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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO _____________
COMMISSION FILE NUMBER: 0-23490
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VIVUS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3136179
STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
545 MIDDLEFIELD ROAD, SUITE 200, MENLO PARK, CA 94025
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)
(650) 325-5511
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
------------------------
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. [X] Yes [ ] No
At September 30, 1997, 33,149,729 shares of common stock were outstanding.
Exhibit index on page 22.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VIVUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1997 1996 1997 1996
------- ------- -------- -------
Net product sales.............................. $39,118 $ -- $100,367 $ --
Milestone revenue.............................. -- 10,000 5,000 20,000
------- ------- -------- -------
Net revenues......................... 39,118 10,000 105,367 20,000
Cost of goods sold............................. 11,270 -- 28,920 --
------- ------- -------- -------
Gross margin................................... 27,848 10,000 76,447 20,000
------- ------- -------- -------
Operating expenses:
Research and development..................... 3,947 5,462 7,914 23,007
Selling, general and administrative.......... 11,507 3,118 34,574 6,501
------- ------- -------- -------
Total operating expenses............. 15,454 8,580 42,488 29,508
------- ------- -------- -------
Income (loss) from operations.................. 12,394 1,420 33,959 (9,508)
Interest and other income...................... 1,106 1,242 3,491 2,191
------- ------- -------- -------
Income (loss) before taxes........... 13,500 2,662 37,450 (7,317)
Income taxes................................... 2,241 -- 6,679 --
------- ------- -------- -------
Net income (loss).................... $11,259 $ 2,662 $ 30,771 $(7,317)
======= ======= ======== =======
Net income (loss) per common and equivalent
share........................................ $ 0.31 $ 0.07(1) $ 0.86 $ (0.25)(1)
======= ======= ======== =======
Shares used in the computation of net income
(loss) per share............................. 35,772 35,636(1) 35,602 29,802(1)
======= ======= ======== =======
- ---------------
(1) Prior period figures have been adjusted to reflect the 2 for 1 stock split
which occurred in the second quarter of 1997.
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VIVUS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
Current assets:
Cash............................................................. $ 3,362 $ 555
Available-for-sale securities.................................... 69,430 60,710
Trade and other receivables...................................... 18,105 748
Inventories...................................................... 6,212 4,540
Prepaid expenses and other....................................... 652 587
--------- ---------
Total current assets..................................... 97,761 67,140
Property & equipment............................................... 26,347 6,332
Available-for-sale securities, non-current......................... 24,086 23,060
--------- ---------
Total.................................................... $ 148,194 $ 96,532
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 6,346 $ 3,324
Accrued and other liabilities.................................... 22,036 3,428
--------- ---------
Total current liabilities................................ 28,382 6,752
--------- ---------
Stockholders' equity:
Common stock; $.001 par value; shares
authorized 200,000,000; shares outstanding --
September 30, 1997, 33,149,729; December 31, 1996,
32,454,340(1);............................................... 33 32
Paid in capital.................................................. 159,347 156,173
Less treasury stock,at cost; 185,000 shares at September 30,
1997; none at December 31, 1996............................... (4,184) --
Unrealized gain on securities.................................... 64 77
Deferred compensation............................................ (65) (348)
Accumulated deficit.............................................. (35,383) (66,154)
--------- ---------
Total stockholders' equity............................... 119,812 89,780
--------- ---------
Total.................................................... $ 148,194 $ 96,532
========= =========
- ---------------
(1) Prior period shares have been adjusted to reflect the 2 for 1 stock split
which occurred in the second quarter of 1997.
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VIVUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1997 1996
-------- --------
Cash flows from operating activities:
Net income (loss).................................................... $ 30,771 $ (7,317)
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
Depreciation and amortization..................................... 1,448 719
Stock compensation costs.......................................... 367 332
Issuance of common stock for patent rights........................ -- 5,821
Changes in assets and liabilities:
Receivables..................................................... (17,357) (773)
Inventories..................................................... (1,672) --
Prepaid expenses and other...................................... (65) (122)
Accounts payable................................................ 3,022 (109)
Accrued and other liabilities................................... 18,608 1,099
-------- --------
Net cash provided by (used for) operating activities......... 35,122 (350)
-------- --------
Cash flows from investing activities:
Property purchases................................................... (21,463) (2,101)
Securities purchases................................................. (210,858) (99,350)
Proceeds from sale/maturity of securities............................ 201,099 52,716
-------- --------
Net cash used for investing activities....................... (31,222) (48,735)
-------- --------
Cash flows from financing activities:
Sale of common stock................................................. -- 57,428
Exercise of common stock options..................................... 2,918 864
Purchase of common stock through employees stock purchase plan....... 173 104
Repurchase of common stock through buybacks.......................... (4,184) --
-------- --------
Net cash provided by (used for) financing activities......... (1,093) 58,396
-------- --------
Net increase in cash................................................... 2,807 9,311
Cash:
Beginning of period.................................................. 555 973
-------- --------
End of period........................................................ $ 3,362 $ 10,284
======== ========
Non-cash investing and financing activities:
Unrealized loss on securities........................................ ($13) ($127)
See accompanying notes to financial statements
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VIVUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulations S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three month and nine month periods
ended September 30, 1997 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1997. For further information,
refer to the financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
2. PROVISION FOR INCOME TAXES
The Company's effective tax rate was 17.8 percent of income before taxes
for the nine months ended September 30, 1997. This tax rate includes the effect
of net operating losses (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 expects to fully utilize all NOLs during 1997, and
accordingly, the Company's effective tax rate is expected to increase in the
future.
3. NET INCOME (LOSS) PER SHARE
For the three months and nine months ended September 30, 1997, net income
per common and equivalent share is based on the weighted average number of
common and equivalent shares outstanding during the period, including
outstanding options and warrants. Such options and warrants are excluded from
the net loss per common and equivalent shares for the nine months ended
September 30, 1996 because they are antidilutive. Share and per share amounts
have been calculated based on post-split shares resulting from the two-for-one
stock split effective June 23, 1997.
4. IMPACT OF NEW ACCOUNTING PRONOUNCEMENT
The Company will adopt SFAS No. 128, "Earnings per Share," effective
December 15, 1997 for the year ending December 31, 1997. This Statement cannot
be applied before December 15, 1997. It requires that all earnings-per-share
data for prior periods presented be restated to conform with the new statement.
