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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 June 30, 1997.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File number 000-19809
DURA PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-3645543
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5880 PACIFIC CENTER BLVD., SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE IS (619) 457-2553
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[ X ] Yes [ ] No
The number of shares of the Registrant's Common Stock outstanding as of July 1,
1997 was 43,848,063.
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DURA PHARMACEUTICALS, INC.
INDEX
Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
December 31, 1996 and June 30, 1997 . . . . . . . . 3
Consolidated Statements of Operations -
Three and six months ended June 30, 1996 and 1997 . 4
Consolidated Statements of Cash Flows -
Six months ended June 30, 1996 and 1997 . . . . . . 5
Notes to Consolidated Financial Statements. . . . . . 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . 7-11
Risks and Uncertainties . . . . . . . . . . . . . . . 11-18
PART II - OTHER INFORMATION
Item 2. Changes in Securities . . . . . . . . . . . . . . . . 19
Item 4. Submission of Matters to a Vote of Security Holders . 19
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . 20
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DURA PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
DOLLARS IN THOUSANDS
ASSETS DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents........................................ $131,101 $ 41,008
Short-term investments........................................... 109,244 145,186
Accounts and other receivables................................... 24,092 22,975
Inventory........................................................ 7,544 13,792
--------- ---------
Total current assets........................................ 271,981 222,961
PROPERTY............................................................ 27,500 39,956
LICENSE AGREEMENTS AND PRODUCT RIGHTS............................... 186,750 251,704
GOODWILL............................................................ 6,630 8,603
OTHER............................................................... 11,809 12,312
--------- ---------
Total....................................................... $504,670 $ 535,536
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities......................... $25,819 $ 34,121
Current portion of long-term obligations......................... 26,298 22,896
--------- ---------
Total current liabilities................................... 52,117 57,017
LONG-TERM OBLIGATIONS............................................... 6,670 6,910
OTHER NON-CURRENT LIABILITIES....................................... 2,306 2,891
--------- ---------
Total liabilities........................................... 61,093 66,818
--------- ---------
--------- ---------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, shares authorized - 5,000,000;
no shares issued or outstanding
Common stock, no par value, shares authorized - 100,000,000;
issued and outstanding - 43,183,591 and 43,847,803,
respectively.................................................... 525,350 531,377
Accumulated deficit............................................... (78,992) (60,923)
Unrealized gain (loss) on investments............................. (38) 76
Warrant subscriptions receivable.................................. (2,743) (1,812)
-------- ---------
Total shareholders' equity................................... 443,577 468,718
Total........................................................ $504,670 $535,536
-------- --------
-------- --------
See accompanying notes to consolidated financial statements.
3
DURA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS, EXCEPT PER SHARE DATA
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ---------------------
1996 1997 1996 1997
---------- --------- -------- ---------
REVENUES:
Sales.......................................... $ 12,905 $ 35,404 $ 26,960 $ 69,339
Contract....................................... 5,895 8,227 10,426 15,184
--------- --------- -------- ---------
Total revenues............................ 18,800 43,631 37,386 84,523
--------- --------- -------- ---------
OPERATING COSTS AND EXPENSES:
Cost of sales.................................. 3,799 7,976 7,422 15,946
Clinical, development and regulatory........... 3,720 6,593 7,119 12,353
Selling, general and administrative............ 7,419 16,760 15,272 32,752
--------- --------- -------- ---------
Total operating costs and expenses........ 14,938 31,329 29,813 61,051
--------- --------- -------- ---------
OPERATING INCOME............................... 3,862 12,302 7,573 23,472
--------- --------- -------- ---------
OTHER:
Interest income................................ 1,501 2,992 2,410 6,379
Other - net.................................... (224) (125) (518) (278)
--------- --------- -------- ---------
Total other............................... 1,277 2,867 1,892 6,101
--------- --------- -------- ---------
INCOME BEFORE INCOME TAXES..................... 5,139 15,169 9,465 29,573
PROVISION FOR INCOME TAXES..................... 530 5,887 800 11,504
--------- --------- -------- ---------
NET INCOME..................................... $ 4,609 $ 9,282 $ 8,665 $ 18,069
--------- --------- -------- ---------
--------- --------- -------- ---------
NET INCOME PER SHARE........................... $ 0.12 $ 0.20 $ 0.23 $ 0.38
WEIGHTED AVERAGE NUMBER OF
OF COMMON AND COMMON
EQUIVALENT SHARES.............................. 38,679 47,327 37,277 47,285
See accompanying notes to consolidated financial statements.
4
DURA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
1996 1997
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................. $ 11,987 $ 30,241
--------- ---------
INVESTING ACTIVITIES:
Purchases of short-term investments...................... (88,371) (141,604)
Sales and maturities of short-term investments........... 29,941 105,776
Product acquisitions..................................... - (69,731)
Purchases of long-term investments....................... (5,000) -
Capital expenditures..................................... (3,390) (13,735)
Other.................................................... (3,803) (1,155)
--------- ---------
Net cash used for investing activities............. (70,623) (120,449)
--------- ---------
FINANCING ACTIVITIES:
Issuance of common stock and warrants.................... 152,642 3,615
Principal payments on notes payable...................... (7,057) -
Principal payments on long-term obligations.............. (5,500) (3,500)
--------- ---------
Net cash provided by financing activities.......... 140,085 115
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... 81,449 (90,093)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........... 25,554 131,101
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................. $107,003 $ 41,008
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized)................... $ 105 $ 0
Income taxes............................................ $ 8 $ 4,438
See accompanying notes to consolidated financial statements.
