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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 SEPTEMBER 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
incorporation or organization) Identification No.)
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
October 31, 1999 was 10,208,838.
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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 September 30, 1999
(unaudited) and December 31, 1998 ........................................... 1
Condensed Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 1999 and 1998 (unaudited)..................... 2
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 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........................... 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ................................................... 16
Signatures......................................................................................... 17
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SALIX PHARMACEUTICALS, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(EXPRESSED IN U.S. DOLLARS)
September December 31,
1999 1998
(unaudited) (Note 1)
-------- --------
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 1,318 $ 2,763
Short term investments ......................................................... 1,500 4,500
Accounts receivable ............................................................ 64 --
Inventory, net ................................................................. 468 615
Prepaids and other current assets ..................................... 150 105
-------- --------
Total current assets 3,500 7,983
Property and equipment, net .................................................... 171
Other assets ................................................................... 51 51
-------- --------
$ 3,722 $ 8,256
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Accounts payable and other current liabilities ........................ $ 1,488 $ 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;
10,208,838 shares issued and outstanding at
September 30, 1999 and December 31, 1998 ......................... 27,626 27,626
Accumulated deficit ................................................... (25,392) (20,800)
-------- --------
Shareholders' equity ............................................. 2,234 6,826
-------- --------
$ 3,722 $ 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 Nine months ended
September 30, September 30,
-------------------- -----------------------
1999 1998 1999 1998
------ ------- -------- --------
Revenues:
Product revenue ................................................. $ 75 $ 138 $ 213 $ 284
Revenue from collaborative agreements and other ................. -- -- 1,484 --
------ ------- -------- --------
Total revenues ............................................. 75 138 1,697 284
------ ------- -------- --------
Expenses:
Cost of products sold ........................................... 111 207 674 495
License fees .................................................... -- -- 297 76
Research and development ........................................ 1,127 1,474 3,977 4,841
General and administrative ...................................... 382 607 1,501 2,095
------ ------- -------- --------
Total expenses ............................................. 1,620 2,288 6,449 7,507
------ ------- -------- --------
Loss from operations ..................................................... 1,545) (2,150) (4,752) (7,223)
------ ------- -------- --------
Interest and other income (expense), net ................................. 56 138 160 478
------ ------- -------- --------
Net loss ................................................... $(1,489) $(2,012) $ 4,592) $ (6,745)
======= ======= ======== ========
Net loss per share, basic and diluted .................................... $(0.15) $ (0.20) $ (0.45) $ (0.66)
======= ======= ======== ========
Shares used in computing net loss per share, basic and diluted ........... 10,209 10,193 10,209 10,186
======= ======= ======== ========
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)
Nine months ended
September 30,
---------------------
1999 1998
------ -----
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .................................................................. $(4,592) $ (6,745)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ........................................ 68 66
Changes in assets and liabilities:
Accounts receivable, inventory and other current assets ............. 38 (459)
Accounts payable and other current liabilities ....................... 58 140
------- --------
Net cash used in operating activities ............................ (4,428) (6,998)
CASH FLOWS FROM INVESTING ACTIVITIES
Sale and maturity of short term investments ............................... 3,000 --
Purchases of property and equipment ....................................... (17) (118)
------- --------
Net cash provided by (used in) investing activities .................. 2,983 (118)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock .................................... -- 89
Net cash provided by financing activities ............................ -- 89
Net decrease in cash and cash equivalents .......................................... (1,445) (7,027)
Cash and cash equivalents at beginning of period ................................... 2,763 15,173
------- --------
Cash and cash equivalents at end of period ......................................... $ 1,318 $ 8,146
======= ========
The accompanying notes are an integral part of these financial statements.
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SALIX PHARMACEUTICALS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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.
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
and the nine month periods ended September 30, 1999 and September 30,
1998 but have been excluded from the computation, as their effect is
anti-dilutive.
3. Commitments
At September 30, 1999, the Company had a binding purchase order
commitment for inventory purchases aggregating approximately $1.0 million
to be delivered in 1999.
4. Inventory
All inventories at December 31, 1998 and September 30, 1999 have been
classified as raw materials.
5. Liquidity and Capital Resources
The Company has sustained continuing operating losses and expects to
incur further substantial losses until product approvals are obtained and
product revenues reach a sufficient level to support ongoing operations.
The Company believes that the Company's cash reserves at September 30,
1999 and the projected milestone payments from Astra and Menarini should
be sufficient to satisfy the cash requirements of the Company's product
development programs through at least the first quarter of 2000.
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SALIX PHARMACEUTICALS, LTD.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical results or anticipated results, including those set forth under
"Factors that May Affect Future Results" under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in, or
incorporated by reference into, this report. The following discussion should be
read in conjunction with the Company's Condensed Consolidated Financial
Statements and notes thereto included elsewhere in this report.
