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, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to ___________.
Commission File Number 0-21863
EPIX MEDICAL, INC.
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(Exact name of Registrant as Specified in its Charter)
DELAWARE
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(State or other jurisdiction of
incorporation or organization)
04-3030815
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(I.R.S. Employer Identification No.)
71 ROGERS STREET
CAMBRIDGE, MASSACHUSETTS
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(Address of principal executive offices)
02142
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(Zip Code)
Registrant's telephone number, including area code: (617) 250-6000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section
12(g) of the Act:
Common Stock, $.01 Par Value Per Share
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(Title of Class)
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| |
As of November 3, 2000, 13,129,721 shares of the registrant's Common Stock,
$.01 par value per share, were issued and outstanding.
EPIX MEDICAL, INC.
INDEX
PAGE
NUMBER
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets--September 30, 2000 and December 31, 1999 3
Condensed Statements of Operations--Three and Nine Months Ended September 30, 2000 and 1999 4
Condensed Statements of Cash Flows--Nine Months Ended September 30, 2000 and 1999 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
2
EPIX MEDICAL, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------------- ---------------------
Assets:
Current assets:
Cash and cash equivalents $ 3,965,206 $ 430,124
Available-for-sale marketable securities 25,308,773 13,709,980
Prepaid expenses and other current assets 1,082,836 1,214,929
-------------------- ---------------------
Total current assets 30,356,815 15,355,033
Property and equipment, net 1,353,926 2,058,282
Notes receivable from officer - 356,159
Other assets 134,860 116,109
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Total assets $ 31,845,601 $17,885,583
==================== =====================
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable and accrued expenses $5,202,148 $3,753,836
Contract advances 2,748,987 308,955
Current portion of capital lease obligations 283,078 379,911
Current portion of note payable 438,946 397,864
Current portion of loan payable 1,805,501 -
-------------------- ---------------------
Total current liabilities 10,478,660 4,840,566
Capital lease obligations, less current portion 114,431 323,748
Note payable, less current portion 39,241 373,783
Loan payable, less current portion 2,797,646 1,583,557
Stockholders' equity:
Common stock, $.01 par value, 40,000,000 shares authorized;
13,114,512 and 11,680,315 shares issued and outstanding at
September 30, 2000 and December 31, 1999, respectively 131,145 116,803
Additional paid-in capital 78,985,827 56,520,680
Stock subscription receivable (757,898) -
Loans to stock option holders (207,109) (387,430)
Accumulated deficit (59,709,239) (45,398,477)
Other comprehensive loss (27,103) (87,647)
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Total stockholders' equity 18,415,623 10,763,929
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Total liabilities and stockholders' equity $ 31,845,601 $17,885,583
==================== =====================
See accompanying notes to condensed financial statements.
3
EPIX MEDICAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
-------------------- -------------------- -------------------- --------------------
Revenues $ 1,635,827 $ 70,480 $ 4,781,957 $ 624,299
Operating expenses:
Research and development 5,535,849 3,785,555 16,043,125 10,503,522
General and administrative 1,041,168 1,106,759 3,522,892 3,238,801
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-------------------- -------------------- --------------------
Total operating expenses 6,577,017 4,892,314 19,566,017 13,742,323
-------------------- -------------------- -------------------- --------------------
Operating loss (4,941,190) (4,821,834) (14,784,060) (13,118,024)
Interest income 505,951 265,437 817,317 952,170
Interest expense (144,521) (48,580) (344,019) (156,674)
-------------------- -------------------- -------------------- --------------------
Net loss $(4,579,760) $(4,604,977) $(14,310,762) $(12,322,528)
==================== ==================== ==================== ====================
Weighted average shares:
Basic and diluted 13,022,045 11,608,707 12,207,011 11,522,763
==================== ==================== ==================== ====================
Loss per common share:
Basic and diluted $(0.35) $(0.40) $(1.17) $(1.07)
==================== ==================== ==================== ====================
See accompanying notes to condensed financial statements.
4
EPIX MEDICAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
--------------------------- ----------------------------
Operating activities:
Net loss $(14,310,762) $(12,322,528)
Adjustments to reconcile net loss to cash used by operating
activities:
Depreciation and amortization 722,959 750,041
Stock compensation expense 98,945 98,956
Loss on sale of fixed assets 18,070
Interest income related to stock option loans (6,902) (9,313)
Change in operating assets and liabilities:
Prepaid expenses, other current assets, notes
receivable from officer and other assets 469,501 (3,474)
Contract advances 2,440,032 (476,544)
Accounts payable and accrued expenses 1,448,312 24,384
Receipt of cash from Schering AG for marketing rights 10,000,000 -
Disbursement of cash to Mallinckrodt for marketing
rights (10,000,000) -
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Net cash used by operating activities (9,137,915) (11,920,408)
Investing activities:
Purchase of fixed assets (18,603) (44,622)
Proceeds from sale of fixed assets - 45,000
Purchases of marketable securities (289,210,144) (158,976,542)
Proceeds from sales or redemptions of marketable securities 277,671,896 171,054,395
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Net cash (used) provided by investing activities (11,556,851) 12,078,231
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Financing activities:
Proceeds from collection of stock option loans and
related interest 394,331 -
Proceeds from issuance of loan payable 3,019,590 -
Repayment of capital lease obligations (306,150) (336,784)
Repayment of note payable (293,460) (257,424)
Proceeds from ESPP purchases 69,984 66,895
Proceeds from issuance of stock to Schering BV 20,000,000 -
Proceeds from exercise of stock options 1,345,553 76,642
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Net cash provided (used) by financing activities 24,229,848 (450,671)
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Increase (decrease) in cash and cash equivalents 3,535,082 (292,848)
Cash and cash equivalents at beginning of period 430,124 369,454
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Cash and cash equivalents at end of period $3,965,206 $ 76,606
=========================== ============================
Supplemental disclosure of noncash investing and financing
activities:
Fixed assets acquired through lease financing - $154,759
=========================== ============================
Issuance of stock option loans for exercise of stock options $207,109 $249,993
=========================== ============================
Stock subscription receivable $757,898 -
=========================== ============================
Supplemental cash flow information:
Cash paid for interest $255,630 $156,674
=========================== ============================
See accompanying notes to condensed financial statements.
5
EPIX MEDICAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and the instructions to Form 10-Q and the
rules of the Securities and Exchange Commission (the "Commission"). Accordingly,
they do not include all of the information and footnotes required to be
presented for complete financial statements. The accompanying condensed
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the results for the interim periods presented. Operating
results for the three and nine month periods ended September 30, 2000 are not
necessarily indicative of the results expected for the full fiscal year.
The condensed financial statements and related disclosures have been
prepared with the assumption that users of the interim financial statements have
read or have access to the audited financial statements for the preceding fiscal
year. Accordingly, these condensed financial statements should be read in
conjunction with the audited financial statements and the related notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1999.
2. SIGNIFICANT AGREEMENTS
In June 2000, the Company entered into a strategic collaboration agreement
pursuant to which the Company granted Schering AG an exclusive license to
co-develop and market MS-325 worldwide, exclusive of Japan. MS-325 is the
Company's cardiovascular magnetic resonance imaging agent formerly known by the
Mallinckrodt Inc. ("Mallinckrodt") product name AngioMARK. Generally, the
Company and Schering AG will share equally in MS-325 clinical development costs
and profits. Under the agreement, the Company will assume responsibility for
completing clinical trials and filing for Food and Drug Administration approval
in the United States and Schering AG will lead clinical activities for the
product outside the United States, excluding Japan. In addition, the Company
granted Schering AG an exclusive option to develop and market an unspecified
cardiovascular product from the Company's product pipeline. In connection with
this strategic collaboration agreement and in connection with the amendment to
the strategic collaboration agreement between the Company and Mallinckrodt, as
further described below, Schering AG paid the Company an up-front fee of $10
million, which the Company then paid to Mallinckrodt. Schering AG also made a
$20 million equity investment in the Company at $17.98 per share of common
stock, through its affiliate, Schering Berlin Venture Corporation ("Schering
BV"). The Company also may receive up to an additional $20 million in milestones
under this agreement. Also, under the agreement the Company has an option to
participate in the development and marketing of two of Schering AG's products
currently in clinical trials, SHU 555C and Gadomer-17.
Also in June 2000, the Company amended its strategic collaboration with
Mallinckrodt to grant Mallinckrodt a non-exclusive, worldwide license to
manufacture MS-325 for clinical development and commercial use. This amendment
was made in accordance with a manufacturing and supply agreement entered into in
June 2000 between Mallinckrodt and Schering AG, and enabled the Company to enter
into the collaboration agreement with Schering AG. In connection with this
amendment, the Company may pay Mallinckrodt up to $5 million in milestones. The
Company will also pay Mallinckrodt a share of MS-325 operating margins for sales
within the US and a royalty on MS-325 gross profits for sales outside the US.
As a result of the above noted agreements, Schering AG effectively
purchased the MS-325 marketing rights previously owned by Mallinckrodt. The $10
million payment from Schering AG to the Company was required to be paid by the
Company to Mallinckrodt. Since the Company paid the $10 million to Mallinckrodt
immediately subsequent to its receipt, the Company did not reflect the receipt
and the disbursement in its statement of operations. Such amounts are, however,
reflected in the Company's statement of cash flows for the nine months ended
September 30, 2000.
6
3. EQUITY FINANCING
In September 2000, the Company entered into an agreement with Acqua
Wellington North American Equities Fund, Ltd. ("Acqua Wellington") for an equity
financing facility covering the sale of up to $45 million of the Company's
common stock, over twenty-eight months. The shares to be issued to Acqua
Wellington pursuant to the financing facility were registered on a shelf
registration statement previously filed by the Company with the Securities and
Exchange Commission, covering the sale of up to three million shares of its
common stock. The shares may be sold, at the Company's discretion, at a small
discount to the market price at the time of sale. The total amount of the
investment is dependent, in part, on the Company's stock price, with the Company
controlling the amount and timing of stock sold.
The Company recorded $757,898 as a stock subscription receivable during
the quarter ended September 30, 2000. This amount represented the sale of
54,422 shares of the Company's common stock under the equity financing
facility through September 30, 2000. As of September 30, 2000, Acqua
Wellington had not yet transferred funds to pay for the 54,422 shares of the
Company's common stock. The Company sold an additional 6,439 shares of its
common stock to Acqua Wellington for $85,000 between October 1, 2000 and
October 3, 2000. On October 4, 2000, the Company received $842,898 in net
proceeds from Acqua Wellington, which included the $85,000 from the sale of
the 6,439 shares of common stock, as well as the $757,898 recorded as a stock
subscription receivable as of September 30, 2000. On October 18, 2000, an
additional $42,500 in net proceeds was received by the Company from the sale
of 3,229 shares of common stock to Acqua Wellington.
4. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income" ("SFAS 130") requires unrealized gains or losses on the
Company's available-for-sale securities to be included in other comprehensive
income (loss). The following table sets forth the computation of comprehensive
income (loss):
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------------- -----------------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---- ---- ---- ----
Net loss $(4,579,760) $(4,604,977) $(14,310,762) $(12,322,528)
Unrealized gain (loss) on available-for-sale
securities 25,422 (11,978) 60,544 (119,662)
-------------------- -------------------- -------------------- --------------------
Comprehensive loss $(4,554,338) $(4,616,955) $(14,250,218) $(12,442,190)
==================== ==================== ==================== ====================
5. EARNINGS (LOSS) PER SHARE
The Company computes earnings (loss) per share in accordance with the
provisions of SFAS No. 128, "Earnings per Share" and related interpretations and
amendments. Basic net earnings (loss) per share is based upon the
weighted-average number of common shares outstanding and excludes the effect of
potentially dilutive common stock issuable upon exercise of stock options. In
computing diluted earnings (loss) per share, only common shares that are
potentially dilutive, or reduce earnings per share, are included. The exercise
of options is not assumed if the result is antidilutive, such as when a loss
from continuing operations is reported.
6. LOAN PAYABLE
In October 1999, the Company entered into a Non-Negotiable Promissory Note
and Security Agreement (the "Loan") with Mallinckrodt pursuant to which the
Company was eligible to borrow up to $9.5 million from Mallinckrodt, on a
quarterly basis, to cover the Company's share of MS-325 development costs. The
Loan bears interest, adjustable on a quarterly basis, at the Prime Rate
published in the Wall Street Journal. The Company received the third installment
of $1,805,501 pursuant to the Loan during the quarter ended June 30, 2000. The
Loan balance at September 30, 2000 was $4,603,147. Pursuant to the Amended and
Restated Strategic Collaboration Agreement the Company entered into with
Mallinckrodt in June 2000 (See Note 2), the Company will not be entitled to
receive further funding under the Loan, and $1,805,501 is to be repaid to
Mallinckrodt during the fourth quarter of 2000. The remaining balance of the
Loan, $2,797,646, is to be repaid on October 1, 2002.
7
7. NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, as
amended, ("SAB 101") "Revenue Recognition in Financial Statements," which is
to be implemented by the Company no later than the fourth fiscal quarter of
fiscal years beginning after December 15, 1999. SAB 101 provides guidance on
revenue recognition and the SEC staff's views on the application of
accounting principles to selected revenue recognition issues. The Company is
presently analyzing the impact that the implementation of SAB 101 will have
on its financial condition or results of operations.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions
Involving Stock Compensation - an Interpretation of APB Opinion No. 25." FIN 44
is generally effective for transactions occurring after July 1, 2000 but applies
to repricings and certain other transactions after December 15, 1998. The
Company believes this interpretation will not have a significant effect on its
financial statements.
In June 1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The effective date of this statement was deferred to fiscal years
beginning after June 15, 2000 by SFAS No. 137 "Accounting for Derivative
Instruments and Hedging Activities - Deferral of Effective Date of SFAS No.
133." The Company believes the adoption of this new accounting standard will not
have a significant effect on its financial statements.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Since commencing operations in 1992, we have been engaged principally in the
research and development of our product candidates as well as seeking various
regulatory clearances and patent protection. We have had no revenues from
product sales and have incurred losses since inception through September 30,
2000 aggregating approximately $59.7 million. We have received revenues in
connection with various licensing and collaboration agreements. In August 1996,
we entered into a strategic alliance with Mallinckrodt pursuant to which we
received $6.0 million in up-front license fees. The agreement provided for an
additional $2.0 million milestone payment, which was received in July 1997. In
March 1996, we entered into a strategic alliance with Daiichi Radioisotope
Laboratories, Ltd. ("Daiichi"). Under this agreement, we received $3.0 million
in license fees and $5.0 million from the sale of shares of our preferred stock,
and were entitled to receive up to $3.3 million in future payments based upon
our achievement of certain product development milestones. We received $900,000
of such milestone payments in July 1997.
In June 2000, we completed the following strategic transactions:
o We entered into a strategic collaboration agreement pursuant to which we
granted Schering AG an exclusive license to co-develop and market MS-325
worldwide, exclusive of Japan. MS-325 is our cardiovascular magnetic
resonance imaging agent formerly known by the Mallinckrodt product name
AngioMARK. Generally, we and Schering AG will share equally in MS-325
clinical development costs and profits. Under the agreement, we will assume
responsibility for completing clinical trials and filing for Food and Drug
Administration approval in the United States and Schering AG will lead
clinical activities for the product outside the United States, excluding
Japan. In addition, we granted Schering AG an exclusive option to develop
and market an unspecified cardiovascular product from our product pipeline.
In connection with this strategic collaboration agreement and in connection
with the amendment to the strategic collaboration agreement between the
Company and Mallinckrodt, as further described below, Schering AG paid us
an up-front fee of $10 million, which we then paid to Mallinckrodt.
