 1999 presentation.
NOTE 2. AVAILABLE-FOR-SALE SECURITIES
The fair value and the amortized cost of available-for-sale securities at
December 31, 1999 and 1998 are presented in the table that follows. Fair values
are based on quoted market prices obtained from an independent broker. For each
category of investment securities, the table presents gross unrealized holding
gains and losses. As of December 31, 1998, available-for-sale securities with
maturities between one and two years, which total $12.7 million, are classified
as short term assets as it is the Company's intention to sell these securities
before maturity as necessary to meet current liability obligations.
As of December 31, 1999 (in thousands):
UNREALIZED UNREALIZED
AMORTIZED FAIR MARKET HOLDING HOLDING
COST VALUE GAINS LOSSES
--------- ----------- ---------- ----------
U.S. government securities............. $25,155 $24,980 $1 $(176)
Corporate debt......................... 6,642 6,627 2 (17)
------- ------- -- -----
Total........................ $31,797 $31,607 $3 $(193)
======= ======= == =====
36
37
VIVUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 1998 (in thousands):
UNREALIZED UNREALIZED
AMORTIZED FAIR MARKET HOLDING HOLDING
COST VALUE GAINS LOSSES
--------- ----------- ---------- ----------
U.S. government securities............. $16,379 $16,380 $ 7 $(6)
Corporate debt......................... 4,558 4,568 10 --
------- ------- --- ---
Total........................ $20,937 $20,948 $17 $(6)
======= ======= === ===
NOTE 3. INVENTORIES
Inventories are recorded net of reserves of $15.0 million and $14.8 million
as of December 31, 1999 and 1998, respectively, and consist of (in thousands):
1999 1998
------ ------
Raw materials............................................... $2,039 $4,021
Work in process............................................. 143 162
Finished goods.............................................. 1,346 1,089
------ ------
Total............................................. $3,527 $5,272
====== ======
NOTE 4. FIXED ASSETS
Property and equipment as of December 31 consists of (in thousands):
1999 1998
-------- --------
Machinery and equipment..................................... $ 18,755 $ 18,762
Computers and software...................................... 3,935 3,866
Furniture and fixtures...................................... 2,195 2,195
Building Improvements....................................... 11,714 11,642
-------- --------
36,599 36,465
Accumulated depreciation and amortization................... (20,528) (17,252)
-------- --------
Property and equipment, net....................... $ 16,071 $ 19,213
======== ========
37
38
VIVUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. ACCRUED AND OTHER LIABILITIES
In 1999, the Company recorded an allowance for product returns of $9.1
million related to expired products related to excess inventory in the wholesale
channel prior to the launch of sildenafil. At December 31, 1999, a balance of
$4.3 million remained to offset anticipated future returns.
Accrued and other liabilities as of December 31 consist of (in thousands):
1999 1998
------- -------
Restructuring............................................... $ 8,185 $15,058
Product returns............................................. 4,300 --
Income taxes................................................ 3,016 2,082
Research and clinical expenses.............................. 2,803 2,337
Royalties................................................... 2,312 2,133
Unearned revenue............................................ 1,930 5,040
Employee compensation and benefits.......................... 1,286 902
Other....................................................... 978 1,602
------- -------
$24,810 $29,154
======= =======
NOTE 6. RESTRUCTURING AND RELATED CHARGES
During the second quarter of 1998, the Company recorded restructuring and
related costs of $6.5 million. The charge included costs of $3.2 million
resulting from the termination of certain marketing and promotional programs, a
provision of $2.3 million for reductions in the Company's workforce that
includes severance compensation and benefit costs, and $1.0 million in
write-down of fixed assets.
During the third quarter of 1998, the Company took additional steps to
restructure its operations and recorded $54.2 million of costs and write-downs.
These charges included a $16.0 million write-down of inventory, primarily raw
materials and commitments to buy raw materials, a $32.2 million write-down in
property, and $6.0 million of other restructuring costs primarily related to
personnel costs and operating lease commitments. These write-downs were
calculated in accordance with the provisions of SFAS No. 121 and represents the
excess of the carrying value of property and equipment, primarily the Company's
New Jersey manufacturing leaseholds and equipment, over the projected future
discounted cash flows for the Company.
