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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
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 JUNE 30, 1999
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: 000-23265
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SALIX PHARMACEUTICALS, LTD.
(Exact name of Registrant as specified in its charter)
BRITISH VIRGIN ISLANDS 94-3267443
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3600 WEST BAYSHORE ROAD, SUITE 205
PALO ALTO, CALIFORNIA 94303
(Address of principal executive offices, including zip code)
(650) 856-1550
(Registrant's telephone number, including area code)
--------------------------
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 [ ]
The number of shares of the Registrant's Common Stock outstanding as of
July 31, 1999 was 10,208,837.
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SALIX PHARMACEUTICALS, LTD.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
- ------- --------------------- --------
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999
(unaudited) and December 31, 1998 ............................ 1
Condensed Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 1999 and 1998 (unaudited) .......... 2
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1999 and 1998 (unaudited) .............. 3
Notes to Condensed Consolidated Financial Statements ............ 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................... 5
Item 3. Quantitative and Qualitative Disclosures About Market Risk .......... 15
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds ........................... 15
Item 4. Submission of Matters to a Vote of Security Holders ................. 16
Item 6. Exhibits and Reports on Form 8-K .................................... 17
Signatures .................................................................. 18
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SALIX PHARMACEUTICALS, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(EXPRESSED IN U.S. DOLLARS)
June 30, December 31,
1999 1998
-------- --------
(unaudited) (Note 1)
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 836 $ 2,763
Short term investments ............................................. 3,500 4,500
Accounts receivable ................................................ 60 --
Inventory, net ..................................................... 360 615
Prepaids and other current assets .................................. 214 105
-------- --------
Total current assets .......................................... 4,970 7,983
Property and equipment, net ................................................. 182 222
Other assets ................................................................ 51 51
-------- --------
$ 5,203 $ 8,256
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current liabilities ..................... $ 1,480 $ 1,430
-------- --------
Commitments ................................................................. -- --
Shareholders' equity:
Preferred stock, issuable in series, no par value;
5,000,000 shares authorized; none outstanding ................. -- --
Common stock, no par value; 40,000,000 shares authorized; 10,208,837
shares issued and outstanding at June 30, 1999
and December 31, 1998 ........................................ 27,626 27,626
Accumulated deficit ................................................ (23,903) (20,800)
-------- --------
Shareholders' equity .......................................... 3,723 6,826
-------- --------
$ 5,203 $ 8,256
======== ========
The accompanying notes are an integral part of these financial statements.
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SALIX PHARMACEUTICALS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(EXPRESSED IN U.S. DOLLARS)
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
Revenues:
Product revenue ..................................... $ 64 $ 146 $ 138 $ 146
Revenue from collaborative agreements and other ..... 1,000 -- 1,484 --
-------- -------- -------- --------
Total revenues ................................. 1,064 146 1,622 146
-------- -------- -------- --------
Expenses:
Cost of products sold ............................... 302 242 563 288
License fees ........................................ 100 76 297 76
Research and development ............................ 1,679 1,787 2,850 3,367
General and administrative .......................... 536 722 1,119 1,488
-------- -------- -------- --------
Total expenses ................................. 2,617 2,827 4,829 5,219
-------- -------- -------- --------
Loss from operations ......................................... (1,553) (2,681) (3,207) (5,073)
-------- -------- -------- --------
Interest and other income (expense), net ..................... 67 170 104 340
-------- -------- -------- --------
Net loss ....................................... $ (1,486) $ (2,511) $ (3,103) $ (4,733)
======== ======== ======== ========
Net loss per share, basic and diluted ........................ $ (0.14) $ (0.25) $ (0.30) $ (0.46)
======== ======== ======== ========
Shares used in computing net loss per share, basic and diluted 10,209 10,182 10,209 10,182
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
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SALIX PHARMACEUTICALS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
(EXPRESSED IN U.S. DOLLARS)
Six months ended
June 30,
----------------------
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ...................................................... $ (3,103) $ (4,733)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ............................ 47 42
Changes in assets and liabilities:
Accounts receivable, inventory and other current assets . 86 (329)
Accounts payable and other current liabilities ........... 50 (48)
-------- --------
Net cash used in operating activities ................ (2,920) (5,068)
CASH FLOWS FROM INVESTING ACTIVITIES
Sale and maturity of short term investments ................... 1,000 --
Purchases of property and equipment ........................... (7) (90)
-------- --------
Net cash provided by (used in) investing activities ...... 993 (90)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock ........................ -- 72
-------- --------
Net cash provided by financing activities ................ -- 72
Net decrease in cash and cash equivalents .............................. (1,927) (5,086)
Cash and cash equivalents at beginning of period ....................... 2,763 15,173
-------- --------
Cash and cash equivalents at end of period ............................. $ 836 $ 10,087
======== ========
The accompanying notes are an integral part of these financial statements.
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SALIX PHARMACEUTICALS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. Organization and Basis of Presentation
Salix Pharmaceuticals, Ltd. (the "Company") was incorporated in the
British Virgin Islands in December 1993 for the purpose of acquiring all
of the outstanding capital stock of Salix Pharmaceuticals, Inc., a
California corporation ("Salix California"), and Glycyx Pharmaceuticals,
Ltd., a Bermuda corporation ("Glycyx"). Salix California was incorporated
in California in 1989 and Glycyx was incorporated in Bermuda in 1992. The
Company is developing new pharmaceuticals, primarily focused in the area
of gastrointestinal disease. The Company conducts its business within one
industry segment.
The condensed consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated. These
statements are stated in United States dollars.
The accompanying unaudited condensed consolidated financial
statements include all adjustments (consisting only of normal recurring
items) which, in the opinion of management, are necessary for a fair
presentation of financial position, results of operations and cash flows.
These financial statements should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results
of Operations included elsewhere in this Report and with the audited
financial statements for the fiscal year ended December 31, 1998 included
in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 filed with the Securities and Exchange Commission. The
results of operations for interim periods are not necessarily indicative
of results to be expected for a full year.
These statements have been prepared in accordance with accounting
principles generally accepted in the United States. The application of
these principles conforms in all material respects with financial
statements prepared using accounting principles generally accepted in
Canada. The Company's Common Shares are traded on The Toronto Stock
Exchange.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
2. Net Loss Per Common Share
Basic and diluted net losses per common share have been computed
using the weighted-average number of common shares outstanding during
each period. Options and warrants were outstanding during both quarters
ended June 30, 1999 and June 30, 1998 but have been excluded from the
computation, as their effect is anti-dilutive.
3. Commitments
At June 30, 1999, the Company had a binding purchase order commitment
for inventory purchases aggregating approximately $1.0 million to be
delivered in 1999.
4. Inventory
All inventories at December 31, 1998 and June 30, 1999 have been
classified as raw materials.