Had the new pronouncement been in effect for the periods presented,
earnings-per-share would have been as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ---------------------
1997 1996 1997 1996
------ ----- ------ ------
Basic earnings-per-share..................... $0.34 $0.08 $0.93 $(0.25)
Diluted earnings-per-share................... 0.31 0.07 0.86 (0.25)
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DESCRIPTION OF BUSINESS
VIVUS, Inc. ("VIVUS" or the "Company") is a leading developer of advanced
therapeutic systems for the treatment of erectile dysfunction. Erectile
dysfunction, commonly referred to as impotence, is the inability to achieve and
maintain an erection of sufficient rigidity for sexual intercourse. The
Company's transurethral system for erection is a non-invasive, easy to use
system that delivers pharmacologic agents topically to the urethral lining. In
November 1996, the Company obtained regulatory marketing clearance from the U.S.
Food and Drug Administration (the "FDA") to manufacture and market its first
product, MUSE(R) (alprostadil). The Company commenced product shipments to
wholesalers in December 1996 and commercially introduced MUSE (alprostadil) in
the United States through its direct sales force beginning in January 1997. In
addition, the Company submitted applications for regulatory approval to market
MUSE (alprostadil) in the United Kingdom in September 1996; Sweden in October
1996; Norway in January 1997; China, Australia and New Zealand in April 1997;
Canada and Switzerland in May 1997; and Korea, South Africa, Brazil and
Argentina in August 1997. These applications will be subject to rigorous
approval processes, and there can be no assurance such approval will be granted
in a timely manner, if at all. Furthermore, the Company received FDA clearance
in December 1996 for ACTIS(R), an adjustable elastomeric venous flow control
device designed for those patients who suffer from veno-occlusive dysfunction
(commonly referred to as venous leak syndrome). The Company commenced commercial
sales of ACTIS in July 1997. ACTIS is currently being studied for adjunctive use
with MUSE (alprostadil), however, there can be no assurance that such studies
will demonstrate that adjunctive use of ACTIS with MUSE (alprostadil) is an
effective treatment for erectile dysfunction.
The Company has limited experience in manufacturing and selling MUSE
(alprostadil) in commercial quantities. Since the commercial launch of MUSE
(alprostadil) in January 1997, the Company has experienced product shortages due
to higher than expected demand and difficulties encountered in scaling up
production of MUSE (alprostadil). The Company has initiated the build out of
90,000 square feet of additional manufacturing space, and it is currently
seeking a location for construction of a European manufacturing operation. If
the Company encounters further difficulties with its current manufacturing
facility or delays in completion or regulatory approval of its new manufacturing
facility, capacity constraints could continue for an extended period of time,
which would have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's New Jersey manufacturing facility at Paco Pharmaceutical
Services, Inc. ("Paco") was inspected by the FDA for the first time after the
pre-approval inspection during twelve days in February and March 1997. That
inspection resulted in the issuance by the FDA of an extensive FDA Form 483,
which detailed specific areas where the FDA inspector observed that the
Company's operations were not in full compliance with some areas of the current
Good Manufacturing Practices ("cGMP") regulations. A corrective action plan
addressing all identified cGMP deficiencies was initiated immediately, and the
Company submitted a written response to the FDA Form 483 and requested a meeting
with the FDA District Office officials to address the matter. Approximately 30
days after submitting the initial written response, the Company provided the FDA
with a written update of the progress made against the corrective action plan.
The Company provided an additional written response to comments and questions
from the FDA in April and May 1997. Following a meeting with FDA officials on
May 23, 1997, the FDA issued a Warning Letter to the Company on May 29, 1997
reiterating the deficiencies noted in the earlier FDA Form 483. The Company's
manufacturing facility was reinspected by the FDA during seven days in August
and September 1997. That reinspection resulted in the issuance of an FDA Form
483, which mentioned specific areas cited in the earlier Form 483, where the FDA
inspector continued to observe that the Company's operations were still not in
full compliance with some areas of the cGMP regulations. On September 18, 1997,
the Company provided a written response and requested that the FDA affirm that
the Company's New Jersey manufacturing facility is in substantial compliance
with cGMPs.
Continued failure to adequately address cGMP deficiencies within a
reasonable time frame or to comply with cGMP regulations would have an adverse
effect on the Company's ability to supply its product in the US
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and internationally, which would have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that the FDA will deem the Company's corrective action or written
response to the Form 483 observations to be adequate or that additional
corrective action will not be required. Failure to achieve and maintain
satisfactory cGMP compliance could 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 New
Jersey manufacturing facility until cGMP compliance is achieved.
In May 1996, the Company entered into an international marketing agreement
with Astra AB ("Astra"). Astra will purchase the Company's products for resale
in Europe, South America, Central America, Australia and New Zealand. As
consideration for execution of the international marketing agreement, Astra paid
the Company $10 million in June 1996. In September 1996, the Company received a
$10 million milestone payment from Astra as a result of filing an application
for marketing authorization for MUSE (alprostadil) in the United Kingdom. The
Company will be paid up to an additional $10 million in the event certain other
milestones are achieved. However, there can be no assurance that such milestones
will be achieved.
In January 1997, the Company entered into an international marketing
agreement with Janssen Pharmaceutica International ("Janssen"), a subsidiary of
Johnson & Johnson. Janssen will purchase the Company's products for resale in
China, multiple Pacific Rim countries (excluding Japan), Canada, Mexico and
South Africa. As consideration for execution of the international marketing
agreement, Janssen paid the Company $5 million in January 1997. The Company will
receive additional payments in the event certain other milestones are achieved.
However, there can be no assurance that such milestones will be achieved.
The Company has sought and will continue to seek additional pharmacologic
agents for the treatment of erectile dysfunction that are suitable for
transurethral delivery for which significant safety data already exists. The
Company believes that such agents may progress rapidly through clinical
development and the regulatory process due to the preexisting safety data. The
Company expects to begin a Phase III multi-center trial in the first half of
1998 for its second product candidate, a combination of alprostadil and prazosin
delivered via the Company's transurethral system for erection. The Company has
several other product candidates in preclinical development.
Based on a published study of more than 1,200 men in Massachusetts, the
Company estimates that more than 30% of males in the United States between the
ages of 40 and 70 suffer from moderate to complete erectile dysfunction. The
Company believes that similar rates of erectile dysfunction prevail outside the
United States. An estimate from the National Institute of Health ("NIH")
Consensus Statement on Impotence (1992) suggests that the number of men in the
United States with erectile dysfunction may be 10 to 20 million. The rate of
erectile dysfunction increases significantly with age. In addition to the
Company's transurethral system for erection, the primary medical therapies
currently used to treat erectile dysfunction are needle injection of
pharmacologic agents into the penis, vacuum constriction devices, penile
implants and oral medications. Despite the detrimental effect erectile
dysfunction may have on a couple's quality of life, the Company believes that,
due in part to the limitations of other therapies, less than 10% of men
suffering from erectile dysfunction received medical treatment prior to the
introduction of MUSE (alprostadil). The Company believes that MUSE (alprostadil)
could become a first line therapy for erectile dysfunction.