Unless otherwise indicated, all references to "dollars" or "$" 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, in Sweden as Colazid, and in Denmark as Premid, 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 September 30, 1999, the Company had
accumulated losses of approximately $25.4 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 $36.2 million,
of which $21.7 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 million 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 fourth quarter 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 at all.
Depending on the outcome of the trial, the results may be useful for obtaining
additional approvals in Europe and enhancing U.S. labeling for balsalazide
disodium.
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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 and in
Denmark under the brand name Premid. The Company expects Astra and Menarini to
undertake additional commercial launches of balsalazide disodium in approved
countries throughout 1999 and into 2000. 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, Sweden, and Denmark 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 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
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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 Nine Month Periods Ended September 30, 1999 and 1998
For the three month period ended September 30, 1999, the Company
recognized product revenue of $75,000. During the corresponding three month
period in 1998 the Company had product sales of $138,000. For the nine month
period ended September 30, 1999 the Company had product sales of $213,000 and
revenue from collaborative agreements of $1,484,000. During the corresponding
nine month period in 1998 the Company had product sales of $284,000 and no
revenue from collaborative agreements.
Operating expenses for the three months ended September 30, 1999 and
1998 were $1.6 million and $2.3 million, respectively. Cost of goods sold,
research and development and general and administrative costs were all lower in
the three months ended September 30, 1999. Operating expenses for the nine
months ended September 30, 1999 and 1998 were $6.4 million and $7.5 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 nine month periods ended
September 30, 1999 were $111,000 and $674,000 respectively, compared with
$207,000 and $ 495,000 in the corresponding three and nine month periods in
1998. In the nine month period ended September 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 was nil in both the three month periods ended
September 30, 1999 and 1998. License fee expense totaled $297,000 for the nine
month period ended September 30, 1999, compared with $76,000 in the
corresponding nine month period 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 $1.1 million and $4.0 million for
the three and nine month periods ended September 30, 1999, respectively,
compared with $1.5 million and $4.8 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 $382,000 and $1.5 million for
the three and nine months ended September 30, 1999, respectively, compared with
$607,000 and $2.1 million in the corresponding three and nine 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 $56,000 and $160,000 in the three and
nine month periods ended September 30, 1999, respectively, down from $138,000
and $478,000 in the three and nine month periods ended September 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 $4.6 million for
the three and nine month periods ended September 30, 1999, respectively,
compared with $2.0 million and $6.7 million in the three and nine month periods
ended September 30, 1998 respectively. The lower net loss for the current three
and nine 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
undertaken and completed a year 2000 readiness program and 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. Specifically, the Company has
transitioned its primary operating systems during the previous two years and
based upon the results of the assessment described below, the Company does not
believe that year 2000 issues will have a material effect on the Company's
business, results of operations or financial condition.. 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 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 September 30, 1999, the Company has financed its
operations principally through reimbursement payments, license fees and
milestone revenues, totaling approximately $18.3 million under
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collaborative research and licensing agreements, and sales of equity and
convertible debt securities totaling approximately $27.6 million.
At September 30, 1999, the Company had approximately $2.8 million in
cash, cash equivalents, and short-term investments as compared to $7.3 million
at December 31, 1998. The decrease of $4.5 million from December 31, 1998 was
due to cash used in operating activities (see "Results of Operations").
As of September 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 September 30, 1999 and the
projected milestone payments from Astra and Menarini should be sufficient to
satisfy the cash requirements of the Company's product development programs
through at least the first quarter of 2000. 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.
Development, manufacture, and marketing of pharmaceutical products 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 FDA for
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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
September 30, 1999, the Company had incurred cumulative losses since inception
of approximately $25.4 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, Sweden, or Denmark, 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 and regulatory agencies other countries through their facilities
inspection programs. 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 receive regulatory
approvals and are 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
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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.
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
Supplemental Protection Certificates from both the United Kingdom Patent Office
and the Italian Patent and Trademark Office extending patents in both countries
by five years 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 prior to patent expiration, 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
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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 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.
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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 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. On
September 28, 1999 the Board of The Toronto Stock Exchange approved new
continued listing standards, including suspension and delisting procedures. The
revised financial criteria to be considered include a higher minimum market
capitalization, an increased public float requirement, higher minimum asset
requirements and larger minimum revenue requirements. Companies that do not meet
the new standards will have a 6-month transition period, as from October 1,
1999, to satisfy the new requirements. The Company does not currently meet all
of the revised criteria, which could result in the Company's stock being
delisted. Delisting would have a significant material adverse effect upon
shareholder liquidity.
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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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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 September 30, 1999.
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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: November 11, 1999 By: /s/ Robert P. Ruscher
------------------------------
Robert P. Ruscher, President and
Chief Executive Officer
Date: November 11, 1999 By: /s/ John Brough
------------------------------
John Brough
Chief Financial Officer
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule