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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
.......................
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
COMMISSION FILE NUMBER
0-23641
ALLERGAN SPECIALTY THERAPEUTICS, INC.
A DELAWARE CORPORATION IRS EMPLOYER IDENTIFICATION
33-0779207
2525 DUPONT DRIVE, IRVINE, CALIFORNIA 92612
TELEPHONE NUMBER 714/246-4500
Indicate by a 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.
(1) X yes no
------ ------
(2) X yes no
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of November 6, 1998, there were 3,272,690 shares of callable Class A common
stock outstanding, and 1,000 shares of Class B common stock outstanding.
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ALLERGAN SPECIALTY THERAPEUTICS, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998
INDEX
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Condensed Statements of Operations -
For the quarter ended September 30, 1998
and for the period from commencement of
operations (March 10, 1998) to September 30, 1998 3
Condensed Balance Sheets at September 30, 1998
and December 31, 1997 4
Condensed Statement of Cash Flows -
For the period from commencement of
operations (March 10, 1998) to September 30, 1998 5
Notes to Condensed Financial Statements 6-11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12-21
PART II - OTHER INFORMATION
ITEM 6 - 22
Signature 23
Exhibits
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PART I - FINANCIAL INFORMATION
Allergan Specialty Therapeutics, Inc.
(a development stage company)
Condensed Statements of Operations
For the quarter ended September 30, 1998
and for the period from commencement of
operations (March 10, 1998) to September 30, 1998
(In thousands, except share data)
Commencement of
Quarter Ended Operations to
September 30, 1998 September 30,1998
------------------ -----------------
Revenues $ 3,004 $ 6,512
Costs and expenses:
Research and development 8,626 24,754
Technology fees 1,375 5,145
General and administrative
expenses 284 414
----------- -----------
Total costs and expenses $ 10,285 $ 30,313
----------- -----------
Loss before income taxes (7,281) (23,801)
Provision for taxes 938 1,860
----------- -----------
Net loss $ (8,219) $ (25,661)
=========== ===========
Basic and diluted loss per share $ (2.51) $ (7.84)
=========== ===========
Basic and diluted shares outstanding 3,273,690 3,273,690
See accompanying notes to condensed financial statements.
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Allergan Specialty Therapeutics, Inc.
(a development stage company)
Condensed Balance Sheets
(In thousands, except share data)
September 30, December 31,
1998 1997
------------- ------------
ASSETS
Cash $ 51 $ 1
Investments 171,924 --
Prepaid technology fees 4,210 --
Other assets 1,320 --
--------- ----
$ 177,505 $ 1
========= ====
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Payable to Allergan, Inc. $ 3,928 $ --
Accounts payable and accrued liabilities 955 --
--------- ----
Total liabilities 4,883 --
Stockholders' equity:
Callable Class A Common stock,
$.01 par value; 6,000,000 shares
authorized, 3,272,690 issued
and outstanding 33 --
Class B Common stock,
$1.00 par value; 1,000 shares
authorized, issued and outstanding 1 --
Additional paid-in capital 196,753 1
Accumulated other comprehensive income 1,496 --
Deficit accumulated during
development stage (25,661) --
--------- ----
Total stockholders' equity 172,622 1
--------- ----
$ 177,505 $ 1
========= ====
See accompanying notes to condensed financial statements.
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Allergan Specialty Therapeutics, Inc.
(a development stage company)
Condensed Statement of Cash Flows
For the period from commencement of
operations (March 10, 1998) to September 30, 1998
(In thousands)
OPERATING ACTIVITIES:
Net loss $ (25,661)
Changes in operating assets and liabilities:
Other assets (1,320)
Prepaid technology fees (4,210)
Payable to Allergan, Inc. 3,928
Accounts payable and accrued liabilities 955
---------
Net cash used in operating activities (26,308)
INVESTING ACTIVITIES:
Purchases of available-for-sale securities (182,542)
Sales of available-for-sale securities 12,114
---------
Net cash used in investing activities (170,428)
FINANCING ACTIVITIES:
Issuance of common stock 200,000
Offering costs (3,214)
---------
Net cash provided by financing activities 196,786
---------
Net increase in cash 50
Cash - beginning of period 1
---------
Cash - end of period $ 51
=========
See accompanying notes to condensed financial statements.
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Allergan Specialty Therapeutics, Inc.
Notes to Condensed Financial Statements
1. Basis of Presentation and Significant Accounting Policies
Allergan Specialty Therapeutics, Inc. ("ASTI" or "the Company") was
incorporated in Delaware on November 12, 1997 and commenced operations
on March 10, 1998. ASTI was formed for the purpose of conducting
research and development of potential human pharmaceutical products, and
to commercialize such products, most likely through licensing to
Allergan, Inc. (Allergan).
The Company is subject to risks associated with development stage
companies. All of the Company's efforts to date have been limited to
obtaining capital and conducting research and development. The Company
does not yet generate any revenues from product sales or royalties.
Research and development is performed by Allergan and the costs incurred
are reimbursed by ASTI.
The accompanying financial statements at September 30, 1998 and for the
quarter ended September 30, 1998 and for the period from commencement of
operations to September 30, 1998 are unaudited, and in the opinion of
management, includes all adjustments (consisting only of normal
recurring accruals) necessary to present fairly the financial
information contained therein. These statements do not include all
disclosures required by generally accepted accounting principles. The
results of operations for the period ended September 30, 1998 and for
the period from commencement of operations to September 30, 1998 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1998.
Accounting for revenues and expenses
ASTI's revenues consist of interest and investment income and
Pre-Selection Product Payments (see Note 2). In later years ASTI may
also derive revenues from the sale or license of its products, most
likely through the sale of licensed products by Allergan. Royalty and
other product revenue will be recorded as earned.
ASTI incurs most of its expenses under its agreements with Allergan.
Research and development costs paid to Allergan under a Research and
Development Agreement (R&D Agreement) are recorded as research and
development expenses when incurred. Technology fees paid to Allergan
under a Technology License Agreement (Technology Agreement) are recorded
as technology fees on a straight-line basis over the life of the
Technology Agreement. Amounts paid to Allergan under a Services
Agreement are recorded as administrative expenses as incurred. See Note
2 for a description of the agreements between ASTI and Allergan.
Use of estimates
The preparation of financial statements in accordance 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.
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Allergan Specialty Therapeutics, Inc.
Notes to Condensed Financial Statements (Continued)
1. Basis of Presentation and Significant Accounting Policies (continued)
The Company invests its excess cash in money market funds, equity
securities and debt instruments of financial institutions and
corporations with strong credit ratings. The Company has established
guidelines with respect to diversification and maturities in order to
maintain safety and liquidity. At September 30, 1998, all excess cash
amounting to $171,924,000 was invested primarily in debt securities.
ASTI classifies investments as available-for-sale securities with net
unrealized gains or losses as a component of other comprehensive income.
Amounts classified as investments are liquidated and used to pay
operating expenses as needed.
Per share information
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share,"
(EPS). SFAS No. 128 requires calculations for "basic earnings per share"
including only actual weighted shares outstanding and "diluted earnings
per share" including the effect of any common equivalent shares or other
items that are dilutive. The Company has no common equivalent shares or
other items that are dilutive. The reconciliations of the numerators and
denominators of the basic and diluted earnings per share computations
for the quarter ended September 30, 1998 and for the period from
commencement of operations (March 10, 1998) to September 30, 1998 are as
follows:
Income (loss) Shares Per-share
(Numerator) (Denominator) Loss
------------- ------------- ---------
Computation of basic
and diluted EPS:
Quarter ended
September 30, 1998 (8,219,000) 3,273,690 $(2.51)
Computation of basic and
diluted EPS:
Commencement of
operations to
September 30, 1998 (25,661,000) 3,273,690 $(7.84)
2. Arrangements with Allergan, Inc.
On March 10, 1998, 3,272,690 shares of callable Class A Common Stock of
ASTI, representing all of the issued and outstanding shares of such
class, were distributed by Allergan to the holders of record of Allergan
common stock at the close of business on February 17, 1998 (the
"Distribution"). Prior to the Distribution, Allergan contributed
$200,000,000 in cash to ASTI in exchange for all of the shares of ASTI
Common Stock.
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Allergan Specialty Therapeutics, Inc.
Notes to Condensed Financial Statements (Continued)
2. Arrangements with Allergan, Inc. (continued)
On March 10, 1998, 1,000 shares of Class B Common Stock of ASTI,
representing all of the issued and outstanding shares of such class,
were issued to Allergan. As sole holder of all of the issued and
outstanding shares of Class B Common Stock, Allergan has the option to
repurchase all of the outstanding Class A Common Stock under specified
conditions.
In connection with the Distribution, ASTI and Allergan entered into a
number of agreements, including the R&D Agreement, Technology Agreement,
Services Agreement and License Option Agreement (License Agreement).
Pursuant to the R&D Agreement, ASTI reimbursed Allergan for research and
development costs of $8,626,000 incurred during the quarter ended
September 30, 1998, with respect to the initial ASTI Products and
Pre-Selection Work, as defined. Research and development expenses were
$24,754,000 during the period from commencement of operations through
September 30, 1998 which includes reimbursement to Allergan for research
and development services performed during the period from October 24,
1997 through March 9, 1998. From time to time thereafter, Allergan shall
propose work plans, subject to ASTI board approval, for the continued
development of each of the initial ASTI Products as well as other
product candidates. ASTI is required to utilize the cash initially
contributed to ASTI by Allergan plus interest and investment income
thereon, less administrative expenses and technology fees to conduct
activities under the R&D Agreement. The R&D Agreement specifies payment
of Developed Technology Royalties and Pre-Selection Product Payments by
Allergan to ASTI under certain conditions. Through September 30, 1998,
no amounts have been earned by ASTI with respect to Developed Technology
Royalties.
In July 1998, Allergan entered into a multi-year research and
development collaboration with Parke-Davis Pharmaceutical Research
Division of Warner-Lambert Company to identify, develop and
commercialize up to two RXR subtype selective retinoid compounds for the
treatment of metabolic diseases, including adult onset diabetes, insulin
resistant syndromes and dyslipidemias (Collaboration Agreement). The
technologies involved in the collaboration were previously licensed by
ASTI from Allergan pursuant to the Technology Agreement. In accordance
with a letter agreement between Allergan and ASTI, ASTI is entitled to
receive Pre-Selection Product Payments representing ten percent of the
potential $104 million in technology access fees and development
milestones to be received by Allergan pursuant to Allergan's agreement
with Warner-Lambert. Through September 30, 1998, ASTI earned $500,000 of
Pre-Selection Product Payments in accordance with the letter agreement.
In addition, ASTI is entitled to royalties on net sales of developed
products, depending on actual lead compound selection and sales results.
ASTI intends to use the funds received for further research and
development.
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Allergan Specialty Therapeutics, Inc.
Notes to Condensed Financial Statements (Continued)
2. Arrangements with Allergan, Inc. (continued)
Subject to certain limitations, the Technology Agreement grants ASTI an
exclusive license to research and develop all of Allergan's proprietary
and contractual rights with respect to certain retinoid and
neuroprotective technologies. As consideration for the exclusive
license, ASTI will pay a technology fee of $10,000,000 in year one;
$6,700,000 in year two; $3,300,000 in year three; and $2,000,000 in year
four commencing October 24, 1997. The technology fee is charged to
operations on a straight-line basis over the life of the Technology
Agreement. The technology fee is payable monthly in arrears provided,
however, that ASTI shall no longer be obligated to make such payments
beginning with any month following the date on which the total number of
ASTI Products either under development or licensed to Allergan pursuant
to the License Agreement is less than two. Through September 30, 1998,
ASTI paid $9,355,000 in technology fees, of which $4,210,000 is included
in prepaid technology fees in the accompanying balance sheet.
ASTI has granted Allergan an option to acquire a license to each product
developed under the R&D Agreement, including the Initial Products on a
country-by-country basis at any time until (a) with respect to the
United States, 30 days after clearance by the FDA to commercially market
such ASTI Product and (b) with respect to any other country, 90 days
after the earlier of (i) clearance by the appropriate regulatory agency
to commercially market the product and (ii) clearance by the FDA to
market the product in the United States.
Upon exercise of the license option, Allergan will make Product Payments
to ASTI as defined in the R&D Agreement. Through September 30, 1998, no
license option has been exercised. The license option will expire to the
extent not previously exercised, 30 days after the expiration of
Allergan's option to purchase all of the outstanding ASTI Shares,
described below.
In accordance with ASTI's Restated Certificate of Incorporation,
Allergan has the right to purchase all (but not less than all) of the
ASTI Class A Common Stock (the "Purchase Option"). Allergan may exercise
the Purchase Option by written notice to ASTI at any time during the
period beginning immediately after the Distribution and ending on
December 31, 2002; provided that such date will be extended for
successive six month periods if, as of June 30, 2001, ASTI has not paid
or accrued expenses for at least 95% of all Available Funds, as defined,
pursuant to the R&D Agreement. In any event, the Purchase Option will
expire 90 days after Allergan receives notice that the Available Funds
(as defined in the R&D Agreement) held by ASTI is less than $15 million.
Through September 30, 1998, Allergan has not exercised the Purchase
Option.
If the Purchase Option is exercised, the exercise price will be the
greatest of:
(a) (i) 25 times the aggregate of (1) all worldwide payments with
respect to all Licensed Products, Developed Technology Products and
Pre-Selection Products for the four calendar quarters immediately
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Allergan Specialty Therapeutics, Inc.
Notes to Condensed Financial Statements (Continued)
2. Arrangements with Allergan, Inc. (continued)
preceding the quarter in which the Purchase Option is exercised (Base
Period) and (2) all payments that would have been made and all payments
due to be made by Allergan to ASTI during the Base Period if Allergan
had not previously exercised its payment buy-out option with respect to
any product; provided, however, that, for the purposes of the foregoing
calculation, for any product which has not been commercially sold during
each of the four calendar quarters in the Base Period, Allergan will be
deemed to have made Product Payments, Developed Technology Royalties and
Pre-Selection Product Payments to ASTI for each such quarter equal to
the average of the payments made during each of such calendar quarters
during which such product was commercially sold, less (ii) any amounts
previously paid to exercise any payment buy-out option for any product;
(b) the fair market value of 500,000 shares of Allergan Common
Stock determined as the average of the closing sales price of Allergan
Common Stock on the New York Stock Exchange for the 20 trading days
ending with the trading day that is two trading days prior to the date
of determination;
(c) $250 million less the aggregate amount of all technology fee
payments and research and development costs paid or incurred by ASTI as
of the date the Purchase Option is exercised; or
(d) $60 million.
In each case, the amount payable as the Purchase Option Exercise Price
will be reduced to the extent, if any, that ASTI's liabilities at the
time of exercise (other than liabilities under the R&D Agreement,
Services Agreement and the Technology Agreement) exceed ASTI's cash and
cash equivalents and short-term and long-term investments (excluding the
amount of Available Funds remaining at such time). Allergan must pay the
Purchase Option Exercise Price in cash.
ASTI and Allergan have entered into a Services Agreement pursuant to
which Allergan has agreed to provide ASTI with administrative services,
including accounting and legal services on a fully-burdened cost
reimbursement basis. The Services Agreement expires on December 31, 1998
and will be renewed automatically for successive one year periods during
the term of the R&D Agreement. ASTI may terminate the Services Agreement
at any time upon 60 days written notice.
3. New Accounting Standards
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was
issued. SFAS No. 130 established standards for reporting comprehensive
income and its components. Other comprehensive income for the quarter
ended September 30, 1998 is comprised of unrealized gain on investments
of $1,641,000. Other comprehensive income for the
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Allergan Specialty Therapeutics, Inc.
Notes to Condensed Financial Statements (Continued)
3. New Accounting Standards (continued)
period from commencement of operations through September 30, 1998 is
comprised of unrealized gain on investments of $1,496,000. Total
comprehensive loss for the quarter ended September 30, 1998 and for the
period from commencement of operations to September 30, 1998 was
$6,578,000 and $24,165,000, respectively.
4. During the quarter ended September 30, 1998, ASTI's Board of Directors
approved a plan to fund Pre-Selection Work for androgen tears, which is
being investigated for the treatment of dry eye, and certain research
aimed at diseases of the retina.
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ALLERGAN SPECIALTY THERAPEUTICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 1998
This Quarterly Report on Form 10-Q may contain certain projections, estimates
and other forward-looking statements that involve a number of risks and
uncertainties. While this outlook represents management's current judgment on
the future direction of the business, such risks and uncertainties could cause
actual results to differ materially from any future performance suggested below.
The Company undertakes no obligation to release publicly the results of any
revisions to these forward-looking statements to reflect events or circumstances
arising after the date hereof.
The following should be read in conjunction with "--Risks and Uncertainties"
below and the Company's Financial Statements and notes thereto in Item 1 above.
RESULTS OF OPERATIONS
- ---------------------
Net interest and investment income earned on investment funds, were $2,504,000
for the quarter ended September 30, 1998 and $6,012,000 for the period from
ASTI's commencement of operations, March 10, 1998, through September 30, 1998.
Interest income was earned during the period from March 10, the date Allergan
contributed $200 million to ASTI, and September 30, 1998. In the future, as
ASTI's funds are used pursuant to the R&D Agreement and to pay the Technology
Fee pursuant to the Technology Agreement, lower cash balances will be available
for investment and therefore interest and investment income is expected to
decrease.
In July 1998, Allergan entered into a multi-year research and development
collaboration with Parke-Davis Pharmaceutical Research Division of
Warner-Lambert Company to identify, develop and commercialize up to two RXR
subtype selective retinoid compounds for the treatment of metabolic diseases,
including adult onset diabetes, insulin resistant syndromes and dyslipidemias
(Collaboration Agreement). The technologies involved in the collaboration were
previously licensed by ASTI from Allergan pursuant to the Technology Agreement.
As a result, ASTI is entitled to receive Pre-Selection Product Payments
representing ten percent of the potential $104 million in technology access fees
and development milestones to be received by Allergan pursuant to Allergan's
agreement with Warner-Lambert. Through September 30, 1998, $500,000 of
Pre-Selection Payments was earned by ASTI. In addition, ASTI is entitled to
royalties on net sales of developed products, depending on actual lead compound
selection and sales results. In accordance with a letter agreement with
Allergan, ASTI is required to use all of the received funds other than royalty
payments for further research and development.
Research and development expenses were $8,626,000 for the quarter ended
September 30, 1998. Research and development expenses were $24,754,000 during
the period from commencement of operations through September 30, 1998 which
includes reimbursement for services performed during the period from October 24,
1997 through March 9, 1998. During the quarter, ASTI's Board of Directors
approved work plans and cost estimates presented by Allergan in accordance with
the R&D Agreement for the remainder of the 1998
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Allergan Specialty Therapeutics, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 1998 (Continued)
RESULTS OF OPERATIONS (Continued)
- ---------------------------------
calendar year. The approved work plans and cost estimates are similar to the
estimates provided in ASTI's prospectus dated March 6, 1998. ASTI paid
technology fees of $2,500,000 to Allergan during the quarter ended September 30,
1998. ASTI paid technology fees of $9,355,000 for the period from commencement
of operations to September 30, 1998 which includes technology fees incurred
during the period from October 24, 1997 through March 9, 1998.
General and administrative expenses for the quarter ended September 30, 1998 and
for the period from commencement of operations through September 30, 1998 were
not material. It is anticipated that such expenses will increase in future
reporting periods, particularly with respect to expenses under the Services
Agreement pursuant to which Allergan has agreed to provide ASTI with
administrative services, including accounting and legal services, on a
fully-burdened cost reimbursement basis.
In its early years, the results of operations of ASTI are expected to reflect
primarily interest and investment income on the funds contributed by Allergan,
and research and development expenses related to development of ASTI Products
and the Technology Fee. ASTI's net loss for the quarter ended September 30, 1998
was $8,219,000 or $(2.51) per share. ASTI's net loss for the period from
commencement of operations through September 30, 1998 was $25,661,000 or $(7.84)
per share. ASTI is expected to continue to record significant net losses in
future periods, as expenses under its agreements with Allergan are expected to
continue to exceed investment income.
Provision for taxes was $938,000 for the quarter ended September 30, 1998.
Provision for taxes for the period from commencement of operations to September
30, 1998 was $1,860,000. ASTI expects to have taxable income as a result of the
requirement to capitalize technology fees and its likely election to capitalize
research and development expenses for tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
On March 9, 1998, Allergan contributed $200 million in cash to ASTI in exchange
for all of the issued and outstanding shares of callable Class A Common Stock of
ASTI. On March 10, 1998, Allergan distributed the Class A shares to holders of
Allergan common stock and ASTI commenced operations. The funds contributed by
Allergan, plus investment income earned thereon, will be used primarily to fund
the development of ASTI Products and to conduct related activities. Funds not
immediately required for development activities will be invested in low-risk
securities.
At September 30, 1998, ASTI had cash on hand of approximately $51,000. The
Company invests its excess cash in money market funds, equity securities and
debt instruments of financial institutions and corporations with strong credit
ratings. The Company has established guidelines with respect to the
diversification and maturities in order to maintain safety and liquidity.
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Allergan Specialty Therapeutics, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 1998 (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
- -------------------------------------------
At September 30, 1998, ASTI had $171,924,000 in investments. ASTI classifies all
investments as available-for-sale securities with net unrealized holding gains
or losses as a component of other comprehensive income. ASTI liquidates
investments to pay for operating expenses as needed.
Based on anticipated spending levels for the continued development of all the
current ASTI Products, it is expected that ASTI's funds for product development
will be exhausted during the next few years. At that time, product development
funding by ASTI will cease. However, several factors could impact the level and
timing of ASTI funding, including the addition of any new ASTI Products, the
discontinuation of the development of any ASTI Products, any commercial
arrangements between Allergan and other companies which would cause Allergan to
exercise its License Option with respect to any ASTI Product, any change in the
number of projects advancing to or continuing in later stages of development or
any adjustments in the rate of spending on products currently in development.