Schering AG also made a $20 million dollar equity investment in us at
$17.98 per share of common stock, through its affiliate, Schering BV. We
may receive up to an additional $20 million in milestones under this
agreement. Also, under the agreement, we will have an option to participate
in the development and marketing of two of Schering AG's products currently
in clinical trials, SHU 555C and Gadomer-17.
o In connection with the exclusive license that we granted to Schering AG, we
amended our strategic collaboration agreement with Mallinckrodt to grant
Mallinckrodt a non-exclusive, worldwide license to manufacture MS-325 for
clinical development and commercial use in accordance with a manufacturing
and supply agreement entered into between Mallinckrodt and Schering AG, and
to enable us to enter into the collaboration agreement with Schering AG. In
connection with this amendment, we may pay up to $5 million in milestones
to Mallinckrodt. We also will pay Mallinckrodt a share of MS-325 operating
margins for sale within the US and a royalty on MS-325 gross profits for
sales outside the US. In addition, we will reimburse Mallinckrodt for its
portion of clinical development costs incurred during 2000 and we will
prepay the portion of the Non-Negotiable Promissory Note and Security
Agreement related to 2000 expenses. We currently estimate the total of
these payments to be $3.3 million.
On May 8, 2000, we granted to Schering AG a worldwide, royalty-bearing license
to patents covering Schering AG's development project, Eovist injection, an MRI
contrast agent for imaging the liver, currently in Phase III clinical trials.
Schering AG had been an opposing party in our European patent case prior to the
licensing agreement. On May 9, 2000, the Opposition Division of the European
Patent Office maintained our European Patent in a slightly amended form. The
patent is owned by the Massachusetts General Hospital and is exclusively
licensed to us. The remaining opposing parties can elect to appeal the decision.
Also on May 8, 2000, Schering AG granted us a non-exclusive, royalty-bearing
license to certain of its Japanese patents. We have agreed to withdraw our
invalidation claim of Schering AG's Japanese patent 1,932,626 in the Japanese
Patent Office pursuant to this license agreement.
Our initial product candidate, MS-325, is currently our only product candidate
undergoing human clinical trials. We filed an investigational new drug
application for MS-325 in July 1996. We initiated a Phase I clinical trial in
1996 and a Phase I dose escalation study in 1997, both of which have been
completed. We completed a Phase II clinical trial in June 1998 to test the
safety and preliminary efficacy of MS-325-enhanced magnetic resonance
angiography ("MRA") for the evaluation of peripheral vascular disease and we are
currently conducting a Phase II feasibility trial to test the safety and
feasibility of MS-325-enhanced MRA for the evaluation of coronary artery
disease. In addition, in January 1998, we initiated a Phase II clinical trial to
test the safety and feasibility of MS-325 for detecting breast cancer.
Enrollment in this trial was completed in March 2000. In June 1999, we initiated
a Phase III clinical trial to determine the efficacy of MS-325-enhanced MRA for
the detection of aortoiliac occlusive disease.
We expect continued operating losses for the next several years as we incur
expenses to support research, development and efforts to obtain regulatory
approvals.
9
We anticipate fluctuation in our quarterly results of operations due to several
factors, including: the timing of fees and milestone payments received from and
paid to strategic partners; the formation of new strategic alliances; the timing
of expenditures in connection with research and development activities; the
timing of product introductions and associated launch, marketing and sales
activities; and the timing and extent of product acceptance for different
indications and geographical areas of the world.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES. Third quarter revenues were approximately $1.6 million and $70,000 in
2000 and 1999, respectively, and were derived from product development contracts
with Schering AG in the third quarter of 2000 and Mallinckrodt in the third
quarter of 1999. The increase in revenues during the third quarter of 2000 was
primarily due to the impact of the development funding terms under the
collaboration agreement with Schering AG.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for the
three months ended September 30, 2000 were $5.5 million as compared to $3.8
million for the three months ended September 30, 1999. The increased research
and development expenses were primarily due to the impact of development
funding terms under the collaboration agreement with Schering AG, higher
costs associated with advancing MS-325 through clinical trials and increased
costs for personnel and resources to support research and development of our
thrombus imaging program. These increased costs were partially offset by
lower manufacturing costs of material produced in connection with our
strategic alliance with Daiichi.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the
three months ended September 30, 2000 were $1.0 million as compared to $1.1
million for the corresponding period of 1999. The decrease was primarily due to
lower legal costs associated with on-going patent activities, partially offset
by higher costs related to corporate communications and marketing activities.