During first quarter, second quarter and third quarter 1999, the Company
included expired products returns of $500,000, $1 million, and $293,000,
respectively, against the "Other" restructuring. In the fourth quarter 1999, the
Company reclassified these charges to returns reserve to offset product
revenues, and reversed the "Other" restructuring reserve from operating expenses
as such reserves were determined to be excess in 1999.
Restructuring and related charges in fiscal 1999 and 1998 (in thousands):
SEVERANCE INVENTORY PROPERTY
AND EMPLOYEE AND RELATED AND RELATED MARKETING
COSTS COMMITMENTS COMMITMENTS COMMITMENTS OTHER TOTAL
------------ ----------- ----------- ----------- ----------- --------
Restructuring Provision.... $ 3,069 $ 16,083 $ 34,684 $ 3,191 $ 3,708 $ 60,735
Incurred in 1998........... (1,159) (10,699) (30,020) (1,884) (1,915) (45,677)
------- -------- -------- ------- ------- --------
Balance at December 31,
1998..................... 1,910 5,384 4,664 1,307 1,793 15,058
Incurred in 1999........... (1,610) (1,379) (784) (1,307) (1,793) (6,873)
------- -------- -------- ------- ------- --------
Balance at December 31,
1999..................... $ 300 $ 4,005 $ 3,880 $ 0 $ 0 $ 8,185
======= ======== ======== ======= ======= ========
38
39
VIVUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company expects that during the fiscal year 2000 it will make cash
payments of approximately $2.4 million related to the restructuring, with the
remaining $5.7 million in cash payments to occur in later years.
NOTE 7. STOCKHOLDERS' EQUITY
Common Stock
The Company is authorized to issue 200 million shares of common stock. As
of December 31, 1999 and 1998, 32,210,500, and 31,890,091 shares, respectively,
were issued and outstanding.
The Company's Board of Directors approved a stock repurchase program in May
1997 whereby the Company could purchase up to two million shares of its common
stock. As of December 31, 1997, the Company had repurchased 336,700 shares at a
cost of $7,716,000. During January and February 1998, the Company repurchased
1,663,300 additional shares of its common stock at a cost of $23,583,990.
During second quarter 1999, the Company reached a settlement of the
shareholder class action lawsuits, in which the company incurred a non-cash
expense of $600,000 for the issuance of 120,000 shares of VIVUS, Inc. common
stock.
Preferred Stock
The Company is authorized to issue 5,000,000 shares of undesignated
preferred stock. Shares of preferred stock may be issued by the Company in the
future, without stockholder approval, upon such terms as the Company's Board of
Directors may determine.
Stock Warrants
In connection with the issuance of convertible preferred stock in 1993, the
Company issued warrants exercisable for up to 528,600 shares of common stock at
an exercise price of $4.31 per share. In June 1997, 203,590 warrants were
exercised and the Company issued 165,928 net shares based on the market price on
June 23, 1997. The remaining 325,010 warrants were not exercised and expired on
July 12, 1999.
NOTE 8. STOCK OPTION AND PURCHASE PLANS
Stock Option Plans
Under the 1991 Incentive Stock Plan (the Plan), the Company may grant
incentive or non-statutory stock options or stock purchase rights (SPRs). Up to
7,800,000 shares of common stock have been authorized for issuance under the
Plan. The Plan allows the Company to grant incentive stock options (ISOs) to
employees and nonstatutory stock options (NSOs) to employees, directors and
consultants at not less than the fair market value (for an ISO) of the stock at
the date of grant (110% of fair market value for individuals who control more
than 10% of the Company stock; otherwise, not less than 85% of fair market value
for an NSO), as determined by the Board of Directors. Under the Plan, 25% of the
options generally become exercisable after one year and 2.0833% per month
thereafter. The term of the option is determined by the Board of Directors on
the date of grant but shall not be longer than ten years. The Plan allows the
Company to grant SPRs to employees and consultants at not less than 85% of the
fair market value of the stock at the date of grant, as determined by the Board
of Directors. Sales of stock under SPRs are made pursuant to restricted stock
purchase agreements containing provisions established by the Board of Directors.
The Company has a right to repurchase the shares at the original sale price,
which expires at a rate to be determined by the Board of Directors. As of
December 31, 1999, no SPRs have been granted under the Plan.
