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 June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________________ to ____________________
Commission file number 000-28844
ALGOS PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-3142274
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation 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 (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 such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes __x__ No ____
The aggregate number of shares of the Registrant's common stock outstanding on
August 3, 1998 was 16,016,649
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEEETS
(UNAUDITED)
December 31, June 30,
1997 1998
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 20,246,152 $ 308,127
Marketable securities, current 17,922,359 29,989,167
Interest receivable 484,789 680,445
Prepaid expenses 315,679 225,011
------------ ------------
Total current assets 38,968,979 31,202,750
Marketable securities, noncurrent 3,004,580 4,000,000
Restricted cash 150,000 150,000
Property and equipment, net 146,328 1,021,119
Other assets 90,591 30,582
------------ ------------
Total assets $ 42,360,478 $ 36,404,451
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,861,976 $ 3,749,039
Other current liabilities 739,415 349,305
------------ ------------
Total current liabilities 2,601,391 4,098,344
------------ ------------
Commitments
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares
authorized, 15,951,701 and 15,999,551 shares
outstanding as of December 31, 1997 and June 30,
1998, respectively 159,517 159,996
Additional paid-in-capital 56,151,504 56,645,431
Unearned compensation expense (753,707) (921,041)
Deficit accumulated during the development stage (15,798,227) (23,578,279)
------------ ------------
Total stockholders' equity 39,759,087 32,306,107
============ ============
Total liabilities and stockholders' equity $ 42,360,478 $ 36,404,451
============ ============
The accompanying notes are an integral part of these financial statements.
2
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three months ended For the six months ended Cumulative
June 30, June 30, from inception
-------------------------- ------------------------ to June 30,
1997 1998 1997 1998 1998
---- ---- ---- ---- ----
Revenues $ -- $ -- $ -- $ -- $ 3,311,000
Operating expenses:
Research and development 1,968,683 3,783,018 5,134,043 7,003,478 22,580,109
General and administrative 617,594 1,114,847 1,234,331 1,856,379 8,969,629
----------------- ----------------- ----------------- ----------------- -----------------
Total operating expenses 2,586,277 4,897,865 6,368,374 8,859,857 31,549,738
----------------- ----------------- ----------------- ----------------- -----------------
Loss from operations (2,586,277) (4,897,865) (6,368,374) (8,859,857) (28,238,738)
Interest income 655,544 515,615 1,212,862 1,079,804 4,660,458
----------------- ----------------- ----------------- ----------------- -----------------
Net loss $ (1,930,733) $(4,382,250) $ (5,155,512) $ (7,780,053) $ (23,578,280)
================= ================= ================= ================= =================
Net loss per common share,
basic and diluted $ (0.12) $ (0.27) $ (0.33) $ (0.49)
Weighted average common
shares outstanding 15,818,662 15,999,551 15,799,475 15,977,459
The accompanying notes are an integral part of these financial statements.
3
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Cumulative
from
For the six months ended inception to
June 30, June 30,
1997 1998 1998
---------------- --------------- --------------
Cash flows from operating activities $ (4,400,086) $ (6,079,205) $(18,316,022)
Cash flows from investing activities:
Purchases of marketable securities (30,813,025) (13,063,945) (60,877,393)
Redemption of marketable securities 26,816,072
Purchases of property and equipment (81,596) (918,000) (1,227,011)
----------------- ---------------- ---------------
Net cash used in investing activities (30,894,621) (13,981,945) (35,288,332)
----------------- ---------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock 6,659,015
Proceeds from issuance of common stock 73,601 123,125 47,253,465
----------------- ---------------- ---------------
Net cash provided by financing activities 73,601 123,125 53,912,480
----------------- ---------------- ---------------
Net increase (decrease) in cash and cash
equivalents (35,221,106) (19,938,025) 308,127
Cash and cash equivalents, beginning of period 48,575,719 20,246,152 --
----------------- ---------------- ---------------
Cash and cash equivalents, end of period $ 13,354,613 $ 308,127 $ 308,127
================= ================ ===============
The accompanying notes are an integral part of these financial statements.
4
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. ACCOUNTING POLICIES
In the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income",
which establishes standards for determining and reporting comprehensive income
and its components. Comprehensive income represents the change in net assets of
a business enterprise as a result of nonowner transactions. The adoption of the
standard did not have an impact on the Company's financial statements.
