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 March 31, 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
ALGOS PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-3142274
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
1333 Campus Parkway, Neptune, New Jersey, 07753-6815
(Address of principal executive offices)
732-938-5959
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant 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 such shorter period that the registrant was required
to file such reports) and has been subject to such filing requirements for the
past 90 days. Yes X No
--- ---
The aggregate number of shares of the Registrant's common stock outstanding on
May 1, 2000 was 17,421,345.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
December 31, March 31,
1999 2000
----- ----
ASSETS
Current assets:
Cash and cash equivalents $ 30,752 $ 28,247
Marketable securities 4,011 4,002
Interest receivable 207 258
Prepaid expenses and other current assets 234 155
-------- --------
Total current assets 35,204 32,662
Restricted cash 150 150
Property and equipment, net 955 950
-------- --------
Total assets $ 36,309 $ 33,762
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,499 $ 3,915
Other current liabilities 452 260
-------- --------
Total current liabilities 3,951 4,175
-------- --------
Commitments
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares authorized,
17,403,895 and 17,421,345 shares issued and outstanding, respectively 174 174
Additional paid-in-capital 81,700 81,805
Unearned compensation expense (105) (105)
Deficit accumulated during the development stage (49,411) (52,287)
-------- --------
Total stockholders' equity 32,358 29,587
-------- --------
Total liabilities and stockholders' equity $ 36,309 $ 33,762
======== ========
The accompanying notes are an integral part of these financial statements.
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ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
For the three months ended Cumulative
March 31, from inception
-------------------------- to March 31,
1999 2000 2000
---- ---- ----
Revenues $ -- $ -- $ 3,311
-------- -------- ---------
Operating expenses:
Research and development 2,517 1,935 40,105
Selling, general and administrative 3,462 1,386 23,599
-------- -------- ---------
Total operating expenses 5,979 3,321 63,704
-------- -------- ---------
Loss from operations (5,979) (3,321) (60,393)
Interest income 568 445 8,106
-------- -------- ---------
Net loss $ (5,411) $ (2,876) $ (52,287)
======== ======== =========
Net loss per common share, basic
and diluted ($0.31) ($0.17)
======== ========
Weighted average common
shares outstanding, basic and
diluted 17,299,134 17,416,297
========== ==========
The accompanying notes are an integral part of these financial statements.
2
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
For the three months ended Cumulative
March 31, from inception
-------------------------- to March 31,
1999 2000 2000
---- ---- ----
Cash flows from operating activities $ (3,706) $ (2,541) ($45,591)
Cash flows from investing activities:
Purchases of marketable securities (9,842) (76,753)
Redemption of marketable securities 5,000 72,854
Purchases of property and equipment (105) (50) (1,681)
-------- ------- --------
Net cash used in investing activities (4,947) (50) (5,580)
-------- ------- --------
Cash flows from financing activities:
Proceeds from issuance of preferred stock 6,659
Proceeds from issuance of common stock 158 86 72,759
-------- ------- --------
Net cash provided by financing activities 158 86 79,418
-------- ------- --------
Net increase (decrease) in cash and cash equivalents (8,495) (2,505) 28,247
Cash and cash equivalents, beginning of period 37,025 30,752 -
-------- ------- --------
Cash and cash equivalents, end of period $ 28,530 $28,247 $28,247
======== ======= ========
The accompanying notes are an integral part of these financial statements.
3
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The financial statements presented herein have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X and are
unaudited. In the opinion of management, the financial statements reflect all
adjustments (which consist of normal recurring accruals and adjustments)
necessary for a fair statement of the financial position and results of the
interim periods presented.
2. LOSS PER SHARE
Since the Company incurred net losses in all periods presented, outstanding
options and warrants to purchase an aggregate of 1,508,481 and 1,164,231 shares
of Common Stock at March 31, 1999 and 2000, respectively, were not included in
diluted per share calculations, as their effect would be antidilutive.