Under the 1994 Director Option Plan (the Director Option Plan), the Company
reserved 400,000 shares of common stock for issuance to nonemployee directors of
the Company pursuant to nonstatutory stock
39
40
VIVUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
options issued at the fair market value of the Company's common stock at the
date of grant. Under the Director Option Plan, nonemployee directors will
receive an option to purchase 32,000 shares of common stock when they join the
Board of Directors. These options vest 25% after one year and 25% annually
thereafter. Each director shall receive an option to purchase 8,000 shares of
the Company's common stock annually upon their reelection. These options are
fully exercisable ratably over eight months.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used for
grants: risk-free rates ranging from 5 - 6% and corresponding to government
securities with original maturities similar to the vesting periods; expected
dividend yield of 0%; expected lives of .64 years beyond vest dates; and
expected volatility of 55% in all years.
Details of option activity under these plans are as follows:
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
---------- ----------------
Outstanding, December 31, 1996.............................. 4,197,850 $ 9.13
Granted................................................... 1,289,722 22.32
Exercised................................................. (850,550) 5.00
Cancelled................................................. (115,827) 12.90
---------- ------
Outstanding, December 31, 1997.............................. 4,521,195 13.57
---------- ------
Granted................................................... 1,093,338 4.96
Exercised................................................. (379,375) 4.23
Cancelled................................................. (2,163,416) 14.23
Repricing cancellation...................................... (1,910,523) 15.16
Repricing issuance.......................................... 1,910,523 3.42
---------- ------
Outstanding, December 31, 1998.............................. 3,071,742 3.90
---------- ------
Granted................................................... 300,783 3.36
Exercised................................................. (103,623) 2.13
Cancelled................................................. (324,626) .43
---------- ------
Outstanding, December 31, 1999.............................. 2,944,276 $ 3.52
========== ======
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------- ---------------------------------------------------------------------
NUMBER NUMBER
OUTSTANDING AT WEIGHTED-AVERAGE EXERCISABLE
RANGE OF DECEMBER 31, REMAINING WEIGHTED-AVERAGE DECEMBER 31, WEIGHTED-AVERAGE
EXERCISE PRICES 1999 CONTRACTUAL LIFE EXERCISE PRICE 1999 EXERCISE PRICE
--------------- -------------- ---------------- ---------------- ------------ ----------------
$0.24 - $ 2.72 1,013,656 7.47 years $2.10 449,177 $1.48
$2.94 948,653 6.15 years 2.94 753,115 2.94
$3.00 - $25.88 981,967 6.42 years 5.54 727,259 5.54
--------- ---------
$0.24 - $25.88 2,944,276 6.7 years $3.52 1,929,551 $3.58
========= =========
At December 31, 1999, 5,960,960 options remained authorized and unissued
and options to purchase 1,929,551 shares were exercisable under these plans. The
weighted average fair values of options granted during 1999, 1998, and 1997,
were $3.36, $4.96, and $9.32, respectively.
During 1997, options to purchase 100,000 shares of common stock were
granted to research consultants at the fair market value on the date of grant.
Compensation costs, including the impact of re-pricing, using the Black-Scholes
option-pricing model approximately $1.1 million over the option's vesting period
of which $182,000, $648,000 and $140,000 were recorded as expenses for the years
ended December 31, 1999, 1998 and 1997, respectively. These options were
cancelled in July 1999, when the Company decided not to renew the
40
41
VIVUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
contract with the research consultants. The research consultants exercised a
total of 25,000 shares of these options during 1999.
In October 1998, the Company's Board of Directors authorized the re-pricing
of all non-executive employees' options, certain consultants' options, and 50%
of executives' options to the closing value as of October 19, 1998. The
remaining 50% of executive options were re-priced at 150% of the closing value
as of the same date. All re-priced stock options have a six-month "black out"
period, whereby the re-priced stock options are not exercisable, even if vested.
The "black out" period of all re-priced options ended April 18, 1999, and are
now exercisable if vested.
The Company accounts for these plans under APB Opinion No. 25. Except for
compensation discussed in the preceding paragraph, no compensation cost has been
recognized because the exercise price equals the market value of stock on the
date of grant. Options under these plans generally vest over four years, and all
options expire after ten years.
Under FASB Statement No. 123 (FASB 123), "Accounting for Stock-based
Compensation," the estimated fair value of options is amortized to expense over
the options' vesting period. In accordance with the disclosure requirements of
FASB 123, if the Company had elected to recognize this expense, income (loss)
and income (loss) per share would have been reduced to the following pro forma
amounts (in thousands, except per share data):
1999 1998 1997
------- -------- -------
Pro forma net income (loss).......................... $17,341 $(83,129) $31,958
Pro forma net income (loss) per share:
Basic.............................................. $ 0.54 $ (2.61) $ 0.97
Diluted............................................ $ 0.53 $ (2.61) $ 0.90
Stock Purchase Plan
In June 1994, the Company implemented an employee stock purchase plan under
which eligible employees may authorize payroll deductions of up to 10% of their
base compensation (as defined) to purchase common stock at a price equal to 85%
of the lower of the fair market value as of the beginning or the end of the
offering period. A total of 400,000 shares were reserved for issuance under the
employee stock purchase plan. As of December 31, 1999, 269,172 shares have been
issued to employees. During 1999, the weighted average fair market value of
shares issued under the employee stock purchase plan was $2.16 per share.
NOTE 9. LICENSE AGREEMENTS
The Company has entered into several agreements to license patented
technologies that are essential to the development and production of the
Company's products. In connection with these agreements, upon meeting certain
milestones (as defined) and contingent on the issuance of patents in certain
countries, the Company is obligated to (1) pay license fees of $2,575,000 (of
which $2,175,000 was paid prior to December 31, 1997 and $400,000 was paid in
January 1998); (2) issue 896,492 shares of the Company's common stock (all of
which has been issued); and (3) pay royalties on product sales covered by the
license agreements (4% of U.S. and Canadian product sales and 3% of sales
elsewhere in the world). In 1996, the Company issued an additional 400,000
shares of common stock to maintain exclusive rights to certain patents and
patent applications beyond 1998. In connection with this issuance, the Company
recorded a charge of $5,821,000 to the consolidated statements of operations. In
1997, 1998 and 1999, the Company recorded royalty expenses as cost of goods sold
based on product sales.
41
42
VIVUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. LEASE COMMITMENTS
The Company leases its manufacturing facilities under a five-year
non-cancelable operating lease expiring in 2002. The Company has the option to
extend this lease for two renewal terms of five years each. In January 2000, the
Company entered into a seven-year lease for a new corporate headquarters in
Mountain View, California, which lease expires in January 2007.
Future minimum lease payments under operating leases are as follows (in
thousands):
2000........................................................ $1,342
2001........................................................ 1,417
2002........................................................ 844
2003........................................................ 717
2004........................................................ 737
Thereafter.................................................. 1,629
------
$6,686
Rent expense under operating leases totaled $994,000, $2,472,000 and
$1,320,000 for the years ended December 31, 1999, 1998, 1997, respectively.
NOTE 11. INCOME TAXES
Deferred income taxes result from differences in the recognition of
expenses for tax and financial reporting purposes, as well as operating loss and
tax credit carryforwards. Significant components of the Company's deferred
income tax assets as of December 31, are as follows (in thousands):
1999 1998
-------- --------
Deferred tax assets:
Net operating loss carryforwards..................... $ 6,230 $ 17,309
Research and development credit carryforwards........ 4,820 4,625
Capitalized research and development expenses........ 534 1,385
Inventory reserve.................................... 6,100 5,808
Accruals and other................................... 5,163 11,007
Deferred gain........................................ (272) (573)
Depreciation......................................... 4,974 5,466
-------- --------
27,549 45,027
Valuation allowance.................................... (27,549) (45,027)
-------- --------
Total........................................ $ -- $ --
======== ========
For federal and state income tax reporting purposes, net operating loss
carryforwards of approximately $17,719,000 and $440,000 are available to reduce
future taxable income, if any. These carryforwards begin to expire in 2019. In
1995, the Company implemented an international product distribution strategy for
its products. Implementation included the transfer of international product
manufacturing and marketing rights to VIVUS International Limited in a taxable
transaction. The transfer of rights and related allocation of research and
development costs resulted in the current utilization of $29,467,000 of the net
operating loss carryforward. Should significant changes in the Company's
ownership occur, the annual amount of tax loss and credit carryforwards
available for future use would be limited.
42
43
VIVUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provision for income taxes consisted of the following components for
the years ended December 31, 1999 and 1997, (in thousands):
1999 1997
---- --------
Current
Federal................................................. $730 $ 2,170
State................................................... 95 1,332
---- --------
Total current................................... 989 3,502
Deferred (prepaid)
Federal................................................. -- (318)
State................................................... -- --
---- --------
Total deferred (prepaid), net................... -- (318)
---- --------
Total provision for income taxes................ $989 $ 3,184
==== ========
The provisions for income taxes differs from the amount computed by
applying the statutory federal income tax rates as follows, for the years ended
December 31, 1999 and 1997:
1999 1997
---- ----
Provision computed at federal statutory rates............... 35% 35%
State income taxes, net of federal tax effect............... 6 6
Net operating losses utilized............................... (31) (20)
Tax credits utilized........................................ -- (10)
Income not subject to federal and state taxation............ (4) (4)
Other....................................................... (1) 1
--- ----
Provision for income taxes........................ 5% 8%
=== ====
NOTE 12. LEGAL MATTERS
On November 3, 1999, VIVUS International Limited ("VINTL") filed a demand
for arbitration against Janssen Pharmaceutica International ("Janssen") with the
American Arbitration Association pursuant to the terms of the Distribution
Agreement entered into between VINTL and Janssen on January 22, 1997. VINTL
seeks compensation for inventory manufactured by VINTL in 1998 in reliance on
contractual forecasts and orders submitted by Janssen. VINTL also seeks
compensation for forecasts and order shortfalls attributed to Janssen in 1998,
pursuant to the terms of the Distribution Agreement. VINTL seeks an award of
$3.9 million plus costs and interest. On December 3, 1999, Janssen submitted its
response to VINTL's arbitration demand denying liability. On January 3, 2000,
each party designated an independent arbitrator. The designated arbitrators will
select a third neutral arbitrator. An arbitration hearing is expected to occur
in the second quarter of 2000.
On October 5, 1998, the Company was named in a civil action filed in the
Superior Court of New Jersey. This complaint seeks specific performance and
other relief in connection with the Company's leased manufacturing facilities,
located in Lakewood, New Jersey. The Company's lease agreement requires that the
Company provide a removal security deposit in the form of cash or a letter of
credit. The Company and lessor ("plaintiff") have reached a tentative agreement
whereby the Company will provide an irrevocable standby letter of credit in the
amount of $3.3 million for such security deposit in the fourth quarter.
On February 18, 1998, a purported shareholder class action entitled Crain
et al. v. VIVUS, Inc. et al., was filed in Superior Court of the State of
California for the County of San Mateo. Five identical complaints were
subsequently filed in the same court. These complaints were filed on behalf of a
purported class of persons who purchased stock between May 15, 1997 and December
9, 1997. The complaints alleged that the Company and
43
44
VIVUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
certain current and former officers or directors artificially inflated the
Company's stock price by issuing false and misleading statements concerning the
Company's prospects and issuing false financial statements. On March 16, 1998, a
purported shareholder class action entitled Cramblit et al. v. VIVUS, Inc. et
al. was filed in the United States District Court for the Northern District of
California. Five additional complaints were subsequently filed in the same
court. The federal complaints were filed on behalf of a purported class of
persons who purchased stock between May 2, 1997 and December 9, 1997. The
federal complaints asserted the same factual allegations as the state court
complaints, but asserted legal claims under the Federal Securities Laws. The
federal court cases were consolidated, and a lead plaintiff was appointed and
the plaintiff filed a consolidated and amended complaint in 1998.
On May 4, 1999, the Company reached a settlement with plaintiffs of the
shareholder class action lawsuits described above. The aggregate settlement
amount was $6 million. The settlement was funded by insurance proceeds of $5.4
million and by the Company contributing 120,000 shares of VIVUS Common Stock to
the settlement fund.