5
DURA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by Dura Pharmaceuticals, Inc. ("Dura" or the "Company") in
accordance with the instructions to Form 10-Q. The consolidated financial
statements reflect all adjustments, consisting of only normal recurring
accruals, which are, in the opinion of management, necessary for a fair
statement of the results of the interim periods presented. These
consolidated financial statements and notes thereto should be read in
conjunction with the audited financial statements and notes thereto included
in the Company's 1996 Annual Report to Shareholders, which statements and
notes are incorporated by reference in the Company's Annual Report on Form
10-K for the year ended December 31, 1996. The results of operations for the
interim periods are not necessarily indicative of results to be expected for
any other interim period or for the year as a whole.
The consolidated financial statements include the accounts of Dura and its
wholly owned subsidiaries, Health Script Pharmacy Services, Inc. ("Health
Script") and Dura Delivery Systems, Inc. ("DDSI"). All intercompany
transactions and balances are eliminated in consolidation.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect amounts reported in the consolidated financial statements and
related notes. Changes in the estimates may affect amounts reported in
future periods.
2. LICENSE AGREEMENTS AND PRODUCT RIGHTS
On May 7, 1997, the Company acquired from Syntex (USA), Inc. and other
members of the Roche Group the exclusive U.S. rights to the intranasal
steroid products Nasarel-R- and Nasalide-R- for $70 million, which was paid
at closing. Additional future contingent payments totaling $15 million are
due through December 1998, subject to the products remaining without a
competing nasal formulation of flunisolide.
3. LOAN AGREEMENT
In April 1997, the Company entered into a loan agreement with a bank which
provides for the borrowing of up to $50 million on an unsecured basis through
May 1, 1999. Borrowings under the agreement bear interest at the bank's
reference rate or an offshore rate plus 1.5% as selected by the Company. The
agreement places restrictions on the payment of cash dividends and on the
incurrence of additional indebtedness by the Company. As of June 30, 1997,
no borrowings were outstanding on this loan.
6
4. COMMON STOCK
Effective July 2, 1997, the Company changed its state of incorporation from
California to Delaware. In connection with this change, the outstanding
shares of the Company's no par value common stock were automatically
converted into and exchanged for an equal number of shares of $.001 par value
common stock.
5. INCOME TAXES
The provisions for income taxes for the periods ended June 30, 1996 and 1997
reflect the expected combined Federal and state tax rates offset by the benefit
from the utilization of net operating loss carryforwards. During the three and
six month periods ended June 30, 1997, substantially all of the benefit from
available net operating loss carryforwards relates to tax deductions from the
exercise of previously granted stock options and, as such, has been credited
directly to common stock.
6. NET INCOME PER SHARE
Net income per share is computed based on the weighted average number of common
and common equivalent shares outstanding during the period. Net income per
share is unchanged on a fully diluted basis for all periods presented.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No.
128"). SFAS No. 128 requires the presentation of basic and diluted earnings
per share amounts. Basic earnings per share is calculated based on the
weighted average number of common shares outstanding during the period while
diluted earnings per share also gives effect to all potential dilutive common
shares outstanding during the period such as options, warrants, convertible
securities, and contingently issuable shares. SFAS No. 128 is effective for
periods ending after December 15, 1997. If SFAS No. 128 had been applied for
the three and six month periods ended June 30, 1996 and 1997, basic and
diluted net income per share would have been as follows:
Three Months Six Months
Ended June 30, Ended June 30,
1996 1997 1996 1997
---- ---- ---- ----
Net income per share - basic $0.14 $0.21 $0.27 $0.42
Net income per share - diluted $0.12 $0.20 $0.23 $0.38
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This information should be read in conjunction with the consolidated financial
statements and the notes thereto included in Item 1 of this Quarterly Report and
the audited financial statements and
7
notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations for the year ended December 31, 1996 contained in
the Company's 1996 Annual Report to Shareholders, which is incorporated by
reference in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996. See "Risks and Uncertainties" for trends and
uncertainties known to the Company that could cause reported financial
information not to be necessarily indicative of the future, including
discussion of the effects of seasonality on the Company.
OVERVIEW
During the second half of 1996 and the first half of 1997, the Company made
significant acquisitions of product rights and licenses. In July 1996, the
Company acquired the worldwide rights to the Entex-R- products, consisting of
four prescription upper respiratory drugs. In September 1996, the Company
acquired the exclusive U.S. marketing rights to the patented antibiotics
Ceclor-R- CD and Keftab-R-. In May 1997, the Company acquired the exclusive
U.S. rights to the intranasal steriod products Nasarel-R- and Nasalide-R-.
The acquisition of these products has had a material impact on the Company's
financial position and results of operations.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 AND 1997
Total revenues for the three-month period ended June 30, 1997 were $43.6
million, an increase of $24.8 million, or 132%, over the same period in
1996. Net income for the three-month period ended June 30, 1997 was $9.3
million, an increase of $4.7 million, or $0.08 per share, over the same
period in 1996.
Pharmaceutical sales for the three-month period ended June 30, 1997 were
$35.4 million, an increase of 174% over the same period in 1996. This
increase was due primarily to new product acquisitions of the Entex products,
Ceclor CD, Keftab, Nasarel and Nasalide.
Gross profit (pharmaceutical sales less cost of sales) for the three-month
period ended June 30, 1997 was $27.4 million, an increase of $18.3 million as
compared to the same period in 1996. Gross profit as a percentage of sales
for the three-month period ended June 30, 1997 was 77%, compared to 71% for
the same period in 1996. This increase is due primarily to higher gross
margins earned on sales of the Entex products, Ceclor CD, Keftab, Nasarel and
Nasalide as compared to the average gross margins earned on the Company's
other products.
Contract revenues for the three-month period ended June 30, 1997 were $8.2
million, an increase of $2.3 million, or 40%, as compared to the same period
in 1996. The Company, under agreements with several companies, conducts
feasibility testing and development work on various compounds for use with
Spiros-TM-, a proprietary pulmonary drug delivery system. Contract revenues
from Spiros-related development and feasibility agreements for the
three-month period ended June 30, 1997 were $7.8 million, including $6.8
million, from Spiros Development Corporation ("Spiros Corp."), as compared to
$4.6 million, including $4.1 million, from Spiros Corp., for the same period
in 1996. Contract revenues from royalties were $453,000 for the three-month
period ended June 30, 1997 and $1.3 million for the same period in 1996.
8
Clinical, development and regulatory expenses for the three-month period
ended June 30, 1997 were $6.6 million, an increase of $2.9 million over the
same period in 1996. The increase reflects expenses incurred by the Company
under feasibility and development agreements covering the use of various
compounds with Spiros.
Selling, general and administrative expenses for three month period ended
June 30, 1997 were $16.8 million, an increase of $9.3 million as compared to
the same period in 1996. Such expenses decreased as a percentage of total
revenues to 38% as compared to 39% for the same period in 1996. The dollar
increase is primarily due to increased costs incurred to support the
Company's sales and contract revenue growth, including costs associated with
expanding the Company's sales force, higher marketing costs relating to the
newly-acquired products, and amortization of newly-acquired product rights.
The decrease as a percentage of revenues reflects the growth of
pharmaceutical sales due to new product acquisitions and the growth of
contract revenues.
Interest income for the three-month period ended June 30, 1997 was $3.0
million, an increase of $1.5 million as compared to the same period in 1996.
The increase is due primarily to higher balances of cash and short-term
investments resulting from public stock offerings completed in May and
November 1996.
The Company's effective tax rate was 39% for the three-month period ended
June 30, 1997 compared to 10% for the same period in 1996. This increase is
primarily due to the utilization of net operating loss carryforwards in 1996.
Net operating loss carryforwards available in 1997 relate primarily to tax
deductions for previously exercised stock options; accordingly, the related
benefit from their utilization will be credited to common stock.
SIX MONTHS ENDED JUNE 30, 1996 AND 1997
Total revenues for the six-month period ended June 30, 1997 were $84.5
million, an increase of $47.1 million, as compared to the same period in
1996. Net income for the six-month period ended June 30, 1997 was $18.1
million, an increase of $9.4 million, or $0.15 per share, over the same
period in 1996.
Pharmaceutical sales for the six-month period ended June 30, 1997 were $69.3
million, an increase of 157% over the same period in 1996. This increase is
due primarily to new product acquisitions of the Entex products, Ceclor CD,
Keftab, Nasarel and Nasalide.
Gross profit for the six-month period ended June 30, 1997 was $53.4 million,
an increase of $33.9 million as compared to the same period in 1996. Gross
profit as a percentage of sales for the six-month period ended June 30, 1997
was 77%, as compared to 72% for the same period in 1996. This increase is
due to higher gross margins earned on sales of the Entex products, Ceclor CD,
Keftab, Nasarel and Nasalide as compared to the average gross margins earned
on the Company's other products.
9
Contract revenues for the six-month period ended June 30, 1997 were $15.2
million, an increase of $4.8 million, or 46%, as compared to the same period
in 1996. The Company, under agreements with several companies, conducts
feasibility testing and development work on various compounds for use with
Spiros-TM-. Contract revenues from Spiros-related development and
feasibility agreements for the six-month period ended June 30, 1997 were
$15.1 million, including $12.2 million from Spiros Corp., as compared to $8.7
million, including $7.8 million from Spiros Corp. for the same period in
1996. Contract revenues from royalties were $619,000 for the six-month
period ended June 30, 1997 and $1.7 million for the same period in 1996.
Clinical, development and regulatory expenses for the six-month period ended
June 30, 1997 were $12.4 million, an increase of $5.2 million over the same
period in 1996. The increase reflects expenses incurred by the Company under
feasibility and development agreements covering the use of various compounds
with Spiros.
Selling, general and administrative expenses for the six-month period ended
June 30, 1997 were $32.8 million, an increase of $17.5 million as compared to
the same period in 1996. Such expenses decreased as a percentage of total
revenues to 39% as compared to 41% for the same period in 1996. The dollar
increase is primarily due to increased costs incurred to support the
Company's sales and contract revenue growth, including costs associated with
expanding the Company's sales force, higher marketing costs relating to the
newly-acquired products, and amortization of newly-acquired product rights.
The decrease as a percentage of revenues reflects the growth of
pharmaceutical sales due to new product acquisitions and the growth of
contract revenues.
Interest income for the six-month period ended June 30, 1997 was $6.4
million, an increase of $4.0 million as compared to the same period in 1996.
The increase is due primarily to higher balances of cash and short-term
investments resulting from public stock offerings completed in May and
November 1996.
The Company's effective tax rate was 39% for the six-month period ended June
30, 1997 compared to 8% for the same period in 1996. This increase is
primarily due to the utilization of net operating loss carryforwards in 1996.
Net operating loss carryforwards available in 1997 relate primarily to tax
deductions for previously exercised stock options; accordingly, the related
benefit from their utilization will be credited to common stock.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments decreased by $54.1 million
to $186.2 million at June 30, 1997 from $240.3 million at December 31, 1996.
The decrease is due primarily to the acquisition of the intranasal steroid
products Nasarel and Nasalide for $70 million in May 1997 and capital
expenditures of $13.7 million, partially offset by cash generated from
operations. Working capital decreased by $54.0 million to $165.9 million at
June 30, 1997 from $219.9 million at December 31, 1996.
10
At June 30, 1997, the Company had an aggregate of $29.8 million in long-term
obligations, of which $22.9 million is to be paid during 1997. As of June
30, 1997, additional future contingent obligations totaling $97.9 million
relating to product acquisitions are due through 2004.
In April 1997, the Company entered into a loan agreement which provides for
the borrowing of up to $50 million on an unsecured basis through May 1,
1999. As of June 30, 1997, no borrowings were outstanding under this loan.
The Company provides development and management services to Spiros Corp.
pursuant to various agreements for the development of Spiros Corp.'s dry
powder drug delivery technology. Dura records contract revenues from Spiros
Corp. equal to amounts due for such services, less a pro rata amount
allocated to a warrant subscription receivable. The Company has a purchase
option to acquire all of the shares of Spiros Corp. which is exercisable
through December 31, 1999, at predetermined prices, payable at the Company's
option in cash or common stock or a combination thereof. In addition, the
Company has an option, through specified dates, to acquire Spiros Corp.'s
exclusive rights for use of Spiros with albuterol in the cassette version for
a minimum of $15 million in cash.
The Company anticipates that its existing capital resources, together with
cash expected to be generated from operations and available bank borrowings,
should be sufficient to finance its operations and working capital needs
through at least June 1998. Significant additional resources, however, may
be required in connection with product or company acquisitions, in-licensing
opportunities, or the development of Spiros products. At present, the Company
is actively pursuing the acquisition of rights to several products and/or
companies which may require the use of substantial capital resources;
however, there are no present agreements or commitments with respect to such
acquisitions.
RISKS AND UNCERTAINTIES
FORWARD-LOOKING STATEMENTS - The Company cautions readers that the
statements in this quarterly report that are not descriptions of historical
facts may be forward-looking statements that are subject to risks and
uncertainties. Actual results could differ materially from those currently
anticipated due to a number of factors, including those identified below. The
Company undertakes no obligation to release publicly the results of any
revisions to these forward - looking statements to reflect events and
circumstances arising after the dates hereof.
REDUCTION IN GROSS MARGINS
There is no proprietary protection for most of the products sold by the
Company and substitutes for such products are sold by other pharmaceutical
companies. The Company expects average selling prices for many of its products
to decline over time due to competitive and reimbursement pressures. While the
Company will seek to mitigate the effect of this decline in average selling
prices, there can be no assurance that the Company will be successful in these
efforts.
11
THIRD-PARTY REIMBURSEMENT; PRICING PRESSURES
The Company's commercial success will depend in part on the availability of
adequate reimbursement from third-party health care payers, such as government
and private health insurers and managed care organizations. Third-party payers
are increasingly challenging the pricing of medical products and services. There
can be no assurance that reimbursement will be available to enable the Company
to achieve market acceptance of its products or to maintain price levels
sufficient to realize an appropriate return on the Company's investment in
product acquisition, in-licensing and development. The market for the Company's
products may be limited by actions of third-party payers. For example, many
managed health care organizations are now controlling the pharmaceuticals that
are on their formulary lists. The resulting competition among pharmaceutical
companies to place their products on these formulary lists has created a trend
of downward pricing pressure in the industry. In addition, many managed care
organizations are pursuing various ways to reduce pharmaceutical costs and are
considering formulary contracts primarily with those pharmaceutical companies
that can offer a full line of products for a given therapy sector or disease
state. There can be no assurance that the Company's products will be included on
the formulary lists of managed care organizations or that downward pricing
pressure in the industry generally will not negatively impact the Company's
operations.
DEPENDENCE ON ACQUISITION OF RIGHTS TO PHARMACEUTICAL PRODUCTS
The Company's strategy for growth is dependent, in part, upon acquiring,
in-licensing and co-promoting pharmaceuticals targeted primarily at allergists,
ear, nose and throat specialists, pulmonologists and a selected subset of
pediatricians and generalist physicians. Other companies, including those with
substantially greater resources, are competing with the Company for the rights
to such products. There can be no assurance that the Company will be able to
acquire, in-license or co-promote additional pharmaceuticals on acceptable
terms, if at all. The failure of the Company to acquire, in-license, co-promote,
develop or market commercially successful pharmaceuticals would have a material
adverse effect on the Company. Furthermore, there can be no assurance that the
Company, once it has obtained rights to a pharmaceutical product and committed
to payment terms, will be able to generate sales sufficient to create a profit
or otherwise avoid a loss.
DEVELOPMENT RISKS ASSOCIATED WITH SPIROS -TM-
Spiros will require significant additional development. There can be no
assurance that development of Spiros will be completed successfully, that Spiros
will not encounter problems in clinical trials that will cause the delay or
suspension of such trials, that current or future testing will show Spiros to be
safe or efficacious or that Spiros will receive regulatory approval. In
addition, regulatory approvals will have to be obtained for each drug to be
delivered through the use of Spiros prior to commercialization. Moreover, even
if Spiros does receive regulatory approval, there can be no assurance that
Spiros will be commercially
12
successful, have all of the patent and other protections necessary to prevent
competitors from producing similar products and not infringe on patent or other
proprietary rights of third parties. The failure of Spiros to receive timely
regulatory approval and achieve commercial success would have a material adverse
effect on the Company.
RISKS ASSOCIATED WITH RECENT ACQUISITIONS
In September 1996, the Company acquired from Lilly the exclusive U.S. rights
to market and distribute Keftab and Ceclor CD and entered into a manufacturing
agreement with Lilly which terminates in certain circumstances. In May 1997, the
Company acquired from Syntex the exclusive U.S. rights to the intranasal steroid
products Nasarel and Nasalide. Any interruption in the supply of these products
due to regulatory or other causes could result in the inability of the Company
to meet demand and could have a material adverse impact on the Company.
The Company has limited experience in marketing antibiotic products, such as
Keftab and Ceclor CD, and steroid products, such as Nasarel and Nasalide. Ceclor
CD was not previously marketed to physicians prior to its October 1996 launch by
Dura, and no assurance can be given that the Company will be able to continue to
successfully compete with currently available products. Failure to successfully
market and sell Keftab, Ceclor CD, Nasarel or Nasalide would have a material
adverse effect on the Company's business, financial condition and results of
operations.
CUSTOMER CONCENTRATION; CONSOLIDATION OF DISTRIBUTION NETWORK
The distribution network for pharmaceutical products has in recent years
been subject to increasing consolidation. As a result, a few large wholesale
distributors control a significant share of the market and the number of
independent drug stores and small chains has decreased. Further consolidation
among, or any financial difficulties of, distributors or retailers could result
in the combination or elimination of warehouses thereby stimulating product
returns to the Company. Further consolidation or financial difficulties could
also cause customers to reduce their inventory levels, or otherwise reduce
purchases of the Company's products which could result in a material adverse
effect on the Company's business, financial condition or results of operations.
Dura's principal customers are wholesale drug distributors and major drug
store chains. For the six months ended June 30, 1997, four wholesale customers
individually accounted for 20%, 18%, 17% and 14% of sales. For 1996, three
wholesale customers individually accounted for 17%, 14% and 13% of sales. Two
wholesale customers individually accounted for 16% and 11% of 1995 sales, and
three wholesale customers individually accounted for 21%, 14% and 12% of 1994
sales. The loss of any of these customers could have a material adverse effect
upon the Company's business, financial condition or results of operations.
SEASONALITY AND FLUCTUATING QUARTERLY RESULTS
Historically, as a result of the winter cold and flu season, industry-wide
demand for respiratory products has been stronger in the first and fourth
quarters than in the second and third quarters of the year. In addition,
variations in the timing and severity of the winter cold and flu season have
influenced the Company's results of operations in the past. While the growth and
productivity of the Company's sales force and the introduction by the Company of
new products have historically mitigated the impact of seasonality on the
Company's results of operations, recent product acquisitions by the Company,
especially Keftab and Ceclor CD, which are used to treat respiratory infections,
are likely to increase the impact of seasonality on the Company's results of
operations. No assurances can be given that the Company's results of operations
will not be materially adversely affected by the seasonality of product sales.
13
COMPETITION
Many companies, including large pharmaceutical firms with financial and
marketing resources and development capabilities substantially greater than
those of Dura, are engaged in developing, marketing and selling products that
compete with those offered by the Company. The selling prices of such products
typically decline as competition increases. Further, other products now in use
or under development by others may be more effective than Dura's current or
future products. The industry is characterized by rapid technological change,
and competitors may develop their products more rapidly than Dura. Competitors
may also be able to complete the regulatory process sooner, and therefore, may
begin to market their products in advance of Dura's products. Dura believes that
competition among both prescription pharmaceuticals and pulmonary drug delivery
systems aimed at the respiratory infection, allergy, cough and cold, and asthma
and COPD markets will be based on, among other things, product efficacy, safety,
reliability, availability and price.
Dura directly competes with at least 25 other companies in the U.S. which
are currently engaged in developing, marketing and selling respiratory
pharmaceuticals. Additionally, there are at least 10 companies currently
involved in the development, marketing or sales of dry powder pulmonary drug
delivery systems. There are two types of dry powder inhalers ("DPIs")
currently in commercial use worldwide. In the U.S., individual dose DPIs
currently are marketed, including the Rotohaler-TM- (developed and marketed
by Glaxo Wellcome, Inc.) and the Spinhaler-R- (developed and marketed by
Fisons Limited). The Turbuhaler-R- (developed and marketed by Astra
Pharmaceuticals), a multiple dose DPI and the leading DPI in worldwide sales,
is considered the current industry standard. In June 1997, the Food and Drug
Administration ("FDA") approved for marketing the first Turbuhaler product in
the United States.
DEPENDENCE ON THIRD PARTIES
The Company's strategy for development and commercialization of certain of
its products is dependent upon entering into various arrangements with corporate
partners, licensors and others and upon the subsequent success of these
partners, licensors and others in performing their obligations. There can be no
assurance that the Company will be able to negotiate acceptable arrangements in
the future or that such arrangements or its existing arrangements will be
successful. In addition, partners, licensors and others may pursue alternative
technologies or develop alternative compounds or drug delivery systems either on
their own or in collaboration with others, including the Company's competitors.
The Company has limited experience manufacturing products for commercial
purposes and currently does not have the capability to manufacture its
pharmaceutical products and therefore is dependent on contract manufacturers for
the production of such products for development and commercial purposes. The
manufacture of the Company's products is subject to current Good Manufacturing
Practice ("cGMP") regulations prescribed by the FDA. The Company relies on a
single manufacturer for each of its products. In the event that the Company is
unable to obtain or retain third-party manufacturing, it may not be able to
commercialize its products as planned. There can be no assurance that the
Company will be able to continue to obtain adequate supplies of such products in
a timely fashion at acceptable quality and prices. Also, there can be no
assurance that the Company will be able to enter into agreements for the
manufacture of future products with manufacturers whose facilities and
procedures comply with cGMP and other regulatory requirements. The Company's
current dependence upon others for the manufacture of its products may adversely
affect future profit margins, if any, on the sale of those products and the
Company's ability to develop and deliver products on a timely and competitive
basis.
LIMITED MANUFACTURING EXPERIENCE
The Company's principal manufacturing facility is located in a Company-owned
building adjacent to its headquarters. The facility initially is intended to be
used to formulate, mill, blend and manufacture drugs to be used with Spiros,
pending regulatory approval. Equipment purchases and validation are currently
scheduled through 1997. The Company's manufacturing facility must be registered
14
with and licensed by various regulatory authorities and must comply with cGMP
requirements prescribed by the FDA and the State of California. The Company is
currently expanding its facilities to provide additional manufacturing
capabilities. The Company will need to significantly scale up its current
manufacturing operations and comply with cGMPs and other regulations prescribed
by various regulatory agencies in the United States and other countries to
achieve the prescribed quality and required levels of production of such
products and to obtain marketing approval. Any failure or significant delay in
the validation of or obtaining a satisfactory regulatory inspection of the new
facility or failure to successfully scale up could have a material adverse
effect on the Company's ability to manufacture products in connection with
Spiros.
MANAGING GROWTH OF BUSINESS
The Company has experienced significant growth as total revenues
increased 58% in fiscal 1995, 102% in fiscal 1996, and 126% for the first six
months of 1997, as compared to prior periods, primarily as a result of the
acquisition or in-licensing of additional respiratory pharmaceutical
products. During fiscal 1997, the Company executed an agreement relating to
the acquisition of the rights to the Nasarel and Nasalide products. During
fiscal 1996, the Company executed agreements relating to the acquisition of
the rights to the Entex, Ceclor CD and Keftab products. During fiscal 1995,
the Company executed three agreements relating to the acquisition,
in-licensing and co-promotion of products and acquired Health Script. Due to
the Company's emphasis on acquiring and in-licensing respiratory
pharmaceutical products, the Company anticipates that the integration of the
recently acquired businesses and products, as well as any future
acquisitions, will require significant management attention and expansion of
its sales force. The Company's ability to achieve and maintain profitability
is based on management's ability to manage its changing business effectively.
UNCERTAINTY OF PROFITABILITY; NEED FOR ADDITIONAL FUNDS
The Company has experienced significant operating losses in the past,
and, at June 30, 1997, the Company's accumulated deficit was $60.9 million.
Although the Company achieved profitability on an annual basis in 1996 and in
the first six months of 1997, there can be no assurance that revenue growth
or profitability will continue on an annual or quarterly basis in the future.
The acquisition and in-licensing of products, the expansion of the Company's
sales force in response to acquisition and in-licensing of products, the
maintenance of the Company's existing sales force, the upgrade and expansion
of its facilities, continued pricing pressure and the potential exercise of
the Spiros Purchase Option or the Albuterol Purchase Option (as defined
below), as well as funds that Dura, at its option, may provide for Spiros
development, both internally and through Spiros Corp., will require the
commitment of substantial capital resources and may also result in
significant losses. Depending upon, among other things, the acquisition and
in-licensing opportunities available, the Company may need to raise
additional funds for these purposes. The Company may seek such additional
funding through public and private financing, including equity or debt
financing. Adequate funds for these purposes, whether through financial
markets or from other sources, may not be available when needed or on terms
acceptable to the Company. Insufficient funds may require the Company to
delay, scale back or suspend some or all of its product acquisition and
in-licensing programs, the upgrade and expansion of its facilities, the
potential exercise of the Spiros Purchase Option and/or the Albuterol
Purchase Option and further development of Spiros. The Company anticipates
that its existing capital resources, together with cash expected to be
generated from operations and available bank borrowings, should be sufficient
to finance its current operations and working capital requirements through at
least June 1998.
15
POTENTIAL EXERCISE OF PURCHASE OPTIONS FOR SPIROS CORP.; CALLABLE COMMON STOCK
AND ALBUTEROL PRODUCT; DILUTION
Dura has an option to purchase all of the currently outstanding shares of
callable common stock of Spiros Corp. ("Spiros Purchase Option"). If Dura
exercises the Spiros Purchase Option, it will be required to make a substantial
cash payment or to issue shares of Common Stock, or both. A payment in cash
would reduce Dura's capital resources. A payment in shares of Common Stock would
result in a decrease in the percentage ownership of Dura's shareholders at that
time. The exercise of the Spiros Purchase Option will likely require Dura to
record a significant charge to earnings and may adversely impact future
operating results. If Dura does not exercise the Spiros Purchase Option prior to
its expiration in December 1999, the Company's rights in and to Spiros with
respect to certain compounds will terminate. Dura also has the option to provide
funding for Spiros development in certain circumstances. Development of Spiros
Corp. products will require significant additional funds. Dura believes that the
current funds of Spiros Corp. will be sufficient to fund product development by
Spiros Corp. through 1997.
As part of the Company's contractual relationship with Spiros Corp., the
Company received an option to purchase certain rights to an albuterol product in
a cassette version of Spiros ("Albuterol Purchase Option") exercisable at any
time through the earlier of 60 days after FDA approval of such albuterol product
or December 31, 1999. If the Company exercises the Albuterol Purchase Option, it
will be required to make a cash payment of at least $15 million which could
have an adverse effect on its capital resources. The Company may not have
sufficient capital resources to exercise the Albuterol Purchase Option which may
result in the Company's loss of valuable rights. In addition, continuation of
development and commercialization of an albuterol product in a cassette version
of Spiros may require substantial additional expenditures by Dura. Dura has not
made any determination as to the likelihood of its exercise of the Spiros
Purchase Option or the Albuterol Purchase Option.
GOVERNMENT REGULATION; NO ASSURANCE OF FDA APPROVAL
Development, testing, manufacturing and marketing of the Company's products
are subject to extensive regulation by numerous governmental authorities in the
U.S. and other countries. The process of obtaining FDA approval of
pharmaceutical products and drug delivery systems is costly and time-consuming.
Any new pharmaceutical product must undergo rigorous preclinical and clinical
testing and an extensive regulatory approval process mandated by the FDA.
Marketing of drug delivery systems also requires FDA approval, which can be
costly and time consuming to obtain. The Company will need to obtain regulatory
approval for each drug to be delivered through the use of Spiros. There can be
no assurance that the pharmaceutical products currently in development, or those
products acquired or in-licensed by the Company, will be approved by the FDA. In
addition, there can be no assurance that all necessary clearances will be
granted to the Company or its licensors for future products or that FDA review
or actions will not involve delays adversely affecting the marketing and sale of
the Company's products. For both currently marketed and future products, failure
to comply with applicable regulatory requirements can, among other things,
result in the suspension of regulatory approval, as well as possible civil and
criminal sanctions. In addition, changes in regulations could have a material
adverse effect on the Company.
The FDA is continuing an evaluation of the effectiveness of all drug
products containing ingredients marketed prior to 1962 (the year of enactment of
the "Drug Amendments of 1962" to the Federal Food, Drug and Cosmetic Act) as
part of its Drug Efficacy Study Implementation ("DESI") program and will
determine which drugs are considered "new drugs" requiring approval through a
New Drug Application ("NDA") for marketing. A Policy Guide (CPG 440.100) issued
by the FDA indicates that the FDA will implement procedures to determine whether
the new drug provisions are applicable to existing products. If a final
determination is made that a particular drug requires an approved NDA, such
approval will be required for marketing to continue. If such a determination is
made, the FDA might impose various
16
requirements; for example, it might require that the current product be the
subject of an approved NDA, that the product be reformulated and an NDA approval
be obtained, that the product must be sold on an over-the-counter basis rather
than as a prescription drug or that the product must be removed from the market.
The Company believes that nine of its prescription pharmaceutical products may
be covered by paragraph B of the Policy Guide and it is aware that one of its
products may be considered to be similar or related to a DESI drug. Also, it is
not aware of evidence to substantiate that three of its products have the same
formulation or conditions for use as products marketed before November 13, 1984.
There can be no assurance as to which regulatory course the FDA will follow, if
any, with respect to many of the Company's pharmaceutical products or whether
the Company will be able to obtain any approvals that the FDA may deem
necessary. If any negative actions are taken by the FDA, such actions could have
a material adverse effect on the Company's business. Health Script is subject to
regulation by state regulatory authorities, principally state boards of
pharmacy. In addition, Health Script is subject to regulation by other state and
federal agencies with respect to reimbursement for prescription drug benefits
provided to individuals covered primarily by publicly-funded programs.
PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in part on its ability to obtain patents
on current or future products or formulations, defend its patents, maintain
trade secrets and operate without infringing upon the proprietary rights of
others, both in the U.S. and abroad. However, only six of the pharmaceuticals
currently marketed by the Company are covered by patents. The Company also has
licenses or license rights to certain other U.S. and foreign patent and patent
applications. There can be no assurance that patents, U.S. or foreign, will be
obtained, or that, if issued or licensed to the Company, they will be
enforceable or will provide substantial protection from competition or be of
commercial benefit to the Company or that the Company will possess the financial
resources necessary to enforce or defend any of its patent rights. Federal court
decisions establishing legal standards for determining the validity and scope of
patents in the field are in transition. There can be no assurance that the
historical legal standards surrounding questions of validity and scope will
continue to be applied or that current defenses as to issued patents in the
field will offer protection in the future. The commercial success of the Company
will also depend upon avoiding the infringement of patents issued to competitors
and upon maintaining the technology licenses upon which certain of the Company's
current products are, or any future products under development might be, based.
Litigation, which could result in substantial cost to the Company, may be
necessary to enforce the Company's patent and license rights or to determine the
scope and validity of proprietary rights of third parties. If any of the
Company's products are found to infringe upon patents or other rights owned by
third parties, the Company could be required to obtain a license to continue to
manufacture or market such products. There can be no assurance that licenses to
such patent rights would be made available to the Company on commercially
reasonable terms, if at all. If the Company does not obtain such licenses, it
could encounter delays in marketing affected products while it attempts to
design around such patents or it could find that the development, manufacture or
sale of products requiring such licenses is not possible. The Company currently
has certain licenses from third parties and in the future may require additional
licenses from other parties to develop, manufacture and market commercially
viable products effectively. There can be no assurance that such licenses will
be obtainable on commercially reasonable terms, if at all, or that the patents
underlying such licenses will be valid and enforceable.
PRODUCT LIABILITY AND RECALL
The Company faces an inherent business risk of exposure to product liability
claims in the event that the use of its technologies or products is alleged to
have resulted in adverse effects. Such risks will exist even with respect to
those products that receive regulatory approval for commercial sale. While the
Company has taken, and will continue to take, what it believes are appropriate
precautions, there can be no assurance that it will avoid significant product
liability exposure. The Company currently has product
17
liability insurance; however, there can be no assurance that the level or
breadth of any insurance coverage will be sufficient to fully cover potential
claims. There can be no assurance that adequate insurance coverage will be
available in the future at acceptable costs, if at all, or that a product
liability claim or recall would not materially and adversely affect the business
or financial condition of the Company.
ATTRACTION AND RETENTION OF KEY PERSONNEL
The Company is highly dependent on the principal members of its management
staff, the loss of whose services might impede the achievement of development
objectives. Although the Company believes that it is adequately staffed in key
positions and that it will be successful in retaining skilled and experienced
management, operational and scientific personnel, there can be no assurance that
the Company will be able to attract and retain such personnel on acceptable
terms. The loss of the services of key scientific, technical and management
personnel could have a material adverse effect on the Company, especially in
light of the Company's recent significant growth.