When ASTI's Available Funds (as defined in the R&D Agreement) is below $15
million, certain events will be triggered. First, Allergan's Purchase Option
with respect to all of the ASTI Class A Common Stock will terminate on the 90th
day after ASTI provides Allergan with a statement that, as of the end of any
calendar month, there are less than $15 million of Available Funds remaining.
Such statement will be accompanied by a report of ASTI's independent auditors.
In addition, Allergan has the right, for 30 days after expiration of the
Purchase Option, to license any or all ASTI Products which have not yet been
licensed, on a product-by-product and country-by-country basis. Allergan is
under no obligation to exercise the Purchase Option or the License Option with
respect to any ASTI Product. In the event that Allergan does not exercise the
Purchase Option or the License Option for all ASTI Products after ASTI's cash
available for product development is exhausted, ASTI will not have funds to
continue or complete development of any remaining products.
YEAR 2000 COMPLIANCE
- --------------------
Most businesses, including the Company, are faced with a potentially serious
threat to their operations, known as the "year 2000 issue" which has been widely
publicized. The year 2000 issue is a general term used to describe the various
problems arising from the inability of computers to properly identify the year
associated with information. This problem could potentially cause system
interruptions or failures or result in systems providing incorrect data. The
effect of the year 2000 issue could impact the performance of operations within
the Company as well as the Company's relationships with third parties, including
vendors and customers who could also experience year 2000 compliance issues.
ASTI understands the importance of identifying and addressing Year 2000
compliance issues and places a high priority on the project. However, inasmuch
as ASTI relies almost entirely upon Allergan's operating and accounting systems,
ASTI relies upon Allergan's efforts to ensure that its systems will be Year 2000
compliant. Allergan has formed a Year 2000 task
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Allergan Specialty Therapeutics, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 1998 (Continued)
YEAR 2000 COMPLIANCE (Continued)
- --------------------------------
force (the "Y2K Task Force") which will include an ASTI officer as a member. The
Y2K Task Force is assessing internal operations and the operations of
significant suppliers, vendors, and other providers of goods and services.
Although the certification process is not yet complete, it has begun and, based
on the findings to date, Allergan has indicated that its Y2K Task Force
currently believes Allergan's operating and accounting systems will be Year 2000
compliant without material impact on the financial position, results of
operations or cash flows of either Allergan or ASTI. However, given that
Allergan cannot control or thoroughly assess the compliance of its third party
suppliers, vendors, providers of goods and services, or governmental agencies
with which it interacts or upon which it relies, no assurance can be made that
Allergan, and in turn, ASTI, will not be affected by the inability of some
computer systems and programs to properly process the year 2000 and beyond.
ASTI has not incurred expenses to date to promote or ensure Year 2000
compliance. ASTI has not yet estimated its future costs to remedy any Year 2000
issues but does not anticipate that any future expenses would be material to
ASTI's financial position, results of operations or cash flows.
In the event that Allergan's operating and accounting systems are not Year 2000
compliant or if any of Allergan's significant suppliers, vendors, other
providers of goods or services, or governmental agencies with which it interacts
or upon which it relies, are not Year 2000 compliant, ASTI's financial condition
and/or results of operations could be materially adversely affected. ASTI has
not yet prepared any contingency plans in the event of a problem relating to the
Year 2000 issue. Once the Y2K Task Force completes its contingency plans, ASTI
will determine whether additional contingencies are necessary.
RISKS AND UNCERTAINTIES
- -----------------------
NEW COMPANY. ASTI is a newly formed company and is subject to the risks inherent
in the establishment of a new business enterprise in the biotechnology industry.
ASTI will incur substantial losses for several years due to the long-term nature
of the research and development of pharmaceutical products through clinical
testing and the regulatory process, which losses may never be recovered.
NO ASSURANCE OF CONTINUED RESEARCH OR DEVELOPMENT OF ASTI PRODUCTS. There can be
no assurance that the ASTI Board of Directors will continue the funding of the
research and development of the initial ASTI Products, or that any ASTI Products
can be successfully researched, developed and/or commercialized within the
anticipated cost estimates or time frames, if at all. Certain of the ASTI
Products are at critical stages of research and development, and technical and
clinical outcomes are impossible to predict. Because of the long-range nature of
any pharmaceutical product research and development plan, research and
development of a particular product or products could accelerate, slow down or
be discontinued, and other unforeseen events could occur, all of which would
significantly affect the
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Allergan Specialty Therapeutics, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 1998 (Continued)
RISKS AND UNCERTAINTIES (Continued)
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timing and amount of ASTI's expenditures on a particular product, or in total.
As a result, estimates of costs and timing of research and development programs
and for the use of Available Funds may not be accurate. There can be no
assurance that Allergan will recommend, or that ASTI will approve, additional
products for research and development as ASTI Products beyond the initial ASTI
Products.
Although ASTI has received from Allergan a license to use Allergan Technology
for the purpose of researching, developing and commercializing ASTI Products,
some or all of the ASTI Products may require new technologies or enhancements or
modifications to existing Allergan Technology, and there can be no assurance
that such technology can or will be successfully developed or acquired. Even if
appropriate technology is available or developed, there can be no assurance that
such ASTI Products will be successfully researched or developed (or be
researched or developed in a timely fashion) or be proven to be safe and
efficacious in clinical trials.
NEED FOR REGULATORY CLEARANCE. All ASTI Products, Developed Technology Products
and Pre-Selection Products will require FDA clearance before such products may
be lawfully marketed in the United States. Applications for FDA clearance must
be based on costly and extensive clinical trials designed to demonstrate safety
and efficacy. Clearance to market such products will also be required from
corresponding regulatory authorities in foreign countries before such products
may be marketed in those countries. Such clearance often involves pricing and
reimbursement approvals in addition to clearance based on safety and efficacy.