In the normal course of business, the Company receives and makes inquiries
regarding patent infringement and other legal matters. The Company believes that
it has meritorious claims and defenses and intends to pursue any such matters
vigorously. The Company is not aware of any asserted or unasserted claims
against it where the resolution would have an adverse material impact on the
operations or financial position of the Company.
NOTE 13. SEGMENT INFORMATION
During 1998, the Company adopted Statement of Financial Accounting
Statement SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information." SFAS 131 requires a new basis of determining reportable business
segments, i.e. the management approach. This approach requires that businesses
disclose segment information used by management to assess performance and manage
company resources. On this basis, the Company primarily sells its product
through wholesale channels in the United States. International sales are made
only to the Company's two international partners. All transactions are
denominated in U.S. dollars, therefore, the Company considers the arrangement as
operating in a single segment.
1999 1998 1997
---- ---- ----
Top five customers accounted for:
Customer A.................................................. 47% 35% *
Customer B.................................................. 10% 13% 24%
Customer C.................................................. 9% * 13%
Customer D.................................................. 9% 11% 14%
Customer E.................................................. 6% 10% 18%
Customer F.................................................. * * 11%
Customer G.................................................. * 11% *
- ---------------
* Customer's percentage did not fall in the top five
NOTE 14. SUBSEQUENT EVENT (UNAUDITED)
The Company entered into a binding Memorandum of Understanding to further
solidify its female sexual dysfunction ("FSD") intellectual property position
through an exclusive agreement with AndroSolutions, Inc., a privately held
biomedical corporation and definitive agreements were executed in March 2000.
The Company and AndroSolutions have jointly formed ASIVI, LLC, a Delaware
limited liability company, into which VIVUS has contributed its issued U.S. FSD
patent and European application and into which
44
45
VIVUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AndroSolutions has contributed its U.S. and European FSD patent applications. In
turn, ASIVI has granted the Company exclusive global rights to develop and
commercialize FSD technologies based on this intellectual property, in return
for certain milestone payments and royalties on FSD products developed by VIVUS.
The Company and AndroSolutions will each own 50% of ASIVI, LLC. The Company
intends to account for their interest in ASIVI, LLC. through the equity method
of accounting.
45
46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
The information required by this item is incorporated by reference from the
discussion in the Company's Proxy Statement captioned "Proposal One: Election of
Directors."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
discussion in the Company's Proxy Statement captioned "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
discussion in the Company's Proxy Statement captioned "Record Date and Share
Ownership."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information required by this item is incorporated by reference from
the discussion in the Company's Proxy Statement captioned "Certain Transactions
and Reports."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. FINANCIAL STATEMENTS
2. FINANCIAL STATEMENT SCHEDULES
Schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the consolidated financial
statements or notes thereto incorporated by reference herein.
3. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.2(7) Amended and Restated Certificate of Incorporation of the
Company
3.3(4) Bylaws of the Registrant, as amended
3.4(8) Certificate of Designations of Rights, Preferences and
Privileges of Series A Participating Preferred Stock
4.1(7) Specimen Common Stock Certificate of the Registrant
4.2(7) Registration Rights, as amended
4.4(1) Form of Preferred Stock Purchase Warrant issued by the
Registrant to Invemed Associates, Inc., Frazier Investment
Securities, L.P., and Cristina H. Kepner
4.5(8) Second Amended and Restated Preferred Shares Rights
Agreement, dated as of April 15, 1997 by and between the
Registrant and Harris Trust Company of California, including
the Certificate of Determination, the form of Rights
Certificate and the Summary of Rights attached thereto as
Exhibits A, B, and C, respectively
10.1(1)+ Assignment Agreement by and between Alza Corporation and the
Registrant dated December 31, 1993
10.2(1)+ Memorandum of Understanding by and between Ortho
Pharmaceutical Corporation and the Registrant dated February
25, 1992
46
47
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.3(1)+ Assignment Agreement by and between Ortho Pharmaceutical
Corporation and the Registrant dated June 9, 1992
10.4(1)+ License Agreement by and between Gene A. Voss, MD, Allen C.