INTEREST INCOME AND EXPENSE. Interest income increased approximately $241,000 in
2000 as compared to 1999, mainly due to higher average levels of invested cash
and marketable securities during the third quarter of 2000. The increase in
interest expense of approximately $96,000 in 2000 was primarily the result of
the loan payable to Mallinckrodt.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES. Revenues for the nine months ended September 30, 2000 and September
30, 1999 were approximately $4.8 million and $624,000, respectively, and were
derived from product development contracts with Schering AG in 2000 and
Mallinckrodt in 1999. The increase in revenues during the nine months ended
September 30, 2000 was primarily due to the impact of the development funding
terms under the collaboration agreement with Schering AG.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for the
nine months ended September 30, 2000 were $16.0 million as compared to $10.5
million for the nine months ended September 30, 1999. The increased research and
development expenses were primarily due to the impact of development funding
terms under the collaboration agreement with Schering AG, as well as higher
costs associated with advancing MS-325 through clinical trials. Increased costs
for personnel and resources to support research and development of our thrombus
imaging program also contributed to the increase.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the
nine months ended September 30, 2000 were $3.5 million as compared to $3.2
million for the corresponding period of 1999. The increase was primarily due to
higher costs related to corporate communications and marketing activities,
partially offset by lower legal costs associated with on-going patent
activities.
INTEREST INCOME AND EXPENSE. Interest income decreased approximately $135,000 in
2000 as compared to 1999 mainly due to lower average levels of invested cash and
marketable securities during the nine months ended September 30, 2000. The
increase in interest expense of approximately $187,000 in 2000 was primarily the
result of the loan payable to Mallinckrodt.
10
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity consist of cash, cash equivalents and
marketable securities, which totaled $29.3 million at September 30, 2000, as
compared to $14.1 million at December 31, 1999.
In September 2000, we entered into an agreement with Acqua Wellington North
American Equities Fund, Ltd. ("Acqua Wellington") for an equity financing
facility covering the sale of up to $45 million of our common stock over
twenty-eight months. These shares may be sold, at our discretion, at a small
discount to the market price of our shares at the time of sale. The total amount
of investment is dependent, in part, on our stock price, with the amount and
timing of stock sold controlled by us. The funds raised in this equity financing
will be used to further enhance our development and discovery programs, as well
as for general research and corporate purposes.
In June 2000, in connection with the execution of the strategic collaboration
agreement between us and Schering AG, we entered into a stock purchase agreement
with Schering BV whereby we issued 1,112,075 shares of our common stock for a
total purchase price of $20.0 million, or $17.98 per share. In addition, in
connection with the stock purchase agreement, we entered into a Standstill
Agreement with Schering BV, pursuant to which Schering BV agreed not to sell or
otherwise dispose of the shares purchased except under certain conditions
enumerated in the Standstill Agreement. We may receive up to an additional $20
million in milestones under the strategic collaboration agreement. In connection
with the amended and restated strategic collaboration agreement with
Mallinckrodt, we may pay up to $5 million in milestones to Mallinckrodt.
In October 1999, we entered into a Non-Negotiable Promissory Note and Security
Agreement (the "Loan") with Mallinckrodt pursuant to which we were eligible to
borrow up to $9.5 million from Mallinckrodt, on a quarterly basis, to cover our
share of MS-325 development costs. The Loan bears interest, adjustable on a
quarterly basis, at the Prime Rate published in the Wall Street Journal. The
Loan balance at September 30, 2000 is $4,603,147. Pursuant to the Amended and
Restated Strategic Collaboration Agreement we entered into with Mallinckrodt in
June 2000, we will not be entitled to receive further funding under the Loan,
and $1,805,501 is to be repaid to Mallinckrodt during the fourth quarter of
2000. The remaining balance of the Loan is to be repaid on October 1, 2002.
We are eligible to receive additional payments of $2.4 million from Daiichi upon
the attainment of certain future MS-325 development milestones. Daiichi is
responsible for funding development of MS-325 in Japan.