RESULTS OF OPERATIONS
Three and Nine months Ended September 30, 1997 and 1996
Product revenue of $39,118,000 and $100,367,000 was recorded for the three
months and nine months ended September 30, 1997 respectively, compared to zero
for each of the same periods in 1996. All product revenue was the result of the
commercial launch of MUSE (alprostadil) and ACTIS in 1997. Due to higher than
expected demand following the launch of MUSE (alprostadil) and difficulties in
scaling up production, demand has exceeded the available supply of product. The
Company has achieved increasing revenues over the three quarters since its
launch of MUSE (alprostadil) by increasing production from its current facility.
There can be no assurance that the Company will be able to obtain significant
additional increases in production from its current facility. No substantial
increases in production capacity are expected prior to
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approval by either the FDA or the Medicines Control Agency of the Company's
90,000 square feet of additional manufacturing space, which is currently under
construction. See Risk Factors -- Limited Manufacturing Experience; Capacity
Constraints.
As consideration for execution of the Janssen marketing agreement, Janssen
paid the Company $5 million in January 1997. The Company recorded this receipt
as milestone revenue in the condensed consolidated statement of operations. In
1996, the Company received milestone payments from Astra under the terms of an
international marketing agreement. The Company recorded these Astra milestone
revenues of $10 million and $20 million, respectively, in the three and nine
month periods ended September 30, 1996.
Cost of goods sold was $11,270,000 and $28,920,000 in the three and nine
months ended September 30, 1997. Cost of goods sold was zero for the same
periods in 1996 as there were no product sales.
The resulting product gross margin for the three and nine months ended
September 30, 1997 was 71%.
For the three months ended September 30, 1997, research and development
expenses were $3,947,000 compared with $5,462,000 for the three months ended
September 30, 1996, a decrease of 28%. For the nine months ended September 30,
1997, research and development expenses were $7,914,000, compared with
$23,007,000 for the nine months ended September 30, 1996, a decrease of 66%.
Research and development expenses for the three and nine month periods ended
September 30, 1997 were less than the same periods in 1996 due primarily to
higher pre-launch manufacturing expenses associated with commercial plant scale
up, and clinical and regulatory costs associated with the preparation and filing
of the Company's New Drug Application for MUSE (alprostadil) in 1996. In
addition, the Company recorded a $5.9 million charge as the result of issuing
200,000 pre-split shares of Common Stock in May 1996 to ALZA Corporation to
maintain exclusive rights to certain patents and patent applications beyond
1998.
Selling, general and administrative expenses for the three months ended
September 30, 1997 were $11,507,000 compared with $3,118,000 for the three
months ended September 30, 1996, an increase of 269%. For the nine months ended
September 30, 1997, selling, general and administrative expenses were
$34,574,000 compared with $6,501,000 for the nine months ended September 30,
1996, an increase of 432%. The increases compared with the same periods in 1996
resulted primarily from the addition of a fifty person field sales force, higher
marketing expenses and the costs associated with adding personnel to support the
growth of the Company's operations and the commercial launch of MUSE
(alprostadil).
Spending levels are likely to continue to increase during 1997 as the
Company further develops its commercial manufacturing, research and development,
marketing and sales capabilities.
Interest and other income for the three months ended September 30, 1997 was
$1,106,000 compared with $1,242,000 for the three months ended September 30,
1996, a decrease of 11%. The decrease related to a charge taken for the write
off of certain fixed assets. For the nine months ended September 30, 1997,
interest and other income was $3,491,000 compared with $2,191,000 for the nine
months ended September 30, 1996, an increase of 59%. The increase was primarily
the result of higher average invested balances.
Income taxes for the three months ended September 30, 1997 were $2,241,000,
approximately 17% of income before taxes, compared with zero for the three
months ended September 30, 1996. For the nine months ended September 30, 1997,
income taxes were $6,679,000, approximately 18% of income before taxes, compared
with zero for the nine months ended September 30, 1996. The increase is due to
the increase in taxable income as a result of increased revenue from product
sales. The 1997 tax rate includes the effect of net operating losses (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
expects to fully utilize all NOLs during 1997, and accordingly, the Company's
effective tax rate is expected to increase in the future.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed operations primarily from the
sale of preferred and common stock. Through September 30, 1997, VIVUS has raised
$150,685,000 from financing activities. Cash, cash equivalents and securities
available-for-sale totaled $96,878,000 at September 30, 1997 compared with
$84,325,000 at December 31, 1996. The increase in cash, cash equivalents and
securities available-for-sale is
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primarily a result of cash provided by operations, partially offset by capital
disbursements. The Company maintains its current excess cash balances in a
variety of interest bearing investment-grade financial investments such as
United States treasury, federal agency and state government securities,
repurchase agreements, corporate debt and bank certificates of deposit.
Principal preservation, liquidity and safety are the primary investment
objectives.
Cash flow from operations in the nine months ended September 30, 1997 was
$35,122,000 compared with cash used of $350,000 in the nine months ended
September 30, 1996. The increased cash provided by operations was primarily due
to net income of $30,771,000.
Trade and other receivables at September 30, 1997 were $18,105,000 compared
with $748,000 at December 31, 1996, an increase of $17,357,000. The increase
primarily resulted from the increase in trade receivables resulting from sales
of MUSE (alprostadil).
Current liabilities were $28,382,000 at September 30, 1997 compared with
$6,752,000 at December 31, 1996, an increase of $21,630,000. The increase was
related primarily to an increase in manufacturing and facilities expenditures,
as well as accrued income taxes, incentive compensation, and accrued royalties.
Capital expenditures in the nine months ended September 30, 1997 were
$21,463,000 compared with $2,101,000 for the same period ended September 30,
1996. Capital expenditures were higher in 1997 due to the construction of the
new manufacturing facility, in Lakewood, New Jersey and the purchase of
additional manufacturing equipment for use at the Company's dedicated
manufacturing operation within the Paco Pharmaceutical Services, Inc. ("Paco")
facility, also in Lakewood. Capital expenditures over the next two years are
likely to increase as they are expected to include additional improvements in
the current manufacturing facilities, completion of the new manufacturing
facility in New Jersey, a new manufacturing facility in Europe, and a new
corporate headquarters and a research and development laboratory facility in the
United States.
The Company expects to incur substantial additional costs, including
expenses related to its second manufacturing facility in the United States and
one in Europe, new product preclinical and clinical costs, ongoing research and
development activities, and general corporate purposes. The Company anticipates
that its existing capital resources will be sufficient to support the Company's
operations through the international commercial introduction of MUSE
(alprostadil), but may not be sufficient for the introduction of any additional
future products. The Company anticipates that it may be required to issue
additional equity or debt securities and may use other financing sources
including, but not limited to, corporate alliances and lease financings to fund
the future development and possible commercial launch of its products. The sale
of additional equity securities would result in additional dilution to the
Company's stockholders. There can be no assurance that such funds will be
available on terms satisfactory to the Company, or at all. Failure to obtain
adequate funding could cause a delay or cessation of the Company's product
development and marketing efforts and would have a material adverse effect upon
the Company's business, financial condition and results of operations. The
Company's working capital and additional funding requirements will depend upon
numerous factors, including: (i) the level of resources that the Company devotes
to sales and marketing capabilities; (ii) the level of resources that the
Company devotes to expanding manufacturing capacity; (iii) the activities of
competitors; (iv) the progress of the Company's research and development
programs; (v) the timing and results of preclinical testing and clinical trials;
(vi) technological advances; and (vii) continued profitability.
The Results of Operations and Liquidity and Capital Resources sections
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended. Actual results could differ materially from
those projected in the forward-looking statements as a result of the factors set
forth in this Liquidity and Capital Resources section, the Risk Factors section,
the Results of Operations section and the Description of Business section. The
discussion of those factors is incorporated herein by this reference as if said
discussion was fully set forth at this point.
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This Quarterly Report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ from
those set forth in such forward-looking statements as a result of certain
factors, including those set forth in this Risk Factors section.
RISK FACTORS
LIMITED MANUFACTURING EXPERIENCE; CAPACITY CONSTRAINTS
The Company has only limited experience in manufacturing MUSE (alprostadil)
in commercial quantities. Since the commercial launch of MUSE (alprostadil) in
January 1997, the Company has experienced product shortages due to higher than
expected demand and difficulties encountered in scaling up production of MUSE
(alprostadil). The Company has initiated the build out of 90,000 square feet of
additional manufacturing space in New Jersey, and it is currently seeking a
location for construction of a European manufacturing operation. The Company
anticipates it will complete construction of the new New Jersey facility by the
end of 1997. However, construction of a cGMP compliant manufacturing site of
this scale is a very complicated task, and the Company may not be able to meet
this schedule. In addition, before the new facility can produce commercial
product, the Company must validate the plant and obtain FDA approval. There is
no assurance validation and FDA approval will be completed and obtained in a
timely manner. If the Company encounters further difficulties with its current
manufacturing facility or delays in completion or approval of its new
manufacturing facility, capacity constraints could continue for an extended
period. Such extended capacity constraints could create the need for product
allocations between domestic and international markets following the launch of
MUSE (alprostadil) outside of the United States, strain relationships with
distribution partners, and possibly cause patients to seek alternative
therapies. Such events could have a material adverse effect upon the business,
financial condition and operating results of the Company.
The formulation, filling, packaging and testing of MUSE (alprostadil) is
performed at Paco, a wholly-owned subsidiary of The West Company, at its
facility in Lakewood, New Jersey. In June 1995, the Company completed
construction of its approximately 6,000 square feet manufacturing and testing
space within Paco's facility. Due to higher than expected demand, the Company
has leased two adjacent buildings in New Jersey, totaling 90,000 square feet,
that are being built out to support expansion of the Company's manufacturing
capabilities. Until the Company develops an in-house manufacturing capability,
it will be entirely dependent upon Paco for the manufacture of its products.
There can be no assurance that the Company's reliance on Paco for the
manufacture of its products will not result in problems with product supply, and
there can be no assurance that the Company will be able to establish a second
manufacturing facility. Interruptions in the availability of products could
limit further development and commercial marketing of MUSE (alprostadil) and
other potential products and would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company and certain of its suppliers and service providers are subject
to routine periodic inspections by the FDA and certain state and foreign
regulatory agencies for compliance with cGMP and other applicable regulations.
The FDA stringently applies regulatory standards for manufacturing. Certain of
the Company's suppliers were inspected for compliance with cGMP regulations as
part of the approval process. However, upon routine re-inspection of its
contract manufacturers, there can be no assurance that the FDA will find the
manufacturing process or facilities to be in compliance with cGMP and other
regulations. Failure to achieve satisfactory compliance with cGMP regulations as
confirmed by routine regulatory inspections could have a significant adverse
effect on the Company's ability to continue to manufacture and distribute its
products and, in the most serious cases, result in the issuance of a regulatory
warning letter or seizure or recall of products, injunction and/or civil fines.
The Company's New Jersey manufacturing facility at Paco was inspected by
the FDA for the first time after the pre-approval inspection during twelve days
in February and March 1997. That inspection resulted in the issuance by the FDA
of an extensive FDA Form 483, which detailed areas where the FDA inspector
observed that the Company's operations were not in full compliance with some
areas of cGMP regulations. A
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corrective action plan addressing all identified cGMP deficiencies was initiated
immediately, and the Company submitted a written response to the FDA Form 483
and requested a meeting with the FDA District Office officials to address the
matter. Approximately 30 days after submitting the initial written response, the
Company provided the FDA with a written update of the progress made against the
corrective action plan. The Company provided an additional written response to
comments and questions from the FDA in April and May 1997. Following a meeting
with FDA officials on May 23, 1997, the FDA issued a Warning Letter to the
Company on May 29, 1997 reiterating the deficiencies noted in the earlier FDA
Form 483. The Company's manufacturing facility was reinspected by the FDA during
seven days in August and September 1997. That reinspection resulted in the
issuance of an FDA Form 483, which mentioned specific areas cited in the earlier
Form 483, where the FDA inspector continued to observe that the Company's
operations were still not in full compliance with some areas of cGMP
regulations. On September 19, 1997, the Company provided a written response and
requested that the FDA affirm that the Company's New Jersey manufacturing
facility is in substantial compliance with cGMP.
Continued failure to adequately address cGMP deficiencies within a
reasonable time frame or to comply with cGMP regulations would have an adverse
effect on the Company's ability to supply its product in the US and
internationally, which would have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that the FDA will deem the Company's corrective action or written
response to the Form 483 observations to be adequate or that additional
corrective action will not be required. Failure to achieve and maintain
satisfactory cGMP compliance could 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 New
Jersey manufacturing facility until cGMP compliance is achieved.
PROPRIETARY RIGHTS AND RISK OF LITIGATION
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. Claims made under
patent applications may be denied or significantly narrowed and issued patents
may not provide significant commercial protection to the Company. The Company
could incur substantial costs in proceedings before the United States Patent
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 that is
exclusively licensed to VIVUS. As a result of the opposition proceedings,
certain claims in the European patent were held to be unpatentable by the
Opposition Division of the European Patent Office (EPO). These claims related to
all pharmaceutical compositions that included prostaglandin E(1). The
patentability of other claims in the patent was confirmed. These claims included
the use of active agents in the treatment of erectile dysfunction by
administration via the urethra to the corpora cavernosa, and 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. Despite the withdrawal of
the Pharmedic Company from the appeals 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.
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
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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 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 or other intellectual property rights.
A former consultant to the Company has claimed that he is the inventor of
certain technology disclosed in two of the Company's patents. The former
consultant further claims that the Company and certain of its officers and
directors defrauded him by allegedly failing to inform him that they intended to
use and patent this technology and by failing to compensate him in the manner
allegedly promised. On May 28, 1996, the Company filed a complaint for
declaratory judgment against the former consultant in the United States District
Court for the Northern District of California, which seeks a declaration from
the court that the former consultant is not an inventor of any of the
technology. On July 17, 1996, the former consultant filed a lawsuit that sought
to have two of the Company's patents corrected to name him as an inventor, or in
the alternative, declared invalid on the grounds that they fail to list him as
an inventor. The former consultant also sought damages for alleged fraud. On
September 16, 1996, the Court dismissed the consultant's lawsuit, and ordered
him to refile his claims as counterclaims in the action initiated by the Company
on May 28, 1996. The consultant filed his counterclaim on September 26, 1996. On
July 25, 1997, the Company filed motions for summary judgment, which request
that the Court enter judgment against the former consultant on all of his
claims. The Company's motions were heard by the Court on September 8, 1997. By
orders dated September 9, 1997, the Court denied one of the Company's motions
which related to the inventorship issues and granted in part and denied in part
the Company's other motion, which was related to the fraud issues. This case is
set for trial on December 9, 1997. The Company has conducted a review of the
circumstances surrounding this matter and believes that the allegations are
without merit. Although the Company believes that it should prevail in the
litigation, the uncertainties inherent in litigation, and in particular, jury
trials, prevent the Company from giving any assurances about the outcome of such
litigation. A judgment in favor of the consultant on some or all of his claims
would have a material adverse effect on the Company.
DEPENDENCE ON THE COMPANY'S TRANSURETHRAL SYSTEM FOR ERECTION
The Company currently relies upon a single therapeutic approach to treat
erectile dysfunction, its transurethral system for erection. Certain side
effects have been found to occur with the use of MUSE (alprostadil). Occasional
mild to moderate transient penile/perineal pain was suffered by 21% to 42% of
patients, depending on dosage, treated with MUSE (alprostadil) in the Company's
Phase II/III Dose Ranging study. Moderate to severe (i.e., syncope) decreases in
blood pressure were experienced by 1% to 4% of patients, depending on dosage
treated with MUSE (alprostadil) in such study. 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 (alprostadil) as a
therapy for the treatment of erectile dysfunction thereby affecting the
commercial viability of MUSE (alprostadil). In addition, technological changes
or medical advancements could diminish or eliminate the commercial viability of
the Company's products. As a result of the Company's single therapeutic approach
and its current focus on MUSE (alprostadil), the failure to successfully
commercialize such product would have an adverse effect on the Company and could
threaten the Company's ability to continue as a viable entity.
GOVERNMENT REGULATION AND UNCERTAINTY OF PRODUCT APPROVALS
The Company's research, preclinical 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. The Company completed pivotal
clinical trials in 1995 and submitted an NDA for its first product, MUSE
(alprostadil), to the FDA in March 1996. In November 1996, the Company received
final marketing clearance from the FDA for MUSE (alprostadil). After regulatory
approval is obtained, the Company's products are subject to continual review.
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Manufacturing, labeling and promotional activities are continually regulated by
the FDA, and the Company must also report certain adverse events involving its
drugs to the Agency under regulations issued by the FDA. Additionally,
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 effect future marketing of a drug.
In addition, the Company submitted applications for regulatory approval to
market MUSE (alprostadil) in the United Kingdom in September 1996; Sweden in
October 1996; Norway in January 1997; China, Australia and New Zealand in April
1997; Canada and Switzerland in May 1997; and Korea, South Africa, Brazil and
Argentina in August 1997. These applications will be subject to rigorous
approval processes. There can be no assurance that approval in these or other
countries will be granted on a timely basis, if at all, or if granted, that such
approval will not contain significant limitations in the form of warnings,
precautions or contraindications with respect to conditions of use. Any delay in
obtaining, or failure to obtain, such approval would adversely effect the
Company's ability to generate product revenue.
The Company's clinical trials for future products will seek safety data as
well as efficacy data and will require substantial time and significant funding.
There is no assurance that clinical trials will be completed successfully within
any specified time period, if at all. Furthermore, the FDA may suspend clinical
trials at any time if it is believed that the subjects participating in such
trials are being exposed to unacceptable health risks. There can be no assurance
that FDA or other regulatory approvals for any products developed by the Company
will be granted on a timely basis, if at all, or if granted, that such approval
will not contain significant limitations in the form of warnings, precautions or
contraindications with respect to conditions of use. Any delay in obtaining, or
failure to obtain, such approvals would adversely effect the Company's ability
to generate product revenue. 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 review, and later discovery of previously unknown problems
with a product, manufacturer or facility may result in the FDA 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.
The Company obtains the necessary raw materials and components for the
manufacture of MUSE (alprostadil) from third parties. The Company currently
contracts with foreign manufacturers that are required to comply with strict
standards established by the Company. Certain suppliers are required by the
Federal Food, Drug, and Cosmetic Act, as amended, and by FDA regulations to
follow cGMP regulations 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. The FDA stringently applies regulatory
standards for manufacturing. Certain of the Company's suppliers were inspected
for compliance with cGMP regulations as part of the approval process. However,
upon routine re-inspection of the manufacturing facilities, there can be no
assurance that the FDA will find the manufacturing process or facilities to be
in compliance with cGMP and other regulations. Failure to achieve satisfactory
compliance with cGMP regulations as confirmed by routine inspections could have
a significant 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 regulatory warning letter or seizure or recall of products,
injunction and/or civil fines.