Delay in obtaining FDA and/or foreign regulatory clearance or pricing or
reimbursement approvals for any such product may have a material adverse effect
on the commercial success of such product. There can be no assurance that the
necessary regulatory clearances and approvals will be obtained in a timely
fashion or, if obtained, that such clearances and approvals will not be revoked
or withdrawn.
NO ASSURANCE OF SUFFICIENCY OF FUNDS OR AVAILABILITY OF ADDITIONAL FUNDS.
Allergan has contributed $200 million in cash to ASTI. Allergan has no
obligation to contribute additional funds to ASTI, and has no present intention
to do so. It is anticipated that if ASTI were to fund the continued research and
development of the initial ASTI Products through FDA review for marketing
clearance, the funding of these activities, together with any Pre-Selection Work
undertaken by Allergan and/or ASTI and funded by ASTI, would require
substantially all of the Available Funds. There can be no assurance that ASTI
will have sufficient funds to complete the research and development of any or
all of the ASTI Products, including the four initial ASTI Products.
Allergan's rights under the Allergan/ASTI Agreements may limit ASTI's ability to
raise funds, or may prevent ASTI from doing so, if ASTI needs additional funds
to continue or complete research and development of any ASTI Product. If ASTI
were to attempt to raise funds following the expiration of the Purchase Option,
ASTI would have very little cash, few assets and an undeterminable number of
products under research and
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Allergan Specialty Therapeutics, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 1998 (Continued)
RISKS AND UNCERTAINTIES (Continued)
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development. Allergan would at that time have the unilateral option to license
any or all ASTI Products for such countries for which Allergan's License Option
had not previously expired. Third parties might therefore be reluctant to lend
money to ASTI, or to invest in ASTI.
NO ASSURANCE OF SUCCESSFUL MANUFACTURING OR MARKETING. Even if ASTI Products are
developed and receive necessary regulatory clearances and approvals, there can
be no assurance that the ASTI Products will be successfully manufactured for
clinical trials or successfully manufactured or marketed for commercial sale. To
be successfully marketed, any ASTI Product must be manufactured in commercial
quantities in compliance with regulatory requirements and at an acceptable cost.
Any significant delays in the completion of validation and licensing of expanded
or new facilities could have a material adverse effect on the ability to
continue clinical trials of and ultimately to market ASTI Products on a timely
and profitable basis. If Allergan does not exercise its License Option for an
ASTI Product (and does not exercise the Purchase Option), ASTI will have to make
alternative arrangements for manufacturing that ASTI Product, and there can be
no assurance that ASTI will be able to do so.
If Allergan exercises its License Option for any ASTI Product, Allergan may need
to develop and/or expand its marketing capabilities to commercialize such
Licensed Product effectively. If Allergan exercises its License Option for any
ASTI Product, and does not at the time the product is to be commercialized have
a sales force in the relevant country or countries, Allergan will need to
arrange for marketing by third parties outside of the United States, and, if the
product is not within Allergan's target markets at such time, within the United
States. If Allergan does not exercise its License Option for an ASTI Product
(and does not exercise the Purchase Option), ASTI will need to find other means
to commercialize that ASTI Product not involving Allergan, and there can be no
assurance that ASTI will be able to do so.
At the present time, ASTI does not have, nor, through the development stage of
the ASTI Products, does it expect to develop, any manufacturing or marketing
capability. If ASTI decides to manufacture or market one or more ASTI Products
itself, ASTI will need substantial additional funds. There is no assurance that
additional funds will be available, or will be available on attractive terms,
and Allergan has no obligation to supply any additional funds to ASTI. In
addition, ASTI may not use Available Funds for this purpose without Allergan's
consent.
If either Allergan or ASTI seeks a third party to manufacture or market an ASTI
Product, there can be no assurance that satisfactory arrangements can be
successfully negotiated or that any such arrangements will be on commercial
terms acceptable to Allergan or ASTI. In addition, even if ASTI decides to
license any ASTI Product to a third party, agreements with that third party, if
available, may be on terms less favorable to ASTI than the terms of the
Allergan/ASTI Agreements.
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Allergan Specialty Therapeutics, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 1998 (Continued)
RISKS AND UNCERTAINTIES (Continued)
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Even if acceptable manufacturing and marketing resources are available, there
can be no assurance that any ASTI Products will be accepted in the marketplace.
There can be no assurance that there will be adequate reimbursement by health
insurance companies or other third party payors for any ASTI Products that are
marketed.
NO ASSURANCE OF EXERCISE OF ALLERGAN'S OPTIONS. Allergan is not obligated to
exercise the License Option for any ASTI Product or to exercise the Purchase
Option, and Allergan will exercise any such option only if it is in Allergan's
best interest to do so. The timing of the exercise of the Purchase Option is
within Allergan's sole discretion, and Allergan may choose to exercise the
Purchase Option at a time when the Purchase Option Exercise Price is as low as
possible. Because the contractual relationship between Allergan and ASTI
contemplates that Allergan will perform research and development activities on
behalf of ASTI, in the event of Allergan's failure to exercise the Purchase
Option, ASTI would be required to seek alternative research and development
facilities, either independently or with a third party. There can be no
assurance that ASTI would be able to obtain access to adequate research and
development facilities in such event on a timely basis, on acceptable terms, or
at all. The timing of the exercise of the License Option with respect to any
Licensed Product is also within Allergan's sole discretion and thereafter
research, development and funding of any such product will be controlled by
Allergan.