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SALIX PHARMACEUTICALS, LTD.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical results or anticipated results, including those set forth under
"Factors that May Affect Future Results" under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in, or
incorporated by reference into, this report. The following discussion should be
read in conjunction with the Company's Condensed Consolidated Financial
Statements and notes thereto included elsewhere in this report.
Unless otherwise indicated, all references to "dollars" or "$" refer to
United States dollars. The Company's Common Shares trade on The Toronto Stock
Exchange and are quoted in Canadian dollars.
OVERVIEW
The Company's principal focus is to identify and acquire
gastrointestinal products that have near-term commercial potential and to apply
its product development expertise to commercialize these products. The Company
selects products that it believes serve a gastrointestinal disease in need of
new treatments, have the potential for rapid regulatory approval, and are
marketable to a small group of specialized physicians. The Company believes this
strategy will reduce the expense, time and risk normally associated with
pharmaceutical development. The Company believes that its first two products,
balsalazide disodium, presently marketed in the United Kingdom under the brand
name Colazide and in Sweden as Colazid, and rifaximin will demonstrate the
Company's ability to execute this strategy.
The Company has generated limited revenues to date from the sales of
products, and it has been unprofitable since inception. The Company expects to
continue to incur substantial losses and expects its operating expenses to
remain at current levels or increase as the Company continues its balsalazide
disodium commercialization efforts and continues its product development and
clinical programs for other products. As of June 30, 1999, the Company had
accumulated losses of approximately $23.9 million. Furthermore, the Company
currently expects operating losses to continue at least through 2002. Since
1992, the Company has financed its operations principally through reimbursement
payments, license fees and milestone revenues, totaling approximately $18.3
million under collaborative research and licensing agreements, and sales of
equity and convertible debt securities totaling approximately $27.6 million.
Over the same period, the Company has recorded expenses totaling $34.6 million,
of which $20.6 million were in research and development expenses and $1.6
million in license fees to licensors. The Company's alliances with Astra AB
("Astra") and a division of Menarini Pharmaceutical Industries s.r.l.
("Menarini") have allowed it to fund the development of balsalazide disodium, to
in-license other gastrointestinal products, and to help establish itself with a
relatively small amount of outside capital.
In October 1998, the Company signed an agreement with Astra under which
the Company will receive additional research and development funding of $3.0
million from Astra related to a recently completed clinical trial comparing
balsalazide disodium to mesalamine, the current leading treatment for ulcerative
colitis and Crohn's disease. Under the agreement the Company will receive the
funds in three installments: $1.0 within 15 days of signing the agreement, $1.0
million upon completion of treatment of the last patient in the trial, and $1.0
million upon delivery of the study results report. The Company received the
first payment in October 1998 and the second payment in April 1999. The Company
anticipates that the last event will occur in the second half of 1999.
In exchange for the $3.0 million payment, Astra will receive rights to
the trial results for use throughout the territories in which it has a license
to market balsalazide disodium. In addition, the Company will transfer to Astra
the New Drug Application ("NDA") for balsalazide disodium, which the Company
filed in June 1997 with the United States Food and Drug Administration ("FDA"),
although the transfer will occur only after FDA approval is received, if
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at all. Depending on the outcome of the trial, the results may be useful for
obtaining additional approvals in Europe and enhancing US labeling for
balsalazide disodium.
The Company's collaborative research and licensing agreements provide
for payments in support of the Company's research activities, as well as
additional payments for licensing fees and upon the attainment of specified
milestones. Research reimbursements under these agreements are recorded when
earned based on contract costs incurred to date compared with total estimated
contract costs. License fees and milestone revenues are recognized according to
contract terms. Amounts received in advance of the applicable research
activities are deferred as unearned revenue. Amounts received that are
refundable until the milestones are achieved are deferred as advances from
licensees until earned.
The Company licensed balsalazide from Biorex Laboratories Limited
("Biorex") in exchange for participation in future milestone revenues and
profits. The Company will sell balsalazide disodium, the disodium salt of
balsalazide, which is manufactured by third parties under contract with the
Company, to its distribution partners, Astra and Menarini, at a formula price.
The Company received approval in July 1997 to market balsalazide disodium in the
United Kingdom for the treatment of acute ulcerative colitis. Astra began the
commercial launch of balsalazide disodium under the brand name Colazide in
October 1997 in the United Kingdom. In May 1998, the Company received
notification of additional approvals for balsalazide disodium in Austria,
Belgium, Denmark, Italy, Luxembourg, and Sweden, through the mutual recognition
process of the European Union ("EU"). Astra and Menarini withdrew marketing
applications from other EU countries that had questions that could not be
addressed within the time constraints of the review period required by the
mutual recognition process. These countries are Finland, France, Germany,
Greece, Ireland, Netherlands, Portugal, and Spain. The application process for
approval in these countries is the responsibility of Astra and Menarini and
there can be no assurance that they will pursue such applications or, if they
do, that they will be successful. In December 1998, Astra received approval to
market balsalazide disodium in Switzerland and Argentina. In March 1999, Astra
launched balsalazide disodium in Sweden, under the brand name Colazid. The
Company expects Astra and Menarini to undertake additional commercial launches
of balsalazide disodium in approved countries throughout 1999. In January 1999,
Astra and Menarini submitted an application to market balsalazide disodium for
the maintenance of remission of ulcerative colitis in the seven EU countries for
which marketing approval for the acute indication had been received. This
application was approved in July 1999 allowing Astra and Menarini to promote
balsalazide disodium for the additional indication. The Company recognized its
initial product revenues from Astra's sales of balsalazide disodium in the
United Kingdom in 1997 and will recognize product revenues from sales of
balsalazide disodium outside the United Kingdom in 1999. The selling price of
balsalazide disodium to Astra outside the United Kingdom and Sweden has not been
determined, and the Company will be obligated to pay to Biorex, the original
licensor of the product, a portion of any gross profit on balsalazide disodium
sales to Astra and Menarini outside the United States. In addition, the Company
anticipates product costs to remain high due to manufacturing scale-up.
In June 1997, the Company submitted an NDA to the FDA for balsalazide
disodium as a therapy for acute ulcerative colitis. In June 1998, the FDA issued
an "approvable" letter for the Company's balsalazide disodium NDA. The FDA's
letter and subsequent correspondence have indicated that the application might
be approved upon the satisfaction of specific issues relating to the
manufacturing process and other technical issues, as well as product labeling.
To the extent necessary, the Company has re-focused part of its management's
efforts to concentrate fully on the resolution of the remaining issues, as
outlined in the approvable letter, as it seeks to fulfill the FDA requirements
and obtain final approval. While the Company believes that it can successfully
fulfill the FDA requirements and obtain marketing approval, there can be no
assurance that its efforts in this regard, in whole or in part, will be
successful. In addition, certain of the issues raised in the FDA letter require
the cooperation of the Company's third-party contract manufacturers to meet the
conditions of the approvable letter. There can be no assurance that the
Company's third-party contract manufacturers will fully comply with the
conditions of the approvable letter. If any issue contained in the approvable
letter is not resolved to the satisfaction of the FDA, there can be no assurance
that approval will be granted. Failure to obtain marketing approval for
balsalazide disodium from the FDA could have a material adverse impact on the
Company's financial condition and future results of operations.