3. MERGER AGREEMENT WITH ENDO PHARMACEUTICALS HOLDINGS INC.
On November 26, 1999, the Company entered into a definitive merger
agreement pursuant to which Algos will merge with a subsidiary of Endo
Pharmaceuticals Holdings Inc. in a tax-free transaction. In the transition,
Algos shareholders will receive common stock of Endo and warrants to purchase
additional shares of common stock of Endo for nominal consideration. The
warrants will become exercisable only if the U.S. Food and Drug Administration
approves Algos' New Drug Application for MorphiDex'r' by a specified date.
The agreement places restrictions on the Company's ability to enter into
certain transaction, including incurring debt, issuing additional shares of
stock, paying dividends, disposing of assets and entering into certain
significant agreements. The transaction is subject to the approval of Algos
shareholders, regulatory approvals and certain other conditions and is
expected to be completed in the second quarter of 2000. Algos will reimburse
Endo for all out-of-pocket expenses if the Algos shareholders do not approve
the merger.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
Algos, a development stage company, is engaged primarily in the development
and commercialization of proprietary pharmaceutical products. Since its
formation in January 1992, Algos has devoted a substantial amount of its efforts
to licensing technology, recruiting key management and staff, developing
products, filing patent and regulatory applications and raising capital.
Algos has incurred losses since its inception and expects to incur losses
in the future. Algos' product development expenses may increase as additional
drugs are developed. In August 1999, Algos received a not approvable letter from
the FDA regarding a new drug application filed in 1998 for its most
developmentally advanced drug, MorphiDex'r'. Algos will incur additional
development costs for MorphiDex'r' in connection with amending the new drug
application and delay certain expenses associated with pre-commercialization
activities such as the establishment of a sales force, the preparation of
promotional plans and materials, additions to and changes in financial and
operating systems, and related administrative activities.
On November 26, 1999, the Company entered into a definitive merger
agreement pursuant to which Algos will merge with a subsidiary of Endo
Pharmaceuticals Holdings Inc. in a tax-free transaction. In the transition,
Algos shareholders will receive common stock of Endo and warrants to purchase
additional shares of common stock of Endo for nominal consideration. The
warrants will become exercisable only if the U.S. Food and Drug Administration
approves Algos' New Drug Application for MorphiDex'r' by a specified date.
The agreement places restrictions on the Company's ability to enter into
certain transaction, including incurring debt, issuing additional shares of
stock, paying dividends, disposing of assets and entering into certain
significant agreements. The transaction is subject to the approval of Algos
shareholders, regulatory approvals and certain other conditions and is
expected to be completed in the second quarter of 2000. Algos will reimburse
Endo for all out-of-pocket expenses if the Algos shareholders do not approve
the merger.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2000 Compared to the Three Months
Ended March 31, 1999
Revenue:
Research and development:
In the three months ended March 31, 2000, research and development expenses
were $1.9 million, a decrease of $0.6 million, or 23%, from the three months
ended March 31, 1999. Research and development expenses were higher in 1999 due
to the impact of large-scale clinical studies of MorphiDex'r' and a greater
number of ongoing clinical studies of HydrocoDex'TM' and other Algos products in
development. Algos' development expenses may increase in future periods as
additional clinical studies are initiated and Algos' products enter more
advanced stages of development.
Selling, general and administrative:
In the three months ended March 31, 2000, selling, general and
administrative expenses were $1.4 million, a decrease of $2.1 million from the
three months ended March 31, 1999. The decrease was primarily attributable to
expenses incurred in 1999 in preparation for the possible future
commercialization of products, including fees to sales and marketing
consultants, educational materials and activities, and the addition of marketing
personnel. Algos expects to delay some other expenses associated with the
possible commercialization of products pending amendments to the MorphiDex'r'
new drug application. In addition, in 1999, Algos incurred higher compensation
expenses, professional fees and other general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
In the three months ended March 31, 2000 and 1999, spending for Algos'
product development efforts and other pre-commercialization activities resulted
in net cash outflows from operations of $2.5 million, $3.7 million,
respectively. Algos funded this spending primarily from accumulated cash
balances which resulted primarily from sales of common stock. In the three
months ended March 31, 2000, net cash outflows from operations decreased
compared to the three months ended March 31, 2000 as the result of lower
development expenses and lower spending for other pre-commercialization
activities.
Algos expects to incur product development expenses as clinical trials of
MorphiDex'r' and HydrocoDex'TM' continue and other drugs that the Company
currently has under development move into advanced clinical trials and as
additional drugs are developed and research and development staff
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increased. In August 1999, Algos received a not approvable letter from the FDA
regarding its new drug application for MorphiDex'r'. Algos will incur additional
development costs associated with amending the MorphiDex'r' new drug
application. Algos currently expects that as a stand-alone entity its cash and
marketable securities at March 31, 2000 will be sufficient to fund its
development activities through the year 2001 and support a resubmission of the
new drug application based upon Algos' current schedule of clinical trials and
level of business activities. However, if additional trials are necessary or
advisable, or if additional products are developed, Algos may require additional
funds. In the event that internally generated funds are insufficient for such
efforts, Algos will need to raise additional capital. We cannot assure you that
Algos would be able to obtain such additional financing on terms acceptable to
Algos. Algos' future funding requirements will depend on a number of factors,
including: the results of its development efforts; the timing and costs of
obtaining required regulatory approvals; the amount of resources required for
activities in preparation for the possible commercialization of MorphiDex'r';
the successful completion of the merger of Algos with Endo Pharmaceuticals
Holdings Inc. the commercialization of competing products; the execution of
licensing or other collaborative research agreements on terms acceptable
to Algos; and the cost of prosecuting and defending patents.
NET OPERATING LOSSES
At December 31, 1999, Algos had accumulated net operating loss
carryforwards of approximately $48 million for federal and state tax purposes.
Federal carryforwards expire in 2009 through 2019 and are available to reduce
future taxable income recognized in the carryforward period, if any. Due to the
uncertainty of future taxable income, Algos has established a valuation
allowance for these carryforwards and has not recognized their potential benefit
on a current basis. The future utilization of these carryforwards may be limited
by Section 382 of the Internal Revenue Code related to changes ownership of
Algos.
OTHER
Generally, Algos' results of operations are not significantly affected by
seasonal factors and Algos does not believe that inflation has had a significant
impact on its business.
Statement of Financial Accounting Standards (SFAS) No. 133, 'Accounting for
Derivative Instruments and Hedging Activities' is effective in the year 2001.
Based on Algos' current business activities, the statement is not expected to
have a material impact on Algos' financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements". Algos is
currently evaluating the future impact of SAB No. 101 on its financial
statements.
FORWARD LOOKING STATEMENTS
This Report contains "forward-looking" statements, within the meaning of
Section 27A of Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, that are based on management's beliefs and
assumptions, current expectations, estimates, and projections. Statements
that are not historical facts, including statements which are preceded by,
followed by, or that include the words "believes;" "anticipates;" "plans;"
"expects;" or similar expressions and statements about Algos' development or
commercialization schedules and future use of funds are forward-looking
statements. Many of the factors that will determine Algos' future results
are beyond the ability of Algos to control or predict. These statements
are subject to risks and uncertainties and, therefore, actual results may differ
materially. The reader should not rely on any forward-looking statement.