RELIANCE ON PROPRIETARY TECHNOLOGIES; UNPREDICTABILITY OF PATENT PROTECTION.
Patent protection generally has been important in the pharmaceutical industry.
Therefore, ASTI's financial success may depend in part upon Allergan obtaining
strong patent protection for the technologies incorporated in ASTI Products.
Allergan will determine which patent applications to pursue, and the expense of
obtaining and maintaining patents covering Developed Technology will be shared
equally by Allergan and ASTI during the terms of the Research and Development
Agreement.
However, there can be no assurance that patents will be issued covering any
products, or that any existing patents or patents issued in the future will be
of commercial benefit. In addition, it is impossible to anticipate the breadth
or degree of protection that any such patents will afford, and there can be no
assurance that any such patents will not be successfully challenged in the
future. If Allergan is unsuccessful in obtaining or preserving patent
protection, or if any products rely on unpatented proprietary technology, there
can be no assurance that others will not commercialize products substantially
identical to such products.
Patents have been issued to third parties covering various therapeutic agents,
products and technologies. There can be no assurance that any ASTI Products,
Developed Technology Products or Pre-Selection Products will not infringe
patents held by third parties. In such event, licenses from such third parties
would be required, or their patents would have to be designed around. There can
be no assurance that such licenses would be available or that they would be
available on commercially attractive terms, or that any necessary redesign could
be successfully completed.
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Allergan Specialty Therapeutics, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 1998 (Continued)
RISKS AND UNCERTAINTIES (Continued)
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Allergan licenses certain intellectual property from third parties which it will
sublicense to ASTI pursuant to the Technology License Agreement. Specifically,
Allergan has licensed certain rights to its retinoid technology from Allergan
Ligand Retinoid Therapeutics, Inc. (ALRT) and certain rights to the technology
underlying Memantine from Children's Medical Center Corporation and Merz + Co.
GmbH & Co. ("Merz"). Under the terms of certain of its license agreements,
Allergan may be obligated to exercise diligence and make certain royalty and
milestone payments as well as incur costs related to filing and prosecuting the
underlying patents. Each agreement is terminable by either party upon notice if
the other party defaults in its obligations. Should Allergan default under any
of its agreements, Allergan and therefore ASTI may lose its right to market and
sell products based upon such licensed technology. In addition, there can be no
assurance that Allergan's licensors will meet their obligations to Allergan
pursuant to such licenses. In such event, ASTI's results of operations and
business prospects would be materially and adversely affected.
COMPETITION. ASTI Products, Developed Technology Products and Pre-Selection
Products are likely to face competition from other therapies for the same
indications. Competitors potentially include any of the world's pharmaceutical
and biotechnology companies. Many pharmaceutical companies have greater
financial resources, technical staffs and manufacturing and marketing
capabilities than Allergan or ASTI. A number of companies have developed and are
developing competing technologies and products. To the extent that ASTI
Products, Developed Technology Products and Pre-Selection Products incorporate
therapeutic agents that are off-patent or therapeutic agents marketed by
multiple companies, such products will face more competition than products
incorporating proprietary therapeutic agents.
The fundamental technology underlying retinoids licensed to ASTI is also
cross-licensed to Ligand Pharmaceuticals Incorporated (Ligand) and therefore
competition from similar activities by Ligand and its collaborators in retinoids
is likely. In addition, pursuant to an agreement between Allergan and Ligand,
each party has been granted non-exclusive rights to use any unsynthesized
compounds developed by ALRT provided that such license will become exclusive
with respect to any compound for which an IND is filed with and accepted by the
FDA. Accordingly, no assurance can be given that Ligand will not be the first
party to file an IND with respect to any retinoid compound under research by
ASTI, thereby preventing ASTI and Allergan from undertaking any further
research, development or commercialization with respect to such compound.
POTENTIAL CONFLICTS OF INTEREST BETWEEN ALLERGAN AND ASTI. Because Allergan may
develop and/or market products (including Developed Technology Products and
Pre-Selection Products) for its own account, independent of ASTI, that compete
directly with ASTI Products, Allergan and ASTI may have conflicting interests
with respect to certain products and/or certain markets. In addition, ASTI
Products, Developed Technology Products and Pre-Selection Products may compete
with one another. Allergan Technology excludes, and ASTI will have no rights
with respect to, any topical formulation of Tazarotene. Allergan is currently
marketing a topical
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Allergan Specialty Therapeutics, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 1998 (Continued)
RISKS AND UNCERTAINTIES (Continued)
- -----------------------------------
formulation of Tazarotene for the treatment of psoriasis and acne in the United
States under the brand name "Tazorac" and outside of the United States under the
brand name "Zorac".
DEPENDENCE ON ALLERGAN FOR PERSONNEL AND FACILITIES. ASTI will depend
substantially on Allergan for research and development activities to be
performed under the Research and Development Agreement. Although ASTI may
perform directly, or engage other third parties to perform on its behalf, some
of these activities, it is likely that Allergan will be responsible for
executing substantially all of ASTI's research and development activities. While
Allergan believes that its current and planned personnel and facilities will be
adequate for the performance of its duties under the R&D Agreement, such
personnel will perform services in the same facilities for Allergan itself.
Subject to Allergan's obligation to use diligent efforts under the R&D
Agreement, Allergan may allocate its personnel and facilities as it deems
appropriate. Allergan's own research and development activities may restrict the
resources that otherwise would be available for performing Allergan's duties
under the Research and Development Agreement.