The Company's second product, rifaximin, is currently under
development. The Company obtained the rights to develop, make, use and sell
rifaximin in Canada and the United States from Alfa Wassermann S.p.A. ("Alfa
Wassermann") in exchange for future royalties and milestone payments. Alfa
Wassermann has also agreed to supply Salix with bulk active ingredient rifaximin
at a fixed price. If regulatory approvals are obtained, the Company intends
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to establish its own direct sales force to market rifaximin. This strategy for
rifaximin represents the business model that the Company intends to adopt for
future product development and commercialization. Although the creation of an
independent sales organization will require a substantial investment by the
Company, the Company anticipates that the financial results from rifaximin and
future products will be more favorable to the Company than those anticipated
from the sale of balsalazide disodium by Astra and Menarini since the Company
has retained the distribution rights to rifaximin, whereas Astra and Menarini
have the distribution rights for balsalazide. In the case of balsalazide
disodium, the Company granted exclusive distribution rights in certain
territories in exchange for funding needed to complete late-stage development of
balsalazide disodium, to in-license other gastrointestinal products and to help
establish the Company as a viable gastrointestinal pharmaceutical company. The
Company is currently unable to provide a meaningful estimate of the investment
required to create an independent sales organization because such investment is
dependent on a number of contingencies, including receipt of necessary
regulatory approvals for specific indications.
The Company intends to pursue development of rifaximin for bacterial
infections of the lower gastrointestinal tract. The Company recently started
recruiting patients in a multi-center placebo controlled phase III trial for the
treatment of bacterial infectious diarrhea in travelers. It is currently
anticipated that this trial will be completed during the first half of 2000. The
Company plans to develop rifaximin for other possible indications, including
antibiotic associated colitis and hepatic encephalopathy as financial resources
will allow. In February 1998, the Company received Orphan Drug Designation from
the FDA for rifaximin to treat hepatic encephalopathy. Orphan Drug Designation
can entail certain possible advantages in the testing and approval process for
the drug. See "Factors That May Affect Future Results".
In February 1999, the Company signed a letter of intent with Fujirebio
Inc. of Tokyo, Japan to negotiate a license agreement under which the Company
would obtain exclusive rights to lafutidine, a third generation anti-ulcer
treatment, throughout the world, excluding Japan, Taiwan, Korea, Brazil and
Argentina. See "Factors That May Affect Future Results".
RESULTS OF OPERATIONS
Three and Six Month Periods Ended June 30, 1999 and 1998
For the three month period ended June 30, 1999, the Company recognized
product revenue of $64,000 and received revenue from collaborative agreements of
$1.0 million in relation to the October 1998 agreement with Astra. During the
corresponding three month period in 1998 the Company had product sales of
$146,000. For the six month period ended June 30, 1999 the Company had product
sales of $138,000 and revenue from collaborative agreements of $1,484,000.
During the corresponding six month period in 1998 the Company had product sales
of $146,000 and no revenue from collaborative agreements.
Operating expenses for the three months ended June 30, 1999 and 1998
were $2.6 million and $2.8 million, respectively. Operating expenses for the six
months ended June 30, 1999 and 1998 were $4.8 million and $5.2 million,
respectively. The decreases were the result of lower general and administrative
costs and lower research and development costs partially offset by higher cost
of goods and license fees paid to licensors as noted below.
Cost of products sold for the three and six month periods ended June
30, 1999 were $302,000 and $563,000 respectively, compared with $242,000 and $
288,000 in the corresponding three and six month periods in 1998. In the six
month period ended June 30, 1999, the Company suffered manufacturing losses of
approximately $0.2 million due to the quality of an active ingredient supplied
by one of the Company's active ingredient suppliers. Product costs are expected
to remain high for the near term due to manufacturing scale-up and validation of
additional vendors.
License fee expense totaled $100,000 and $297,000 for the three and six
month periods ended June 30, 1999, compared with $76,000 in both the
corresponding three and six month periods in 1998. The current year license fees
were due to the Company's recognition of revenue resulting from the approval of
balsalazide disodium for sale in Sweden and an annual payment relating to
rifaximin. The license fees paid in 1998 related to rifaximin.
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Research and development expense was $1.7 million and $2.9 million for
the three and six month periods ended June 30, 1999, respectively, compared with
$1.8 million and $3.4 million for the comparable periods in 1998. The decrease
in research and development expenses in 1999 is due primarily to reduced
spending related to a balsalazide disodium clinical trial initiated in late 1997
in the United States and management initiatives to reduce overall expenditures,
offset by increased expenditures on rifaximin and lafutidine. Management expects
research and development spending to remain constant or decrease as the Company
focuses on completing it's response to the balsalazide approvable letter in the
U.S. and submitting an NDA for the first indication for rifaximin.
General and administrative expenses were $536,000 and $1.1 million for
the three and six months ended June 30, 1999, respectively, compared with
$722,000 and $1.5 million in the corresponding three and six month periods in
1998. The decreases over 1998 are due mainly to cost reduction initiatives,
including a reduction in headcount.
Interest and other income was $67,000 and $104,000 in the three and six
month periods ended June 30, 1999 respectively, down from $170,000 and $340,000
in the three and six month periods ended June 30, 1998. The reduction was mainly
attributable to lower average cash balances in 1999. See "Liquidity and Capital
Resources".
The Company experienced net losses of $1.5 million and $3.1 million for
the three and six month periods ended June 30, 1999, respectively, compared with
$2.5 million and $4.7 million in the three and six month periods ended June 30,
1998 respectively. The lower net loss for the current three and six month
periods is attributable to higher revenues and lower expenses as noted above.