The Company's New Jersey manufacturing facility at Paco was inspected by
the FDA for the first time after the pre-approval inspection during twelve days
in February and March 1997. That inspection resulted in the issuance by the FDA
of an extensive FDA Form 483, which detailed specific areas where the FDA
inspector observed that the Company's operations were not in full compliance
with some areas of cGMP regulations. A corrective action plan addressing all
identified cGMP deficiencies was initiated immediately, and the Company
submitted a written response to the FDA Form 483 and requested a meeting with
the FDA District Office officials to address the matter. Approximately 30 days
after submitting the initial written response, the Company provided the FDA with
a written update of the progress made against the corrective action plan. The
Company provided an additional written response to comments and questions from
the FDA
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in April and May 1997. Following a meeting with FDA officials on May 23, 1997,
the FDA issued a Warning Letter to the Company on May 29, 1997 reiterating the
deficiencies noted in the earlier FDA Form 483. The Company's manufacturing
facility was reinspected by the FDA during seven days in August and September
1997. That reinspection resulted in the issuance of an FDA Form 483, which
mentioned specific areas cited in the earlier Form 483, where the FDA inspector
continued to observe that the Company's operations were still not in full
compliance with some areas of cGMP regulations. On September 19, 1997, the
Company provided a written response and requested that the FDA affirm that the
Company's New Jersey manufacturing facility is in substantial compliance with
cGMPs.
Continued failure to adequately address cGMP deficiencies within a
reasonable time frame or to comply with cGMP regulations would have an adverse
effect on the Company's ability to supply its product in the US and
internationally, which would have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that the FDA will deem the Company's corrective action or written
response to the Form 483 observations to be adequate or that additional
corrective action will not be required. Failure to achieve and maintain
satisfactory cGMP compliance could 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 New
Jersey manufacturing facility until cGMP compliance is achieved.
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 erectile dysfunction exist, such
as needle injection therapy, vacuum constriction devices, penile implants and
oral medications, and the manufacturers of these products will continue to
improve these therapies. In July 1995, the FDA approved the use of alprostadil
in The Upjohn Company's needle injection therapy product for erectile
dysfunction. Previously, Upjohn had obtained approval in a number of European
countries. In June 1997, Schwartz Pharma announced the FDA approval of their
needle injection treatment for erectile dysfunction. Additional competitive
therapies under development include an oral medication by Pfizer, Inc., for
which they have filed for regulatory approval in the United States and Europe.
Other large pharmaceutical companies are also actively engaged in the
development of therapies for the treatment of erectile dysfunction. These
companies have substantially greater research and development capabilities as
well as substantially greater marketing, financial and human resources than the
Company. In addition, these companies have significantly greater experience than
the Company in undertaking preclinical 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 erectile dysfunction. For instance, Zonagen,
Inc. and Pentech Pharmaceutical, Inc. have oral medications in Phase III
clinical trials. These entities may also market commercial products either on
their own or through collaborative efforts. The Company's competitors may
develop technologies and products that are more effective than those being
developed by the Company. Such developments would render the Company's products
less competitive or even obsolete. The Company is also competing with respect to
marketing capabilities and manufacturing efficiencies, areas in which it has
limited experience.
LIMITED SALES AND MARKETING EXPERIENCE; DEPENDENCE ON THIRD PARTIES
Before commercially launching its first product, MUSE (alprostadil), in
January 1997, the Company had no experience in the sale, marketing and
distribution of pharmaceutical products. The Company is marketing and selling
its products initially through a direct sales force in the United States. There
can be no assurance that the Company's domestic sales and marketing efforts will
be successful.
In February 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, 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
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heavily dependent on CORD's efforts to fulfill orders and warehouse its products
effectively. There can be no assurance such efforts will be successful.
In May 1996, the Company entered into an international marketing agreement
with Astra to purchase the Company's products for resale in Europe, South
America, Central America, Australia and New Zealand. As consideration for
execution of the international marketing agreement, Astra paid the Company $10
million in June 1996. In September 1996, the Company received a $10 million
milestone payment from Astra as a result of filing an application for marketing
authorization for MUSE (alprostadil) in the United Kingdom. The Company will be
paid up to an additional $10 million in the event certain other milestones are
achieved. However, there can be no assurance that such milestones will be
achieved. The marketing agreement does not have minimum purchase commitments,
and Astra may take up to twelve months to introduce a product in a given country
following regulatory approval in such country. As a result of this marketing
agreement with Astra, the Company is dependent on Astra's efforts to market,
distribute and sell the Company's products effectively in the above mentioned
markets. There can be no assurance that such efforts will be successful.
In July 1996, the Company entered into a distribution agreement with ASD, a
subsidiary of Bergen Brunswig Corporation. ASD provides "direct-to-physician"
distribution, telemarketing and customer service capabilities in support of the
U.S. marketing and sales efforts. As a result of this distribution agreement
with ASD, the Company is dependent on ASD's efforts to distribute, telemarket,
and provide customer service effectively. There can be no assurance that such
efforts will be successful.
In January 1997, the Company signed an international marketing agreement
with Janssen, a subsidiary of Johnson & Johnson. Janssen will purchase the
Company's products for resale in China, multiple Pacific Rim countries
(excluding Japan), Canada, Mexico and South Africa. As consideration for
execution of the international marketing agreement, Janssen paid the Company $5
million in January 1997. The Company will receive additional payments in the
event certain other milestones are achieved. However, there can be no assurance
that such milestones will be achieved. As a result of this distribution
agreement with Janssen, the Company is dependent on Janssen's efforts to
distribute and sell the Company's products effectively in the above mentioned
markets. There can be no assurance that such efforts will be successful.
The Company intends to market and sell its products in other foreign
markets through distribution, co-promotion or license agreements with corporate
partners. To date, the Company has entered into international marketing
agreements with Astra and Janssen. There can be no assurance that the Company
will be able to successfully enter into additional agreements with corporate
partners upon reasonable terms, if at all. To the extent that the Company enters
into distribution, co-promotion or license agreements for the sale of its
products, the Company will be dependent upon the efforts of third parties. These
third parties may have other commitments, and there can be no assurance that
they will commit the necessary resources to effectively market, distribute and
sell the Company's product.