RELATIONSHIP BETWEEN ASTI AND ALLERGAN MAY LIMIT ASTI'S ACTIVITIES AND MARKET
VALUE. The terms of the Allergan/ASTI Agreements and ASTI's Restated Certificate
of Incorporation were not determined on an arm's-length basis and certain terms
may limit ASTI's activities and its market value.
ASTI's Restated Certificate of Incorporation prohibits ASTI from taking or
permitting any action that might impair Allergan's rights under the Purchase
Option. Prior to the expiration of the Purchase Option, ASTI may not, without
the consent of the holders of ASTI Class B Common Stock, merge or liquidate, or
sell, lease, exchange, transfer or dispose of any substantial assets, or amend
its Restated Certificate of Incorporation to alter the Purchase Option, ASTI's
authorized capitalization, or the provisions of the Restated Certificate of
Incorporation governing ASTI's Board of Directors. Because Allergan owns all of
the outstanding Class B Common Stock, Allergan is able to influence
significantly or control the outcome of any of the foregoing actions requiring
approval by the Class B stockholders of ASTI. The ability of Allergan to
significantly influence or control such matters, together with the provisions of
ASTI's Restated Certificate of Incorporation eliminating the right of the ASTI
stockholders to call special meetings of stockholders, could affect the
liquidity of the ASTI Shares and have an adverse effect on the price of the ASTI
Shares, and may have the effect of delaying or preventing a change in control of
ASTI, including transactions in which stockholders might otherwise receive a
premium for their shares over the current market price. Neither the terms of the
ASTI/Allergan Agreements nor ASTI's Restated Certificate of Incorporation
prohibit Allergan from transferring its ASTI Class B Common Stock. The special
rights accorded to the holder or holders of the ASTI Class B Common Stock will
expire upon expiration of the Purchase Option.
So long as the Purchase Option is exercisable, the market value of the ASTI
Shares will be limited by the Purchase Option Exercise Price. The Purchase
Option Exercise Price was determined by Allergan, giving consideration to
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Allergan Specialty Therapeutics, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 1998 (Continued)
RISKS AND UNCERTAINTIES (Continued)
- -----------------------------------
the structure of the Distribution, ASTI's planned business, the Allergan/ASTI
Agreements, advice given by Merrill Lynch, Pierce, Fenner & Smith Incorporated,
and such other factors as Allergan deemed appropriate.
The Purchase Option Exercise Price was not determined on an arm's-length basis.
The existence of the Purchase Option and Allergan's rights as holder of the ASTI
Class B Common Stock may inhibit ASTI's ability to raise capital. Additional
capital raised by ASTI, if any, would most likely reduce the per share proceeds
available to holders of ASTI Shares if the Purchase Option were exercised. The
existence of the Purchase Option and Allergan's rights as the holder of the ASTI
Class B Common Stock may inhibit a change of control and may make an investment
in ASTI Shares less attractive to certain potential stockholders, which could
adversely affect the liquidity and market value of ASTI Shares.
If Allergan exercises its License Option for any ASTI Product, Allergan will
have the right to commercialize the product with third parties on such terms as
Allergan deems appropriate. In such event, payments from Allergan to ASTI with
respect to the ASTI Product will be based solely on Sublicensing Revenues
received from such third parties.
LIMITATION ON ASTI'S ABILITY TO LICENSE PRODUCTS TO THIRD PARTIES. ASTI has
granted Allergan the License Option, which is exercisable on a
product-by-product and country-by-country basis. During the term of the License
Option for each ASTI Product, ASTI will not be able to license such ASTI Product
to any party other than Allergan. Furthermore, ASTI may perform research with
respect to product candidates which become ASTI Products only if recommended by
Allergan and accepted by ASTI. In particular, it is expected that Allergan will
perform Pre-Selection Work with respect to various product candidates. If such
product candidates do not become ASTI Products, ASTI will have no rights with
respect thereto except the right to receive limited royalties from Allergan on
commercial sales of such products, if any.
POSSIBLE DILUTION; REDUCTION OF PER SHARE PURCHASE OPTION EXERCISE PRICE. All
ASTI Shares issued by ASTI after the Distribution will be subject to the
Purchase Option, and the Purchase Option Exercise Price will not increase as a
result of any such issuance. Accordingly, if additional ASTI Shares were to be
issued, the percentage of the Purchase Option Exercise Price payable with
respect to each ASTI Share in the event Allergan exercises the Purchase Option
would be reduced. Liabilities, including any debt issued by ASTI, but excluding
any accounts payable to Allergan, will reduce the Purchase Option Exercise Price
to the extent that such liabilities exceed ASTI's cash, cash equivalents, and
short-term and long-term investments (excluding Available Funds), unless repaid
or discharged by ASTI prior to exercise of the Purchase Option.
NO DIVIDENDS. ASTI's Restated Certificate of Incorporation prohibits the payment
of dividends from Available Funds.
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Allergan Specialty Therapeutics, Inc.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- Exhibits
(numbered in accordance with Item 601 of Regulation S-K)
10.1 Letter agreement by and between Allergan, Inc. and
Allergan Specialty Therapeutics, Inc.
27.1 Financial Data Schedule
- Reports on Form 8-K.
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SIGNATURE
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.
Date: November 9, 1998 ALLERGAN SPECIALTY THERAPEUTICS, INC.
----------------
/s/ Dwight J. Yoder
-------------------------------
Dwight J. Yoder
Chief Financial Officer
and Duly Authorized Officer
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EXHIBIT INDEX
EXHIBITS Numbered in accordance with Item 601 of Regulation S-K
10.1 Letter agreement by and between Allergan, Inc. and
Allergan Specialty Therapeutics, Inc.
27.1 Financial Data Schedule