Year 2000 Compliance
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. Beginning in the
year 2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. The Company has
transitioned its primary operating systems during the previous two years and
does not anticipate to incur any material costs throughout the remainder of 1999
to complete any aspect of its compliance. The Company's internal operating
systems, including its phone system, rely exclusively on software products of
third party vendors, who have provided assurance to the Company that such
products are year 2000 compliant. The Company has had discussions with its
financial institutions regarding the status of their systems' compliance with
the year 2000 date capability and all have provided assurances to the Company
that all such systems and software have been or are in the process of being
remedied. The Company has conducted a survey of its key vendors, inquiring as to
the compliance of their systems with year 2000 requirements. The Company has
been provided assurances from its key vendors and business partners that those
systems of the vendors and partners upon which the Company's research and
commercial efforts rely are compliant with year 2000 requirements. The Company
has undertaken and completed a year 2000 readiness program and that based upon
information presently available, the Company does not believe that issues
relating to year 2000 compliance will result in a material adverse effect on its
financial condition or results of operations. The Company has made no
contingency plans with respect to potential adverse events resulting from the
failure of its business partners and vendors to be year 2000 compliant, as the
Company believes that such an adverse event is unlikely based on the steps it
has taken and assurances it has received, and that any such event would not have
a materially negative impact on its operations. The Company has inquired and is
not presently aware of any potential adverse event relating to its
computer-based systems and those of its partners which would prevent the
delivery of its products to the customer. If the information provided by its
vendors or its partners were to prove incorrect, however, there can be no
assurance that the costs and disruption associated with implementing new or
corrected software would not have an adverse effect on the Company's business,
financial condition or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Since 1992 and through June 30, 1999, the Company has financed its
operations principally through reimbursement payments, license fees and
milestone revenues, totaling approximately $18.3 million under collaborative
research and licensing agreements, and sales of equity and convertible debt
securities totaling approximately $27.6 million.
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At June 30, 1999, the Company had approximately $4.3 million in cash,
cash equivalents, and short-term investments as compared to $7.3 million at
December 31, 1998. The decrease of $3.0 million from December 31, 1998 was due
to cash used in operating activities (see "Results of Operations").
As of June 30, 1999, the Company had no long-term obligations. The
Company has non-cancelable purchase order commitments for inventory purchases of
approximately $1.0 million to be delivered in 1999. The Company does not
anticipate any significant capital expenditures during the remainder of 1999.
The Company's purchases of raw materials and its product sales to its
European distribution partners are denominated in British Pound Sterling.
Translation into the Company's reporting currency, the United States dollar, has
not historically had a material impact on the Company's financial position.
Additionally, the Company's net assets denominated in currencies other than the
functional currency have not exposed the Company to material risk associated
with fluctuations in currency rates. Given these facts, the Company has not
considered it necessary to use foreign currency contracts or other derivative
instruments to manage changes in currency rates.
The Company has sustained continuing operating losses and expects to
incur further substantial losses until product approvals are obtained and
product revenues reach a sufficient level to support ongoing operations. The
Company believes that the Company's cash reserves at June 30, 1999 and the
projected milestones from Astra and Menarini should be sufficient to satisfy the
cash requirements of the Company's product development programs through at least
the end of 1999. The Company's actual cash requirements may vary materially from
those now planned because of a number of factors, including the results of
research and development activities, FDA and foreign regulatory processes,
establishment of and changes in relationships with strategic partners,
technological advances by the Company and other pharmaceutical companies, the
terms of the Company's collaboration arrangements with strategic partners, and
the status of competitive products. The Company's ability to execute its
business plan, fund future development efforts, and secure future licensing
arrangements, as well as fund the commercialization of rifaximin and other new
potential products will require the Company to raise additional funds. The form,
timing and amount of such funding is dependent upon both internal and external
factors. The Company may also enter into collaborative arrangements with
corporate partners that could provide the Company with additional funding in the
form of equity, debt, licensing, milestone and/or royalty payments. The Company
is also investigating other strategic options including mergers and acquisitions
as a means of securing funding for the Company's operations. There can be no
assurance that the Company will be able to enter into such arrangements or raise
any additional funds on terms favorable to the Company, if at all.
FACTORS THAT MAY AFFECT FUTURE RESULTS
This report, including this Management's Discussion and Analysis of
Financial Condition and Results of Operations, contains forward-looking
statements and other prospective information relating to future events. These
forward-looking statements and other information are subject to certain risks
and uncertainties that could cause actual results to differ materially from
historical results or anticipated results, including the following:
Dependence on Currently Licensed Products; Uncertainty of Regulatory
Approval of Company's Products. The Company's future success will depend, among
other factors, on its ability to in-license, develop, and commercialize new
pharmaceutical products. The Company currently licenses two pharmaceutical
products, balsalazide and rifaximin, and the Company's prospects over the next
three to five years are substantially dependent on regulatory approval and
successful commercialization of these products. The Company has in-licensed
certain rights to balsalazide and rifaximin in certain markets from Biorex and
Alfa Wassermann, respectively. In addition, the Company has entered into
agreements relating to the development, commercialization, manufacture, and
marketing of balsalazide disodium with Astra and Menarini. In February 1999, the
Company signed a letter of intent with Fujirebio Inc. of Tokyo, Japan to
negotiate a license agreement under which the Company would obtain exclusive
rights to lafutidine, a third generation anti-ulcer treatment, throughout the
world, excluding Japan, Taiwan, Korea, Brazil and Argentina.
Development, manufacture, and marketing of balsalazide, rifaximin and
lafutidine are subject to extensive regulation by governmental authorities in
the United States and other countries. The FDA has not approved either
balsalazide, rifaximin or lafutidine for use in the United States. In June 1997,
the Company submitted an NDA to the
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FDA for balsalazide disodium as a therapy for acute ulcerative colitis. In June
1998, the FDA issued an "approvable" letter to the Company for the balsalazide
disodium NDA. The FDA's letter and subsequent correspondence have indicated that
the application might be approved upon the satisfaction of specific issues
relating to manufacturing and other technical issues, as well as product
labeling. To the extent necessary, the Company has re-focused part of its
management's efforts to concentrate fully on the resolution of the remaining
issues, as outlined in the approvable letter, as it seeks to fulfill the FDA
requirements and obtain final approval. While the Company believes that it can
successfully comply with the issues raised by the approvable letter and obtain
FDA approval for balsalazide disodium, there can be no assurance that its
efforts in this regard, in whole or in part, will be successful. In addition,
certain of the issues raised in the FDA letter require the cooperation of the
Company's third-party contract manufacturers to meet the conditions of the
approvable letter. There can be no assurance that the Company's third-party
contract manufacturers will be able to fully comply with the conditions of the
approvable letter. If any issue contained in the approvable letter is not
resolved to the satisfaction of the FDA, there can be no assurance that approval
will be granted. If regulatory approval of balsalazide disodium or any other
product is granted, such approval will be limited to those disease states and
conditions for which the product has been shown to be safe and effective, as
demonstrated to the FDA's satisfaction through well controlled clinical studies.
Furthermore, approval may entail ongoing requirements for post-marketing
studies. Even if such regulatory approval is obtained, a marketed product,
promotional activities for the product, its manufacturer and its manufacturing
facilities are subject to continual review and periodic inspections. In
addition, identification of certain side effects after a drug is on the market
or the occurrence of manufacturing problems could cause subsequent withdrawal of
approval, reformulation of the drug, additional preclinical testing or clinical
trials and changes in labeling of the product.