DEPENDENCE ON DUAL SOURCE OF SUPPLY
To date, the Company has obtained its supply of alprostadil from two
sources. The first is Spolana Chemical Works a.s. ("Spolana") pursuant to a
long-term supply agreement that was executed in May 1997. In January 1996, the
Company entered into a long-term alprostadil supply agreement with Chinoin
Pharmaceutical and Chemical Works Co. ("Chinoin"). Chinoin is the Hungarian
subsidiary of the French pharmaceutical company Sanofi Winthrop. Alprostadil, a
generic drug, is extremely difficult to manufacture and is only available to the
Company from a limited number of other suppliers. While the Company is seeking
additional sources, there can be no assurance that it will be able to identify
and qualify such sources. The Company is required to identify its suppliers to
the FDA. The FDA may require additional clinical trials or other studies prior
to accepting a new supplier. Unless the Company secures and qualifies additional
sources of alprostadil, it will be entirely dependent upon Spolana and Chinoin
for the delivery of alprostadil. If interruptions in the supply of alprostadil
were to occur for any reason, including a decision by Spolana and/or Chinoin to
discontinue manufacturing, political unrest, labor disputes or a failure of
Spolana and/or Chinoin to follow regulatory guidelines, the development and
commercial marketing of MUSE (alprostadil) and other
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potential products could be delayed or prevented. An interruption in the
Company's supply of alprostadil would have a material adverse effect on the
Company's business, financial condition and results of operations.
HISTORY OF LOSSES AND LIMITED OPERATING HISTORY
The Company has generated a cumulative net loss of $35.4 million for the
period from its inception through September 30, 1997. To sustain profitability,
the Company must successfully manufacture and market MUSE (alprostadil). The
Company is subject to a number of risks including its ability to scale-up
manufacturing capabilities and secure adequate supplies of raw materials, its
ability to successfully market, distribute and sell its product, its reliance on
a single therapeutic approach to erectile dysfunction and intense competition.
There can be no assurance that the Company will be able to achieve profitability
on a sustained basis. Accordingly, there can be no assurance of the Company's
future success.
The Company began generating revenues from product sales in January 1997.
The Company has limited experience in manufacturing and selling MUSE
(alprostadil) in commercial quantities. Whether the Company can successfully
manage the transition to a large scale commercial enterprise will depend upon
successful further development of its manufacturing capability and its
distribution network and attainment of foreign regulatory approvals for MUSE
(alprostadil). Failure to make such a transition successfully would have a
material adverse effect on the Company's business, financial condition and
results of operations.
FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FINANCING
The Company expects to incur substantial additional costs, including
expenses related to building its marketing and sales organization, a second
manufacturing plant in the United States, a manufacturing plant in Europe, new
product preclinical and clinical costs, ongoing research and development
activities, and general corporate purposes. The Company anticipates that its
existing capital resources will be sufficient to support the Company's
operations through world-wide commercial introduction of MUSE (alprostadil) but
may not be sufficient for the introduction of any additional future products.
Accordingly, the Company anticipates that it may be required to issue additional
equity or debt securities and may use other financing sources including, but not
limited to, corporate alliances and lease financings to fund the future
development and possible commercial launch of its products. The sale of
additional equity securities would result in additional dilution to the
Company's stockholders. There can be no assurance that additional funds will be
available on terms satisfactory to the Company, or at all. Failure to obtain
adequate funding could cause a delay or cessation of the Company's product
development and marketing efforts and would have a material adverse effect upon
the Company's business, financial condition and results of operations. The
Company's working capital and additional funding requirements will depend upon
numerous factors, including: (i) the level of resources that the Company devotes
to sales and marketing capabilities; (ii) the level of resources that the
Company devotes to expanding manufacturing capacity; (iii) the activities of
competitors; (iv) the progress of the Company's research and development
programs; (v) the timing and results of preclinical testing and clinical trials;
(vi) technological advances; and (vii) continued profitability.
DEPENDENCE ON KEY PERSONNEL
The Company's progress to date has been highly dependent upon the skills of
a limited number of key management personnel. To reach its future business
objectives, the Company will need to hire numerous other qualified personnel in
the areas of sales, marketing, research and development, regulatory affairs,
operations, clinical trial management and preclinical testing. There can be no
assurance that the Company will be able to 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.
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RISKS RELATING TO INTERNATIONAL OPERATIONS
In the event the Company receives necessary foreign regulatory approvals,
the Company plans to market its products 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
anticipated 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 the Company's
products are 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.
PRODUCT LIABILITY AND AVAILABILITY OF INSURANCE
The commercial launch of MUSE (alprostadil) 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 included with MUSE (alprostadil),
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 OF PHARMACEUTICAL PRICING AND REIMBURSEMENT
In the United States and elsewhere, sales of pharmaceutical products
currently 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. There can be no assurance that the Company's
products will be considered cost effective and that reimbursement to the
consumer will be available or sufficient to allow the Company to sell its
products on a competitive basis.
In addition, certain health care providers are moving towards a managed
care system in which such providers contract to provide comprehensive health
care services, including prescription drugs, for a fixed cost per person. The
Company hopes to further qualify its transurethral system for erection for
reimbursement in the managed care environment. However, the Company is unable to
predict the reimbursement policies employed by third-party health care payors.
Furthermore, attempts at qualifying its transurethral system for erection for
reimbursement could be adversely effected by changes in reimbursement policies
of governmental or private health care payors.
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
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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 recently 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 variations in the
Company's financial results, comments by security analysts, the Company's
ability to scale up its manufacturing capability to commercial levels, the
Company's ability to successfully sell its product in the United States and
internationally, any loss of key management, the results of the Company's
clinical trials or those of its competition, adverse regulatory actions or
decisions, announcements of technological innovations or new products by the
Company or its competition, changing governmental regulations, patents or other
proprietary rights or product or patent litigation, may have a significant
effect on the market price of the Company's Common Stock.
ANTI-TAKEOVER EFFECT OF SHAREHOLDER RIGHTS PLAN AND CERTAIN CHARTER AND BYLAW
PROVISIONS
In February 1996, the Company's Board of Directors authorized the Company's
reincorporation in the State of Delaware and adopted a Shareholder Rights Plan.
The Company's reincorporation into the State of Delaware was approved by its
stockholders and effective in May 1996. The Shareholder 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% 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% 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% of
more of the Company's Common Stock.
The Shareholder 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 Shareholder 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.