3. LOSS PER SHARE
Since the Company incurred net losses in all periods presented,
outstanding options and warrants to purchase an aggregate of 1,020,642 and
1,270,415 shares of Common Stock at June 30, 1997 and 1998, respectively, and
100,000 shares of convertible Series B Preferred Stock which were outstanding at
June 30, 1997 were not included in diluted per share calculations, as their
effect would be antidilutive.
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of the following:
December 31, June 30,
1997 1998
------------ -----------
Leasehold improvements $ 506,770
Office furniture and equipment $ 152,727 525,714
Computer equipment 156,284 194,527
---------- ----------
309,011 1,227,011
Less accumulated depreciation 162,683 205,892
---------- ----------
$ 146,328 $1,021,119
========== ==========
5. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
December 31, June 30,
1997 1998
------------ --------
Accrued research expenses $392,618 $166,273
Accrued compensation 346,797 183,032
-------- --------
$739,415 $349,305
======== ========
5
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
6. COMMITMENTS
In April 1998, the Company relocated its executive offices and a
ten-year operating lease agreement signed in 1997 became effective. Minimum
annual lease payments are as follows:
1998 $179,080
1999 268,620
2000 268,620
2001 268,620
2002 268,620
Balance of Term 1,643,300
6
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 for
pain management. Since its formation in January 1992, the Company has devoted a
substantial amount of its efforts to licensing technology, recruiting key
management and staff, developing products, filing patents and other regulatory
applications and raising capital.
The Company has incurred losses since its inception and expects to
incur losses in the future. The Company expects that its product development
expenses will increase as the drugs that the Company currently has under
development move into advanced clinical trials and as additional drugs are
developed. In January 1998, the Company initiated the filing of a sequential NDA
for its most developmentally advanced drug, MorphiDex. Upon completion of an
NDA, the Company may incur significant costs associated with the possible
commercialization of MorphiDex prior to the first commercial sale of the
product, including inventory, the establishment of a sales force, initial
promotional activities and other administrative expenses.
Results of Operations
Three months ended June 30, 1997 and 1998
Research and development:
In the three months ended June 30, 1998, research and development
expenses were $3.6 million, an increase of approximately $1.6 million or 82%,
from 1997. In 1998, expenses increased significantly due to large-scale,
advanced clinical trials of MorphiDex. The Company also incurred higher expenses
due to increased development activity for HydrocoDex and the expansion of the
Company's development staff since the second quarter of the prior year. The
effect of these increases was partially offset by reduced expenses in other
development programs.
General and administrative:
In the three months ended June 30, 1998, general and administrative
expenses were $1.1 million, an increase of $0.5 million or 81%, from 1997. In
1998, expenses increased due to the general expansion of the Company's business
and preliminary activities related to the possible future commercialization of
products, including the addition of sales and marketing personnel and the
expansion of the Company's administrative offices.
Interest income:
Interest income decreased 21% in the three months ended June 30, 1998
to $0.5 million due to lower average cash and securities balances compared to
the second quarter of the prior year.
7
Six months ended June 30, 1997 and 1998
Research and development:
In the six months ended June 30, 1998, research and development
expenses were $6.8 million, an increase of approximately $1.7 million or 33%,
from 1997. In 1998, expenses increased significantly due to large-scale,
advanced clinical trials for MorphiDex and the expansion of the Company's
development staff since mid-1997. The effect of these increases was partially
offset by reduced expenses related to bioavailability studies and the costs of
manufacturing small-scale regulatory test batches of MorphiDex, which occurred
in 1997.
General and administrative:
In the six months ended June 30, 1998, general and administrative
expenses were $1.9 million, an increase of $0.6 million or 50%, from 1997. In
1998, expenses increased due to the general expansion of the Company's business
and preliminary activities related to the possible future commercialization of
products, including the addition of sales and marketing personnel and the
expansion of the Company's administrative offices.
Interest income:
Interest income decreased 11% in the six months ended June 30, 1998 to
$1.1 million as a result of lower average cash and securities balances.
Liquidity and Capital Resources
As a result of its drug development efforts, the Company has
experienced net cash outflows from operations since its inception in 1992. In
the six months ended June 30, 1998, cash outflows from operations amounted to
approximately $6.1 million compared to $4.4 million in the first six months of
1997, primarily as a result of its increased development spending on MorphiDex.
The Company's future funding requirements will depend on a number of
factors, including: the amount of resources required for the establishment of
sales and distribution capabilities; promotion and other activities in
preparation for the possible commercialization of MorphiDex; the results of its
development efforts; the timing and costs of obtaining required regulatory
approvals; the commercialization of competing products; the execution of
licensing or other collaborative research agreements on terms acceptable to the
Company; and the cost of prosecuting and defending patents.
The Company intends to continue certain ongoing large-scale clinical
trials for MorphiDex and has entered into several research and development
commitments for HydrocoDex. The Company expects that its product development
expenses will continue or increase as clinical trials of MorphiDex continue and
other drugs that the Company currently has under development, including
HydrocoDex, move into advanced clinical trials and as additional drugs are
developed. Additionally, the Company will incur increased expenses resulting
from the planned expansion of its research and development staff. The Company
currently expects that its cash and marketable securities at June 30, 1998 would
be sufficient to fund its development
8
activities for approximately two years, based upon the Company's current
schedule of clinical trials. If, however, a significant portion of these funds
is required in the commercialization of MorphiDex, or if additional trials are
necessary or advisable, or if additional products are developed, the Company may
require additional funds to complete such trials. In the event that revenue and
income from successful product introductions or other internally generated funds
are insufficient for such efforts, the Company will need to raise additional
funds either by incurring debt, issuing additional equity or through
collaborative or license arrangements to ensure continuity of operations. There
is no assurance that the Company would be able to obtain such additional
financing on terms acceptable to the Company.
YEAR 2000
The Company believes that its existing financial and operational
systems will function adequately with respect to the use of dates in the year
2000 and thereafter. The Company estimates that the costs associated with the
Year 2000 issue will not have a material impact on the Company's financial
position or operating results. However, there is no assurance that other
entities will not have Year 2000 problems that will affect the Company. In
addition, the Company may make significant additions to and changes in its
existing systems in anticipation of the possible commercialization of products
which would affect the Company's exposure to Year 2000 problems. Therefore,
the Company's assessment of its Year 2000 issues is not complete.
This Management's Discussion and Analysis of Financial condition and
Results of Operations contains "forward-looking" statements, within the meaning
of Section 27A of Securities Act of 1993, 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 the Company's development schedule and
future use of funds are forward-looking statements. Many of the factors that
will determine the Company's future results are beyond the ability of the
Company 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. The Company undertakes no
obligations to update any forward-looking statement 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; and the availability of future financing. Readers should
evaluate any statement in light of these important factors. See "Risk Factors".
9
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of Stockholders of Algos Pharmaceutical Corporation was
held on June 9, 1998.
(b) The following Directors nominated by the Company were elected for three-year
terms:
Roger H. Kimmel and Dieter A. Sulser
John W. Lyle, Donald G. Drapkin, Michael Hyatt and James R. Ledley
continue their terms as Director after the meeting.
(c) At the Annual Meeting, stockholders approved the following:
(i) Election of Directors:
Votes For Votes Against Abstain
--------- ------------- -------
Roger H. Kimmel 12,072,985 2,765 0
Dieter A. Sulser 12,072,985 2,765 0
(ii) An increase in the number of shares which may be granted under the
Company's 1996 Incentive Stock Option Plan by 800,000 shares.
Votes For Votes Against Abstain
--------- ------------- -------
12,003,286 41,038 31,426
10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
Exhibit
No. Title
---------------------------------------------------------------------------
3.1 Form of Amended and Restated Certificate of Incorporation
of Algos Pharmaceutical Corporation(1)
3.2 Form of Amended and Restated By-laws of Algos Pharmaceutical Corporation(1)
4.1 Form of Stock Certificate of Common Stock(1)
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
10.2.1 1994 Stock Option Plan(1)
10.2.2 Form of 1996 Stock Option Plan(1)
10.2.3 Form of 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)'D''D'
10.4.2 License Agreement with McNeil(1)'D''D'
10.4.3 Registration Rights Agreement with The Medical College of Virginia(1)
10.5 Lease Agreement with Commercial Realty & Resources Corp.(3)
21 Subsidiaries of the Registrant(1)
27 Financial Data Schedule
99 Risk Factors
(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.
'D''D' Portions of this Exhibit have received confidential treatment pursuant to
Rule 406(b) under the Securities Act.
Reports on Form 8K:
None
11
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 August 14, 1998 /s/ John W. Lyle
------------------------- -------------------------------------
John W. Lyle
President and Chief Executive Officer
Date August 14, 1998 /s/ Gary R. Anthony
------------------------- -------------------------------------
Gary R. Anthony
Chief Financial Officer and Principal
Accounting Officer
12
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as............................. 'TM'
The dagger symbol shall be expressed as................................ 'D'