In July 1997, the Medicines Control Agency in the United Kingdom
approved balsalazide disodium under the brand name Colazide as a treatment for
acute ulcerative colitis in the United Kingdom. The Company and its partners,
Astra and Menarini, received in May 1998 notification of approval of balsalazide
disodium as a treatment for acute ulcerative colitis in Austria, Belgium,
Denmark, Italy, Luxembourg, and Sweden through the mutual recognition process of
the EU. Astra and Menarini withdrew marketing applications from certain other EU
countries that had questions that could not be addressed within the time
constraints of the review period required by the mutual recognition process.
These countries are Finland, France, Germany, Greece, Ireland, Netherlands,
Portugal, and Spain. The application procedure for approval in these countries
is the responsibility of Astra and Menarini and there can be no assurance that
they will pursue such applications, or if they do, that they will be successful.
In July 1999 Astra and Menarini received approval to market balsalazide disodium
for maintenance of remission of ulcerative colitis in the seven European
countries for which marketing approval for the acute indication had previously
been received. There can be no assurance that balsalazide disodium will receive
approval in any other member country of the European Union. Even if such
approvals are ultimately received, there can be no assurance as to the timing of
such approvals or market acceptance of balsalazide disodium for the approved
indications, or that the Company's marketing partners will launch balsalazide
disodium in the countries where the marketing application has been approved.
With respect to rifaximin, Alfa Wassermann recently completed a clinical
trial in Spain relating to the drug as a therapy for hepatic encephalopathy. The
Company determined through discussions with the FDA that this study is not
sufficient support for the filing of an NDA with the FDA. Therefore, the Company
has initiated a Company-sponsored trial for the indication of bacterial
infectious diarrhea in travelers and will continue to pursue its completion as
financial resources allow. There can be no assurance that this new clinical
trial for rifaximin will demonstrate that the drug is safe and effective for the
indication tested, that such clinical trial will support the filing of an NDA
for rifaximin as a therapy for infectious diarrhea, that in the event an NDA is
filed with the FDA, the Company will be successful in obtaining regulatory
approval in the United States, or that the Company will obtain regulatory
approval for rifaximin from authorities in any other foreign jurisdiction.
With respect to lafutidine, there can be no assurance that the Company
will successfully conclude a license agreement with Fujirebio Inc., nor that
even if the Company is successful in obtaining a license to lafutidine it will
be successful in obtaining marketing approval in the United States or any other
country.
The Company expects that a significant portion of its potential revenues
for the next few years will depend on regulatory approval and sales of
balsalazide disodium and rifaximin. Failure to obtain regulatory approvals,
delays in obtaining regulatory approvals, obtaining regulatory approvals in only
limited markets or for limited uses, or lack of market acceptance for either
product, to the extent regulatory approvals are obtained, would have a material
adverse effect on the Company's business, financial condition, and results of
operations.
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Limited Operating History; History of Operating Losses; Expectation of
Future Losses. The Company has only a limited history of operations consisting
primarily of development of its products and sponsorship with third parties of
research and clinical trials. The Company has had no earnings to date and has
not realized any material operating revenues from product sales, either directly
by the Company or indirectly through its development and distribution partners.
Substantially all of the Company's revenues to date have been derived from
milestone payments from the Company's collaborative partners related to the
development of balsalazide disodium and limited product sales of Colazide. As of
June 30, 1999, the Company had incurred cumulative losses since inception of
approximately $23.9 million. Furthermore, the Company currently expects
operating losses to continue at least through 2002. The Company's future
operating performance will depend on the timing of regulatory approvals of
balsalazide disodium and rifaximin, particularly the timing of FDA approval,
and, if such approvals can be obtained, the level of market acceptance.
Dependence on Collaborative Partners. The initial commercialization of
balsalazide disodium in the United Kingdom and, to the extent regulatory
approval is obtained, in other countries in which the Company has commercial
rights to balsalazide disodium, is entirely dependent on Astra and Menarini, in
their respective territories. Under its agreements with Astra, the Company has
granted Astra exclusive rights to distribute and sell balsalazide disodium on a
worldwide basis with the exception of Italy, Spain, Portugal, and Greece, where
the Company has granted exclusive distribution rights to Menarini, and with the
exception of Japan, Taiwan, and Korea, where the Company does not have rights to
balsalazide disodium. Although Astra has agreed to use its best endeavors to
promote, market, and sell balsalazide disodium in its exclusive markets, there
are no specified financial thresholds that must be achieved for Astra to
maintain its exclusivity. The Company's agreements with Astra provide for, with
respect to Europe, a term of 15 years and, with respect to the United States, a
term ending on the later to occur of the expiration date of the last expiring
patent and the date nine years from the first commercial launch date of
balsalazide disodium but, in either event, the agreements may be terminated
earlier by either party upon the occurrence of specified events, including a
material breach.
The Company received marketing approval for balsalazide disodium in the
United Kingdom from the Medicine Controls Agency in July 1997 and Astra launched
balsalazide disodium commercially in the United Kingdom in October 1997, based
on a selling price set by Astra. Following regulatory approval of balsalazide
disodium in each country in Europe where Astra has exclusive distribution
rights, the balsalazide disodium sales price set on a country by country basis
may be less than the selling price in the United Kingdom. The sales price for
balsalazide disodium will directly affect the Company's revenues because the
parties' agreement obligates Astra to purchase balsalazide disodium from the
Company, and the Company to supply balsalazide disodium to Astra, at a transfer
price equal to a percentage of Astra's selling price. The Company does not
anticipate significant margins from balsalazide disodium sales to Astra in the
United Kingdom or Sweden, or in other European Union countries, where pricing
has not yet been determined. In addition, while the Company and its partners,
Astra and Menarini, received in May 1998 notification of approval of balsalazide
disodium as a treatment for acute ulcerative colitis in Austria, Belgium,
Denmark, Italy, Luxembourg and Sweden, Astra and Menarini withdrew marketing
applications from countries that had questions that could not be addressed
within the time constraints of the review period. Although the Company has been
advised by both Astra and Menarini that they intend to seek approval in those
countries for which marketing applications were withdrawn, including Finland,
France, Germany, Greece, Ireland, Netherlands, Portugal and Spain, the decision
as to which additional approvals to seek, the order in which to seek them and
the responsibility to complete the approval process lies with Astra and Menarini
and not the Company. There can be no assurance that Astra and Menarini will seek
such additional approvals, or if they do that the approvals will be granted.
Also, while Astra and Menarini received in July 1999 notification of approval of
balsalazide disodium as a treatment for the maintenance of remission of
ulcerative colitis in the seven European countries that had previously granted
approval for the acute indication, there can be no assurance that this will
influence either the decision to seek additional approvals nor the outcome of
such applications should they be filed.
There can be no assurance that the Company will be able to negotiate
acceptable collaborative arrangements in the future, or that its current or
future collaborative arrangements, including the agreements with Astra or
Menarini, will be successful or will not be terminated by the other party.
Although the Company believes that parties to any collaborative arrangements
would have an economic motivation to succeed in performing their contractual
responsibilities, the amount and timing of resources to be devoted to these
activities in most instances will not be within the control of the Company.
Failure of the Company and its collaborative partners to develop, commercialize,
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manufacture or market products, including balsalazide disodium, would have a
material adverse effect on the Company's business, financial condition, and
results of operations.
Dependence on Third Parties for Manufacturing. The Company currently
does not manufacture its potential pharmaceutical products, including
balsalazide disodium and rifaximin, and, therefore, is dependent on contract
manufacturers for the production of such products for development and commercial
purposes. In the event that the Company is unsuccessful in obtaining or
retaining third-party manufacturing or if the Company's manufacturers experience
production difficulties, delays or disruptions or fail to comply with regulatory
requirements, the Company may not be able to obtain adequate supplies of
products in a timely fashion or at acceptable quality, quantity, timing or
prices, or to commercialize its potential products as planned. To date, the
Company has experienced difficulties in supplying finished product to Astra due
to disruptions in supply from its contract manufacturers. No assurances can be
given that the Company, or its contract manufacturers, will be able to
manufacture balsalazide disodium (or other future developed products) in
commercial quantities that would enable the Company to meet its future supply
obligations. Under the terms of the Company's distribution agreements with Astra
and Menarini, the obligations of such companies to purchase product will
terminate under certain circumstances in which the Company is unable or
unwilling to adequately supply them with product. In such circumstances, Astra
or Menarini, as the case may be, is granted a temporary license to manufacture
balsalazide disodium. Under certain situations, such manufacturing licenses may
become permanent, in which case the Company's revenues from the arrangements
could be, depending on the circumstances, severely reduced or eliminated.
Moreover, the contract manufacturers that the Company may use must adhere to
current Good Manufacturing Practices, which are regulations strictly enforced by
the FDA through its facilities inspection program. If these facilities cannot
pass a pre-approval plant inspection, the likelihood of the FDA's pre-market
approval of balsalazide disodium would be adversely affected. In its
"approvable" letter relating to the NDA for balsalazide disodium, the FDA
identified certain manufacturing deficiencies that need to be addressed by the
Company and its manufacturers if the NDA is to be approved. There can be no
assurance that the Company or its manufacturers will be able to the address the
FDA's concerns. Certain material manufacturing changes that may occur after
approval are also subject to FDA review and approval. There can be no assurance
that the FDA or other regulatory agencies will approve the processes or the
facilities by which any of the Company's products may be manufactured. In
addition, if the facilities cannot pass regular post-approval inspections,
manufacturing and distribution may be disrupted, recalls of distributed products
may be necessary, and other sanctions could be applied. Any disruption in the
supply in manufacturing and marketing of the Company's proposed products would
have a material adverse effect on the Company's business, financial condition,
and results of operations.
Dependence on In-Licensing and Acquisition of New Products for Future
Growth. Whether or not balsalazide disodium or rifaximin receives regulatory
approvals and is successfully marketed, the Company's ability to grow in the
future will depend on its success in in-licensing or acquiring additional
pharmaceutical products. The Company seeks to in-license or acquire
pharmaceutical products that have been developed beyond the initial discovery
phase and for which late-stage human clinical data is already available. There
can be no assurance that such pharmaceutical products will be available on
attractive terms for in-licensing or acquisition by the Company.
Uncertainty of Market Acceptance. The Company's future success will
depend in part on its ability to develop and commercialize new products,
including balsalazide disodium and rifaximin, or new formulations of, or
indications for current products. Assuming the Company can successfully develop
such products and obtain regulatory approvals, their future success will depend
upon their acceptance by the medical community and third-party payors as useful
and cost-effective. Market acceptance will depend upon several factors,
including the establishment of the safety, effectiveness, patient tolerance, and
cost of the Company's products relative to those of competitors. The Company and
its collaborative partners may be required to engage in extensive advertising,
educational programs or other means to market its products. Failure of any of
the Company's products to achieve market acceptance would have a material
adverse effect on the Company's business, financial condition, and results of
operations.
Lack of Sales and Marketing Experience. The Company has no experience
marketing and selling its products either directly or through distributors. The
Company's sales and marketing strategy for balsalazide disodium relies on its
third-party distributors, Astra and Menarini, to whom the Company has granted
exclusive marketing rights. There can be no assurance that either Astra or
Menarini will market balsalazide disodium successfully in any country in which
they have exclusive rights. The Company intends to establish its own direct
sales force for the purpose of achieving direct sales of rifaximin and other
future products. There can be no assurance that the Company's marketing and
direct sales efforts will be successful.
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Dependence on Exclusive Licenses. The Company's rights to balsalazide
and rifaximin are derived from its license agreements with Biorex and Alfa
Wassermann, respectively. The Company's rights under these licenses are subject
to early termination by Biorex or Alfa Wassermann, as the case may be, under
certain circumstances, including material breach by the Company, the bankruptcy
or insolvency of the Company, or the Company's failure to satisfy its
manufacturing obligations under its agreements with distribution partners. In
the event that Biorex or Alfa Wassermann terminate their respective license
agreements, the Company would have no further rights to utilize their respective
patents or trade secrets to manufacture and market products based on balsalazide
or rifaximin, as the case may be. The Company's licenses for balsalazide and
rifaximin provide that the Company's royalty obligations may extend beyond the
expiration date of the underlying patents, which could have a material adverse
effect on the Company's business, financial condition, and results of operations
in the event a generic version of balsalazide or rifaximin, as the case may be,
were introduced. In addition, the Company's license agreement with Alfa
Wassermann also provides that the Company may not promote, distribute or sell
any antibiotic products that compete with rifaximin in its licensed territory
(the United States and Canada) for a period of five years after the first
commercial sale of rifaximin under the agreement, thereby limiting the Company's
ability to in-license, develop, or market such products.
Patents and Proprietary Rights; Expiration of Patents. Because of the
substantial length of time and expense associated with bringing new products
through development and regulatory approval to the marketplace, the
pharmaceutical industry places considerable importance on obtaining patent and
trade secret protection for new technologies, products and processes. Because
the Company's strategy is to in-license or acquire pharmaceutical products which
typically have been discovered and initially researched by others, such products
may have limited or no remaining patent protection due to the time elapsed since
their discovery. The patents for the balsalazide disodium composition of matter
and method of treating ulcerative colitis with balsalazide expire in July 2001
in the United States, February 2002 in the United Kingdom, May 2002 in France,
July 2001 in Italy, and April 2002 in Germany. The patents for the method of
treating colon cancer using balsalazide expire in January 2014 in the United
States and, assuming patents issue from pending applications, in January 2015 in
various countries in Europe, Asia, and North America. The Company has received a
Supplemental Protection Certificate from the United Kingdom Patent Office
extending the United Kingdom patent from February 2002 until July 2006. The
patents for the rifaximin composition of matter (also covering a process of
making rifaximin and using rifaximin to treat gastrointestinal infectious
diseases) expire in May 2001 in the United States and Canada. The patents for
another process of making rifaximin expire in April 2005 in both the United
States and Canada. Patents for the use of rifaximin for H. pylori infections
expire in June 2013 in the United States and February 2014 in Canada.
Notwithstanding the receipt of the Supplemental Protection Certificate in the
United Kingdom, although the Company believes it may be granted additional
extensions of up to five years in certain circumstances, based on patent term
restoration procedures established in Europe and under the Waxman-Hatch Act in
the United States for products that have received regulatory approval, there is
no assurance that such extensions will be granted. The Company has filed
applications for use patents for additional indications using balsalazide and
related chemical substances. There can be no assurance that any patents will be
issued. There can be no assurance that competitors will not develop products
based on the same active ingredients for marketing as soon as the applicable
patents expire or at any time thereafter or that competitors will not design
around existing patents. Sales of such generic versions could have an adverse
effect on the Company's business, financial condition, and results of
operations. The Company's success will depend in part on its ability to obtain
United States and foreign patent protection for its products and processes,
preserve its trade secrets, and operate without infringing on the proprietary
rights of third parties. There can be no assurance that patents will issue with
respect to, or that the claims allowed will provide sufficient protection to,
the Company's present or future technology.
There can be no assurance that any other patents will be issued on any
of the Company's patent applications or on patent applications licensed from
third parties. Moreover, there can be no assurance that claims allowed in the
patents or patent applications are or will be sufficiently broad to protect the
Company's technology or that the patents will provide protection against
competitive products or otherwise be commercially valuable.
Furthermore, as with any pharmaceutical company, the Company's patent
and other proprietary rights are subject to uncertainty. The Company's patent or
other proprietary rights related to its products might conflict with current or
future rights of others. For instance, there is no assurance that the use of the
Company's technology will not infringe the patent rights of others. For the same
reasons, the products of others could infringe the patent or other proprietary
rights of the Company. Litigation or patent interference proceedings, either of
which could result in substantial cost to the Company, may be necessary to
enforce any patents issued to and other proprietary rights of the
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Company or to determine the scope and validity of other parties' proprietary
rights. The defense and prosecution of patent and intellectual property claims
are both costly and time-consuming, even if the outcome is favorable to the
Company. Any adverse outcome could subject the Company to significant
liabilities to third parties, require disputed rights to be licensed from third
parties, or require the Company to cease selling its products.
In addition to patent protection, the Company also relies on trade
secrets, proprietary know-how and technological advances which it seeks to
protect, in part, through confidentiality agreements with its collaborative
partners, employees and consultants. There can be no assurance that these
agreements will not be breached, that the Company will have adequate remedies
for any breach, or that the Company's trade secrets and proprietary know-how
will not otherwise become known or be independently developed by others.
There can be no assurance that the Company will be able to obtain a
license to any third-party technology that it may require to conduct its
business or that, if obtainable, such technology can be licensed at a reasonable
cost. Failure by the Company to obtain a license to any technology that it may
require for commercialization of its technologies or products will have a
material adverse effect on the Company. In addition, there can be no assurance
that others will not independently develop substantially equivalent proprietary
information or obtain access to the Company's know-how, or that others will not
be issued patents which prevent the manufacture or sale of Company products or
require licensing and the payment of significant fees or royalties by the
Company in order for it to be able to carry on its business. Litigation, which
could result in substantial cost to the Company, may be necessary to enforce or
defend the Company's patents or proprietary rights.
Intense Competition. Competition in the pharmaceutical industry is
intense and characterized by extensive research efforts and rapid technological
progress. The Company believes that there are numerous pharmaceutical and
biotechnology companies, both public and private and including large well-known
pharmaceutical companies, as well as academic research groups throughout the
world engaged in research and development efforts with respect to pharmaceutical
products targeted at gastrointestinal diseases and conditions addressed by the
Company's current and potential products. In particular, the Company is aware of
products in research or development by competitors that address the diseases
being targeted by the Company's products. There can be no assurance that
developments by others will not render the Company's current and potential
products obsolete or non-competitive. Competitors may be able to complete the
development and regulatory approval process sooner and, therefore, market their
products earlier than the Company. Many of the Company's competitors have
substantially greater financial, marketing and personnel resources and
development capabilities than the Company. For example, many large, well
capitalized companies already offer products in the United States and Europe
that target the proposed indications for balsalazide disodium, including
mesalamine (SmithKline Beecham plc, Dr. Falk Pharma GmbH, Pharmacia & Upjohn,
Inc., Solvay S.A., The Procter & Gamble Company, and Hoechst Marion Roussel,
Inc.), sulfasalazine (Pharmacia & Upjohn, Inc.), and olsalazine (Pharmacia &
Upjohn, Inc.). Technological developments by competitors, earlier regulatory
approval for marketing competitive products, or superior marketing capabilities
possessed by competitors could adversely affect the commercial potential of the
Company's products, including balsalazide disodium, and could have a material
adverse effect on the Company's business, financial condition, and results of
operations. In addition, manufacturers of generic drugs may seek to compete
directly with the Company's products in the absence of effective patent
protection or non-patent exclusivity protection.
Currency Fluctuations. A significant portion of the company's business
is conducted in currencies other than the United States dollar. Foreign currency
transaction gains and losses arising from normal business operations are
credited to or charged against earnings in the period incurred. As a result,
fluctuations in the value of the currencies in which the Company conducts its
business relative to the United States dollar have caused and will continue to
cause currency transaction gains and losses. Although translation into the
Company's reporting currency has not historically had a material impact on the
Company's financial position, due to the substantial volatility of currency
exchange rates, among other factors, the Company cannot predict the effect of
exchange rate fluctuations upon future operating results. There can be no
assurance that the Company will not experience currency losses in the future.
The Company has not previously undertaken hedging transactions to cover its
currency exposure but may hedge a portion of its currency exposure in the future
as management deems appropriate.
Management of Growth. If the Company is successful in developing and
commercializing its products the Company expects to experience significant
growth in the number of its employees and the scope of its operations. This
growth could place a significant strain on the Company's management and
operations. The Company's ability to
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manage such growth effectively will depend upon its ability to broaden its
management team and its ability to attract, hire, and retain skilled employees.
The Company's success will also depend on the ability of its officers and key
employees to continue to implement and improve its operational, management
information and financial control systems and to expand, train and manage its
employee base. The Company's inability to manage growth effectively could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on Key Personnel; Ability to Recruit Personnel. The Company
is dependent upon a number of key management and technical personnel. The loss
of the services of one or more key employees could have a material adverse
effect on the Company. The Company's success will also depend on its ability to
attract and retain additional highly qualified management and technical
personnel. The Company faces intense competition for qualified personnel, many
of whom are often subject to competing employment offers. In the event the
Company obtains regulatory approvals for rifaximin, it intends to sell rifaximin
through a small direct sales force. New employees, particularly new sales and
marketing employees, will require substantial training and education concerning
the Company's products. There can be no assurance that the Company will be
successful in attracting and retaining qualified personnel as necessary, and the
failure to do so could have a material adverse effect on the Company's business,
operating results, and financial condition.
Price Volatility; Limited Trading Volume; Foreign Exchange Risk. The
securities markets have from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies. In addition, the market prices of the common stock of many
publicly traded pharmaceutical and biotechnology companies have in the past and
can in the future be expected to be especially volatile. Announcements of
technological innovations or new products by the Company or its competitors,
developments or disputes concerning proprietary rights, publicity regarding
actual or potential medical results relating to products under development by
the Company or its competitors, regulatory developments in both the United
States and other countries, public concern as to the safety of pharmaceutical
products and economic and other external factors, as well as period-to-period
fluctuations in the Company's financial results, may have a significant impact
on the market price of the Company's Common Shares. The Company's Common Shares
have traded on The Toronto Stock Exchange since May 1996 and no public trading
market exists for the Common Shares in the United States. Trading volume in the
Common Shares on The Toronto Stock Exchange has been low and there can be no
assurances that an active trading market will develop or be sustained on The
Toronto Stock Exchange or any other exchange or dealer quotation system. In
addition, the performance of the Company's stock on The Toronto Stock Exchange
may increase the difficulty of raising capital and there can be no assurance
that the Company will be able to access the public capital markets in the event
it needs to raise capital.
The Common Shares trade on The Toronto Stock Exchange in Canadian
dollars. In addition to the general market risks associated with ownership of
equity securities and the more specific risks of ownership of the Common Shares
of the Company, U.S. holders of the Common Shares also bear exchange rate risks
resulting from fluctuations in the relative values of the Canadian dollar and
the U.S. dollar. The value of the Canadian dollar has fluctuated substantially
in the past relative to the United States dollar and other currencies and may
continue to do so in the future. As a result, for U.S. investors and other
non-Canadian investors, the value of the Common Shares in United States dollars
or other currencies may vary independently of changes in the trading price of
the Common Shares on The Toronto Stock Exchange and for reasons unrelated to the
Company or its business, results of operations, or financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Due to the nature and maturity of the Company's short term investments
the Company does not believe such investments present significant market risk.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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In October 1997, the Company completed the sale of 3,000,000 Common
Shares at a per share price of Cdn. $7.00 (U.S. $4.98) in a firm commitment
underwritten public offering. The offering was effected in Canada pursuant to
final receipts issued by each of the provincial securities commissions and in
the United States pursuant to a Registration Statement on Form S-1 (Registration
No. 333-33781), which the United States Securities and Exchange Commission
declared effective on October 14, 1997. Levesque Beaubien Geoffrion Inc.,
Yorkton Securities Inc., Marleau, Lemire Securities Inc., and Midland Walwyn
Capital Inc underwrote the offering. In the United States, the offering was made
by the United States broker-dealer affiliates of the underwriters, NBC Levesque
International Ltd., Yorkton Capital Inc., Marleau Lemire (USA), Inc., and
Midland Walwyn Capital Corporation, respectively. On October 16, 1997, the date
of the effectiveness of the Registration Statement covering the public offering,
the Bank of Canada noon rate of exchange for United States dollars into Canadian
dollars was Cdn. $1.3866 per U.S. $1.00.
Of the Cdn. $21,000,000 in aggregate proceeds raised in connection with
the October 1997 offering, (i) approximately Cdn. $1,365,000 was paid to the
underwriters in connection with underwriting discounts, and (ii) approximately
Cdn. $1,403,000 was paid by the Company in connection with offering expenses,
including legal, printing, and filing fees. There were no direct or indirect
payments to directors or officers of the Company or any other person or entity.
None of the offering proceeds have been used for the construction of plant,
building or facilities or the purchase or installation of machinery or equipment
or for purchases of real estate or the acquisition of other businesses. The
Company is currently investing the net offering proceeds for future use as
additional working capital. Such remaining net proceeds have been invested in
short-term, interest-bearing, investment grade securities. A portion of the net
proceeds may be used for the acquisition of technologies, businesses or products
that are complementary to those of the Company.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1999 Annual Meeting of Shareholders was held on May 25,
1999. The following is a brief description of each matter voted upon at the
meeting and a statement of the number of votes cast for, against or withheld and
the number of abstentions with respect to each matter.
(a) The shareholders elected the following directors to serve for the ensuing
year and until their successors are elected:
NAME FOR WITHHELD
---- --- --------
Randy W. Hamilton 5,983,599 373,319
Lawrance A. Brown, Jr. 6,278,545 78,373
John F. Chappell 5,158,704 1,198,214
Nicholas M. Ediger 5,167,799 1,189,119
Lorin K. Johnson 6,278,545 78,373
David E. Lauck, Sr. 5,983,599 373,319
(b) The shareholders ratified the appointment of Ernst & Young LLP as
independent accountants of the Company for the fiscal year ending
December 31, 1999.
FOR AGAINST ABSTAIN
--- ------- -------
6,347,841 9,067 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.18 Employment Agreement effective May 6, 1999 between Salix
Pharmaceuticals, Ltd and Randy W. Hamilton
16
19
10.19 Employment Agreement effective May 6, 1999 between Salix
Pharmaceuticals, Ltd and Dr. Lorin K. Johnson
10.20 Employment Agreement effective May 6, 1999 between Salix
Pharmaceuticals, Ltd and Robert P. Ruscher
10.21 Employment Agreement effective May 6, 1999 between Salix
Pharmaceuticals, Ltd and John Brough
27.1 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three month period
ended June 30, 1999.
17
20
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.
SALIX PHARMACEUTICALS, LTD.
Date: August 13, 1999 By: /s/ Randy Hamilton
--------------------------------
Randy Hamilton, President and
Chief Executive Officer
Date: August 13, 1999 By: /s/ Robert Ruscher
--------------------------------
Robert Ruscher, Executive Vice
President and Chief Financial
Officer
18
21
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.18 Employment Agreement effective May 6, 1999 between Salix
Pharmaceuticals, Ltd and Randy W. Hamilton
10.19 Employment Agreement effective May 6, 1999 between Salix
Pharmaceuticals, Ltd and Dr. Lorin K. Johnson
10.20 Employment Agreement effective May 6, 1999 between Salix
Pharmaceuticals, Ltd and Robert P. Ruscher
10.21 Employment Agreement effective May 6, 1999 between Salix
Pharmaceuticals, Ltd and John Brough
27.1 Financial Data Schedule