Algos undertakes no obligations to update any forward-looking statements
whether as a result of new information, future events or otherwise. Important
factors that may affect future results include, but are not limited to:
uncertainty associated with pre-clinical studies and clinical trials and
regulatory approval; uncertainty of market acceptance of new products; impact of
competitive products and pricing; product development; changes in laws and
regulations; customer demand; possible future litigation; the availability of
future financing and reimbursement policies of government and private health
insurers and others. Readers should evaluate any statement in light of these
important factors. See Exhibit 99 to this report on Form 10-Q.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
EXHIBIT
NO. TITLE
--- -----
1.1 -- Purchase and Registration Rights Agreement, dated as of
November 9, 1998(6)
2.1 -- The Merger Agreement, dated November 26, 1999, by and
among Endo Pharmaceutical Holdings Inc., Endo Inc. and
Algos Pharmaceutical Corporation (the 'Merger
Agreement')(7)
3.1 -- Amended and Restated Certificate of Incorporation of
Algos Pharmaceutical Corporation(1)
3.2 -- Amended and Restated By-laws of Algos Pharmaceutical
Corporation(1)
4.1 -- Form of Stock Certificate of Common Stock(1)
4.2 -- Warrant to Purchase 250,000 Shares of Common Stock of
Algos Pharmaceutical Corporation and Biotech Target S.A.,
a Panamanian corporation, dated November 9, 1998(6)
5.1 -- Opinion of Latham & Watkins as to the validity of the
Common Stock(1)
10.1.1 -- Employment Agreement with Respect to John W. Lyle(4)
10.1.3 -- Employment Agreement with Respect to Frank S. Caruso(1)
10.1.4 -- Employment Agreement with Respect to Joseph Sardella(5)
10.2.1 -- 1994 Stock Option Plan(1)
10.2.2 -- 1996 Stock Option Plan(1)
10.2.3 -- 1996 Non-Employee Director Stock Option Plan(2)
10.3.1 -- Algos Pharmaceutical Corporation Stockholders'
Agreement(1)
10.4.1 -- License Agreement with The Medical College of
Virginia(1)(A)
10.4.2 -- License Agreement with McNeil Consumer Products
Company(1)(A)
10.5 -- Lease Agreement with Commercial Realty & Resources
Corp.(3)
21 -- Subsidiaries of the Registrant(1)
27 -- Financial Data Schedule, March 31, 2000
99 -- Risk Factors
99.1 -- Form of Warrant Agreement of Endo Pharmaceutical Holdings
Inc. (attached as Exhibit C to the Merger Agreement)(7)
99.2 -- Form of Warrant Agreement of Endo Pharmaceutical Holdings
Inc. (attached as Exhibit I to the Merger Agreement)(7)
99.3 -- Form of Stockholder Voting Agreement between Endo
Pharmaceuticals Holdings Inc. and the stockholder named
therein (attached as Exhibit B to the Merger Agreement)(7)
99.4 -- Form of Employment Agreement between Endo Pharmaceuticals
Holdings Inc. and John W. Lyle (attached as Exhibit H to
the Merger Agreement)(7)
99.5 Letter Agreement, dated November 26, 1999, among Algos
Pharmaceutical Corporation, KIA V, L.P. and KEP V, L.P.(7)
(footnotes continued on next page)
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(footnotes from previous page)
(1) Incorporated by reference to the Registrant's registration statement on
Form S-1 declared effective on September 25, 1996.
(2) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996.
(3) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1997.
(4) Incorporated by Reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997
(5) Incorporated by Reference to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1998.
(6) Incorporated by Reference to the Registrant's registration statement on
Form S-3 dated March 10, 1999.
(7) Incorporated by reference to the Registrant's current Report on Form 8-K
dated November 26th, 1999.
(A) Portions of this Exhibit have received confidential treatment pursuant to
Rule 406(b) under the Securities Act.
Reports on Form 8-K:
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALGOS PHARMACEUTICAL CORPORATION
Date May 15, 2000 /s/ John W. Lyle
----------------- ---------------------------------
John W. Lyle
President and Chief Executive Officer
Date May 15, 2000 /s/ Gary R. Anthony
----------------- ---------------------------------
Gary R. Anthony
Chief Financial Officer and Principal
Accounting Officer
9