17
19
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A former consultant to the Company has claimed that he is the inventor of
certain technology disclosed in two of the Company's patents. The former
consultant further claims that the Company and certain of its officers and
directors defrauded him by allegedly failing to inform him that they intended to
use and patent this technology and by failing to compensate him in the manner
allegedly promised. On May 28, 1996, the Company filed a complaint for
declaratory judgment against the former consultant in the United States District
Court for the Northern District of California, which seeks a declaration from
the court that the former consultant is not an inventor of any of the
technology. On July 17, 1996, the former consultant filed a lawsuit that sought
to have two of the Company's patents corrected to name him as an inventor, or in
the alternative, declared invalid on the grounds that they fail to list him as
an inventor. The former consultant also sought damages for alleged fraud. On
September 16, 1996, the Court dismissed the consultant's lawsuit, and ordered
him to refile his claims as counterclaims in the action initiated by the Company
on May 28, 1996. The consultant filed his counterclaim on September 26, 1996. On
July 25, 1997, the Company filed motions for summary judgment, which request
that the Court enter judgment against the former consultant on all of his
claims. The Company's motions were heard by the Court on September 8, 1997. By
orders dated September 9, 1997, the Court denied one of the Company's motions
which related to the inventorship issues and granted in part and denied in part
the Company's other motion which was related to the fraud issues. This case is
set for trial on December 9, 1997. The Company has conducted a review of the
circumstances surrounding this matter and believes that the allegations are
without merit. Although the Company believes that it should prevail in the
litigation, the uncertainties inherent in litigation, and in particular, jury
trials prevent the Company from giving any assurances about the outcome of such
litigation. A judgment in favor of the consultant on some or all of his claims
would have a material adverse effect on the Company.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (in accordance with Item 601 of Regulation S-K)
###3.2 Form of Amended and Restated Certificate of Incorporation of the
Company, as currently in effect
****3.3 Bylaws of the Registrant, as amended
#3.4 Certificate of Designations of Rights, Preferences and Privileges of
Series A Participating Preferred Stock
###4.1 Specimen Common Stock Certificate of the Registrant
*4.2 Registration Rights as amended
*4.4 Form of Preferred Stock Purchase Warrant issued by the Registrant to
Invemed Associates, Inc., Frazier Investment Securities, L.P., and
Cristina H. Kepner
18
20
#4.5 Second amended and Restated Preferred Shares Rights Agreement, dated as
of April 15, 1997 by and between VIVUS, Inc. 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 Assignment Agreement by and between Alza Corporation and the Registrant
dated December 31, 1993
*+10.2 Memorandum of Understanding by and between Ortho Pharmaceutical
Corporation and the Registrant dated February 25, 1992
*10.3 Assignment Agreement by and between Ortho Pharmaceutical Corporation and
the Registrant dated June 9, 1992
*+10.4 License Agreement by and between Gene A. Voss M.D., Allen C. Eichler,
M.D., and the Registrant dated December 28, 1992
*+10.5A License Agreement by and between Ortho Pharmaceutical Corporation and
Kjell Holmquist AB dated June 23, 1989
*+10.5B Amendment by and between Kjell Holmquist AB and the Registrant dated
July 3, 1992
*10.5C Amendment by and between Kjell Holmquist AB and the Registrant dated
April 22, 1992
*+10.5D Stock Purchase Agreement by and between Kjell Holmquist AB and the
Registrant dated April 22, 1992
*+10.6A License Agreement by and between Amsu, Ltd., and Ortho Pharmaceutical
Corporation dated June 23, 1989
*+10.6B Amendment by and between Amsu, Ltd., and the Registrant dated July 3,
1992
*10.6C Amendment by and between Amsu, Ltd., and the Registrant dated April 22,
1992
*+10.6D Stock Purchase Agreement by and between Amsu, Ltd., and the Registrant
dated July 10, 1992
*10.7 Supply Agreement by and between Paco Pharmaceutical Services, Inc., and
the Registrant dated November 10, 1993
*10.10 Lease by and between McCandless-Triad and the Registrant dated November
23, 1992, as amended
***10.11 Form of Indemnification Agreements by and among the Registrant and the
Directors and Officers of the Registrant
+++10.12 1991 Incentive Stock Plan and Form of Agreement, as amended
+++10.13 1994 Director Option Plan and Form of Agreement
*10.14 Form of 1994 Employee Stock Purchase Plan and Form of Subscription
Agreement
*10.17 Letter Agreement between the Registrant and Leland F. Wilson dated June
14, 1991 concerning severance pay
####+10.21 Distribution Services Agreement between the Registrant and Synergy
Logistics, Inc. (a wholly-owned subsidiary of Cardinal Health, Inc.)
dated February 9, 1996
####+10.22 Manufacturing Agreement between the Registrant and CHINOIN
Pharmaceutical and Chemical Works Co., Ltd. dated December 20, 1995
##+10.23 Distribution and Services Agreement between the Registrant and Alternate
Site Distributors, Inc. dated July 17, 1996
*****+10.24 Distribution Agreement made as of May 29, 1996 between the Registrant
and Astra AB
##10.25 Menlo McCandless Office Lease made as of August 30, 1996 by and between
Registrant and McCandless-Triad
19
21
##10.26 Sublease Agreement made as of August 22, 1996 by and between Registrant
and Plant Research Technologies
###++10.27 Distribution Agreement made as of January 22, 1997 between the
Registrant and Janssen Pharmaceutical International, a division of Cilag
AG International
###10.28 Lease Agreement made as of January 1, 1997 between the Registrant and
Airport Associates
###10.29 Lease Amendment No. 1 as of February 15, 1997 between Registrant and
Airport Associates
10.29A Lease Amendment No. 2 dated July 24, 1997 by and between the Registrant
and Airport Associates
10.29B Lease Amendment No. 3 dated July 24, 1997 by and between the Registrant
and Airport Associates
###10.30 Lease agreement by and between 605 East Fairchild Associates, L.P. and
Registrant dated as of March 5, 1997
#####++10.31 Manufacture and supply agreement between Registrant and Spolana Chemical
Works, a.s. dated May 30, 1997
27.1 Financial Data Schedule
- ---------------
* Incorporated by reference to the same-numbered exhibit filed with
the Registrant's Registration Statement on Form S-1 No. 33-75698.
** Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Registration Statement on Form S-1 No. 33-90390, as
amended.
*** Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Form 8-B filed with the Commission on June 24, 1996.
**** 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, 1996, as amended.
***** 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.
# 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.
## 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
### 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
#### 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
##### 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
+ Confidential treatment granted.
++ Confidential treatment requested.
+++ Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Registration Statement on Form S-8 No. 333-29939.
(b) Reports on Form 8-K
None.
20
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VIVUS, Inc.
Date: October 8, 1997 /s/ DAVID C. YNTEMA
--------------------------------------
David C. Yntema
Chief Financial Officer
/s/ LELAND F. WILSON
--------------------------------------
Leland F. Wilson
President and Chief Executive Officer
21
23
VIVUS, INC.
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
- ------- ----------------------------------------------------------------------------------
10.29A Lease Amendment No. 2 dated July 24, 1997 by and between the Registrant and
Airport Associates
10.29B Lease Amendment No. 3 dated July 24, 1997 by and between the Registrant and
Airport Associates
27.1 Financial Data Schedule
22