During the nine months ended September 30, 2000, we used approximately $9.1
million of cash for operating activities. We expect that our cash needs for
operations will significantly increase in future periods due to planned clinical
trials and other expenses associated with the development of MS-325 and new
research and development programs.
We estimate that existing cash, cash equivalents and marketable securities,
as well as our equity financing facility with Acqua Wellington, will be
sufficient to fund our operations through the first quarter of 2004. We
believe that we will need to raise additional funds for research, development
and other expenses through equity or debt financing, strategic alliances or
otherwise, in order to achieve commercial introduction of any of our product
candidates. There can be no assurance that additional financing will be
available on terms acceptable to us, or at all. Our future liquidity and
capital requirements will depend on numerous factors, including the
following: the progress and scope of clinical trials; the timing and costs of
filing future regulatory submissions; the timing and costs required to
receive both United States and foreign governmental approvals; the cost of
filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights; the extent to which our products gain market
acceptance; the timing and costs of product introductions; the extent of our
ongoing research and development programs; the costs of training physicians
to become proficient with the use of our products; and, if necessary, once
regulatory approvals are received, the costs of developing marketing and
distribution capabilities.
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Because of anticipated spending to support development of MS-325 and new
research programs, we do not expect to generate positive cash flow from
operating activities for any future quarterly or annual period prior to
commercialization of MS-325. We anticipate continued investments in fixed
assets, including equipment and facilities expansion to support new and
continuing research and development programs. We have in place a lease agreement
that will enable us to utilize our current principal scientific facilities
through December 31, 2002, and we have an option to extend the lease for an
additional three or five years at 95% of the then market rate. We also have a
lease for nearby office space, which expires in December 2002.
We have incurred tax losses to date and therefore have not paid significant
federal or state income taxes since inception. At December 31, 1999, we had loss
carryforwards of approximately $42.7 million available to offset future taxable
income. These amounts expire at various times through 2014. As a result of
ownership changes resulting from sales of equity securities, our ability to use
the loss carryforwards is subject to limitations as defined in Sections 382 and
383 of the Internal Revenue Code of 1986, as amended (the "Code"). We currently
estimate that the annual limitation on our use of net operating losses through
May 31, 1996 will be approximately $900,000. Pursuant to Sections 382 and 383 of
the Code, the change in ownership resulting from public equity offerings in 1997
and any other future ownership changes may further limit utilization of losses
and credits in any one year. We also are eligible for research and development
tax credits that can be carried forward to offset federal taxable income. The
annual limitation and the timing of attaining profitability may result in the
expiration of net operating loss and tax credit carryforwards before
utilization.
We do not believe that inflation has had a material impact on our operations.
FORWARD-LOOKING STATEMENTS
The discussion included in this section as well as elsewhere in the Quarterly
Report on Form 10-Q contains forward-looking statements based on the current
expectations of our management. Such statements are subject to risks and
uncertainties which could cause actual results to differ materially from those
projected. See "Important Factors Regarding Forward-Looking Statements" attached
as Exhibit 99.1 and incorporated herein by reference to our Annual Report on
Form 10-K for the year ended December 31, 1999 as previously filed with the
Commission. Readers are cautioned not to place undue reliance on the
forward-looking statements which speak only as of the date thereof. We undertake
no obligation to release publicly the result of any revisions to these
forward-looking statements which may be made to reflect events or circumstances
occurring after the date hereof or to reflect the occurrence of unanticipated
events.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27.1 Financial Data Schedule for the interim year-to date period
ended September 30, 2000 (for electronic filing only).
99.1 Important Factors Regarding Forward-Looking Statements filed
as Exhibit 99.1 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999 and incorporated herein
by reference.
(B) REPORTS ON FORM 8-K
The following report on Form 8-K was filed during the quarter ended
September 30, 2000:
(i) On September 18, 2000, the Company filed with the Securities and
Exchange Commission, a Current Report on Form 8-K reporting the
equity financing agreement the Company entered into with Acqua
Wellington North American Equities Fund, Ltd.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
EPIX Medical, Inc.
Date: November 13, 2000 By: /s/ Pamela E. Carey
-------------------
Pamela E. Carey
Vice President of Finance and Administration,
Chief Financial Officer
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