Eichler, MD, and the Registrant dated December 28, 1992
10.5A(1)+ License Agreement by and between Ortho Pharmaceutical
Corporation and Kjell Holmquist AB dated June 23, 1989
10.5B(1)+ Amendment by and between Kjell Holmquist AB and the
Registrant dated July 3, 1992
10.5C(1) Amendment by and between Kjell Holmquist AB and the
Registrant dated April 22, 1992
10.5D(1)+ Stock Purchase Agreement by and between Kjell Holmquist AB
and the Registrant dated April 22, 1992
10.6A(1)+ License Agreement by and between Amsu, Ltd., and Ortho
Pharmaceutical Corporation dated June 23, 1989
10.6B(1)+ Amendment by and between Amsu, Ltd., and the Registrant
dated July 3, 1992
10.6C(1) Amendment by and between Amsu, Ltd., and the Registrant
dated April 22, 1992
10.6D(1)+ Stock Purchase Agreement by and between Amsu, Ltd., and the
Registrant dated July 10, 1992
10.11(4) Form of Indemnification Agreements by and among the
Registrant and the Directors and Officers of the Registrant
10.12(2) 1991 Incentive Stock Plan and Form of Agreement, as amended
10.13(1) 1994 Director Option Plan and Form of Agreement
10.14(1) Form of 1994 Employee Stock Purchase Plan and Form of
Subscription Agreement
10.17(1) Letter Agreement between the Registrant and Leland F. Wilson
dated June 14, 1991 concerning severance pay
10.21(3)+ Distribution Services Agreement between the Registrant and
Synergy Logistics, Inc. (a wholly-owned subsidiary of
Cardinal Health, Inc.)+ dated February 9, 1996
10.22(3)+ Manufacturing Agreement between the Registrant and CHINOIN
Pharmaceutical and Chemical Works Co., Ltd. dated December
20, 1995
10.22A(11)+ Amendment One, dated as of December 11, 1997, to the
Manufacturing Agreement by and between VIVUS and CHINOIN
Pharmaceutical and Chemical Works Co., Ltd. dated December
20, 1995
10.23(6)+ Distribution and Services Agreement between the Registrant
and Alternate Site Distributors, Inc. dated July 17, 1996
10.24(5)+ Distribution Agreement made as of May 29, 1996 between the
Registrant and ASTRAZ AB
10.24A(14)++ Amended Distribution Agreement dated December 22, 1999
between AstraZeneca and the Registrant
10.27(11)+ Distribution Agreement made as of January 22, 1997 between
the Registrant and Janssen Pharmaceutica International, a
division of Cilag AG International
10.27A(11)+ Amended and Restated Addendum 1091, dated as of October 29,
1997, between VIVUS International Limited and Janssen
Pharmaceutica International
10.28(7) Lease Agreement made as of January 1, 1997 between the
Registrant and Airport Associates
10.29(7) Lease Amendment No. 1 as of February 15, 1997 between
Registrant and Airport Associates
10.29A(10) Lease Amendment No. 2 dated July 24, 1997 by and between the
Registrant and Airport Associates
10.29B(10) Lease Amendment No. 3 dated July 24, 1997 by and between the
Registrant and Airport Associates
10.31(9)+ Manufacture and Supply Agreement between Registrant and
Spolana Chemical Works, A.S. dated May 30, 1997
47
48
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.32A(11) Agreement between ADP Marshall, Inc. and the Registrant
dated December 19, 1997
10.32B(11) General Conditions of the Contract for Construction
10.32C(11) Addendum to General Conditions of the Contract for
Construction
10.34(12)+ Agreement dated as of June 30, 1998 between Registrant and
Alza Corporation
10.35(12)+ Sales Force Transition Agreement dated July 6, 1998 between
Registrant and Alza Corporation
10.36(13) Form of, "Change of Control Agreements," dated July 8, 1998
by and between the Registrant and certain Executive Officers
of the Company.
10.30A(13) Amendment of lease agreement made as of October 19, 1998 by
and between Registrant and 605 East Fairchild Associates,
L.P.
10.37(13) Sublease agreement made as of November 17, 1998 between
Caliper Technologies, Inc. and Registrant
10.22B(13)+ Amendment Two, dated as of December 18, 1998 by and between
VIVUS, Inc. and CHINOIN Pharmaceutical and Chemical Works
Co.
10.31A(13)+ Amendment One, dated as of December 12, 1998 by and between
VIVUS, Inc. and Spolana Chemical Works, A.S.