CHANGE IN CONTROL
Certain provisions of the Company's charter documents and terms relating to
the acceleration of the exercisability of certain warrants and options relating
to the purchase of such securities by the Company in the event of a change in
control may have the effect of delaying, deferring or preventing a change in
control of the Company, thereby possibly depriving shareholders of receiving a
premium for their shares of the Common Stock.
VOLATILITY OF COMPANY STOCK PRICE
The market prices for securities of emerging companies, including the
Company, have historically been highly volatile. Future announcements concerning
the Company or its competitors may have a significant impact on the market price
of the Company's Common Stock. Such announcements might include financial
results, the results of testing, technological innovations, new commercial
products, changes to government regulations, government decisions on
commercialization of products, developments concerning proprietary rights,
litigation or public concern as to safety of the Company's products.
ABSENCE OF DIVIDENDS
The Company has never paid any cash dividends on its Common Stock. In
accordance with a bank loan agreement, the Company is prohibited from paying
cash dividends without prior bank approval. The Company currently anticipates
that it will retain all available funds for use in its business and does not
expect to pay any cash dividends in the foreseeable future.
18
PART II - OTHER INFORMATION
Item 2. Changes in Securities
The Company reincorporated in Delaware through the merger of Dura
Pharmaceuticals, Inc., a California corporation, with and into a
wholly-owned Delaware subsidiary of Dura Pharmaceuticals, Inc. In
connection with this change, the outstanding shares of the Company's
no par value common stock were automatically converted into and
exchanged for an equal number of shares of common stock, $.001 par
value per share, of the Delaware entity.
Item 4. Submission of Matters to a Vote of Security Holders
On May 28, 1997, the Company's Annual Meeting of Shareholders was
held in La Jolla, California for the following purposes:
(a) The following four (4) directors were elected to serve two-year terms
to expire at the 1999 Annual Meeting of Shareholders:
FOR AGAINST WITHHELD
--- ------- --------
Herbert J. Conrad 39,587,506 0 527,186
Gordon V. Ramseier 38,609,406 0 1,505,286
Charles G. Smith 39,609,847 0 504,845
Walter F. Spath 38,582,192 0 1,532,500
The following directors, who were elected during the May 29, 1996
annual Meeting of Shareholders, are currently serving terms that will
expire in 1998.
James C. Blair
Joseph C. Cook
Cam L. Garner
David F. Hale
David S. Kabakoff
(b) The shareholders approved the Company's reincorporation in Delaware,
through the merger of Dura Pharmaceuticals, Inc., a California
corporation, with and into a wholly-owned Delaware subsidiary of Dura
Pharmaceuticals, Inc. The total number of votes cast for, against and
withheld was 25,112,678, 12,477,807 and 31,803, respectively.
(c) The shareholder approved amendments to the Company's 1992 Stock
Option Plan to increase the authorized number shares of Common Stoack
available for issuance under such Plan by 1,600,000 shares to a total
of 7,607,360, and to make certain other amendments. The total number
of votes cast for, against and withheld was 26,727,560, 13,227,514
and 56,585, respectively.
(d) The shareholders ratified the appointment of Deloitte & Touche LLP
as the Company's independent public accountants for the year ending
December 31, 1997. The total number of votes cast for, against and
withheld was 40,035,309, 60,303 and 19,080, respectively.
19
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit
Number
------
2.1 Agreement and Plan of Merger of Dura Pharmaceuticals,
Inc. (a Delaware corporation) and Dura Pharmaceuticals,
Inc. (a California corporation)
3.1 Bylaws
3.2 Certificate of Incorporation
10.1 Business Loan Agreement dated April 14, 1997 between the
Company and Bank of America National Trust and Savings
Association
+ 10.2 Syntex Asset Purchase Agreement dated March 27, 1997
between the Company and Syntex (USA), Inc.
+ 10.3 SPIL Asset Purchase Agreement dated March 27, 1997
between the Compamy and Syntex Pharmaceuticals
International Limited
10.4 1992 Stock Option Plan, as amended
11 Statements re Computations of Net Income Per Share
27 Financial Data Schedule
+ Incorporated by reference to the Company's Current Report on
Form 8-K dated May 7, 1997 and filed on May 22, 1997.
(b) Reports on Form 8-K
On May 22, 1997 the Company filed a Current Report on Form
8-K dated May 7, 1997 providing the required dislcosures
regarding its acquisition of Nasarel-R- and Nasalide-R- products
from Syntex (USA), Inc. and other members of the Roche Group.
20
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
DURA PHARMACEUTICALS, INC.
DATE: JULY 15, 1997 /S/ JAMES W.NEWMAN
- -------------------- -------------------
(JAMES W. NEWMAN)
Senior Vice President, Finance &
Administration and Chief Financial Officer
(Principal Financial and Accounting Officer)
21
EXHIBIT INDEX
TO
FORM 10-Q
DURA PHARMACEUTICALS, INC.
Exhibit No. Description
- ----------- -----------
2.1 Agreement and Plan of Merger of Dura Pharmaceuticals,
Inc. (a Delaware corporation) and Dura Pharmaceuticals,
Inc. (a California corporation)
3.1 Bylaws
3.2 Certificate of Incorporation
10.1 Business Loan Agreement dated April 14, 1997 between
the Company and Bank fo America National Trust and
Savings Association
+ 10.2 Syntex Asset Purchase Agreement dated March 27, 1997
between the Company and Syntex (USA), Inc.
+ 10.3 SPIL Asset Purchase Agreement dated March 27, 1997
between the Compamy and Syntex Pharmaceuticals
International Limited
10.4 1992 Stock Option Plan, as amended
11 Statements re Computations of Net Income Per Share
27 Financial Data Schedule
+ Incorporated by reference to the Company's Current Report on Form 8-K dated
May 7, 1997 and filed on May 22, 1997.
22