10.38(14)++ License Agreement by and between ASIVI, LLC, AndroSolutions,
Inc., and the Registrant dated February 29, 2000
10.38A(14)++ Operating Agreement of ASIVI, LLC, between AndroSolutions,
Inc. and the Registrant dated February 29, 2000
10.39(14) Sublease agreement between KVO Public Relations, Inc. and
the Registrant dated December 21, 1999
21.2 List of Subsidiaries
23.1 Consent of Independent Public Accountants
24.1 Power of Attorney (see "Power of Attorney")
27.1 Financial Data Schedule
- ---------------
+ Confidential treatment granted.
++ Confidential treatment requested.
(1) Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Registration Statement on Form S-1 No. 33-75698, as amended.
(2) Incorporated by reference to the same numbered exhibit filed with the
Registrant's Registration Statement on Form S-1 No. 33-90390, as amended.
(3) Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1995, as amended.
(4) Incorporated by reference to the same numbered exhibit filed with the
Registrant's Form 8-B filed with the Commission on June 24, 1996.
(5) Incorporated by reference to the same numbered exhibit filed with the
Registrant's Current Report on Form 8-K/A filed with the Commission on June
21, 1996.
(6) Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996.
(7) Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1996, as amended.
(8) Incorporated by reference to exhibit 99.1 filed with Registrant's Amendment
Number 2 to the Registration Statement of Form 8-A (File No. 0-23490) filed
with the Commission on April 23, 1997.
(9) Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
1997.
48
49
(10) Incorporated by reference to the same numbered exhibit filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1997.
(11) Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1997.
(12) Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998.
(13) Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1998.
(14) Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1999.
(b) REPORTS ON FORM 8-K
None.
49
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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:
VIVUS, INC.,
a Delaware Corporation
By: /s/ RICHARD WALLISER
------------------------------------
Richard Walliser
Vice President of Finance and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Date: March 30, 2000
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints each of Leland F. Wilson and Richard
Walliser as his attorney-in-fact for him, in any and all capacities, to sign
each amendment to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorney-in-fact or his substitute or substitutes may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ LELAND F. WILSON President, Chief Executive Officer March 30, 1999
- ------------------------------------------ (Principal Executive Officer) and Director
Leland F. Wilson
/s/ VIRGIL A. PLACE Chairman of the Board and Chief Scientific March 30, 1999
- ------------------------------------------ Officer and Director
Virgil A. Place
/s/ RICHARD WALLISER Vice President of Finance and Chief March 30, 1999
- ------------------------------------------ Financial Officer (Principal Financial
Richard Walliser and Accounting Officer)
/s/ JOSEPH E. SMITH Director March 30, 1999
- ------------------------------------------
Joseph E. Smith
/s/ MARIO M. ROSATI Director March 30, 1999
- ------------------------------------------
Mario M. Rosati
/s/ MARK B. LOGAN Director March 30, 1999
- ------------------------------------------
Mark H. Logan
/s/ LINDA M. SHORTLIFFE, M.D. Director March 30, 1999
- ------------------------------------------
Linda M. Shortliffe, M.D.
50
51
VIVUS, INC.
REPORT ON FORM 10-K FOR
THE YEAR ENDED DECEMBER 31, 1998
INDEX TO EXHIBITS*
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT NAME NUMBERED PAGE
------- ------------ -------------
10.24A++ Amended Distribution Agreement dated December 22, 1999
between AstraZeneca and the Registrant......................
10.38++ License Agreement by and between ASIVI, LLC, AndroSolutions,
Inc., and the Registrant dated February 29, 2000............
10.38A++ Operating Agreement of ASIVI, LLC, between AndroSolutions,
Inc. and the Registrant dated February 29, 2000.............
10.39 Sublease agreement between KVO Public Relations, Inc. and
the Registrant dated December 21, 1999......................
21.2 List of Subsidiaries........................................
23.1 Consent of Independent Public Accountants...................
24.1 Power of Attorney (see "Power of Attorney").................
27.1 Financial Data Schedule.....................................
- ---------------
* Only exhibits actually filed are listed. Exhibits incorporated by reference
are set forth in the exhibit listing included in Item 14 of the Report on
Form 10-K.
++ Confidential treatment requested.
51