SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 incorporation or (I.R.S. Employer Identification No.)
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
November 11, 1998 was 17,028,649.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
(Unaudited)
December 31 September 30
1997 1998
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 20,246,152 $ 6,303,792
Marketable securities 17,922,359 19,029,700
Interest receivable 484,789 341,620
Prepaid expenses and other current assets 315,679 798,632
------------ ------------
Total current assets 38,968,979 26,473,744
Marketable securities, noncurrent 3,004,580 4,000,000
Restricted cash 150,000 150,000
Property and equipment, net 146,328 1,051,341
Other assets 90,591 916
------------ ------------
Total assets $ 42,360,478 $ 31,676,001
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,861,976 $ 2,805,299
Other current liabilities 739,415 693,823
------------ ------------
Total current liabilities 2,601,391 3,499,122
------------ ------------
Commitments
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares authorized,
15,951,701 and 16,028,649 shares issued and outstanding,
respectively 159,517 160,287
Additional paid-in-capital 56,151,504 56,833,740
Unearned compensation expense (753,707) (833,108)
Deficit accumulated during the development stage (15,798,227) (27,984,040)
------------ ------------
Total stockholders' equity 39,759,087 28,176,879
------------ ------------
Total liabilities and stockholders' equity $ 42,360,478 $ 31,676,001
============ ============
The accompanying notes are an integral part of these financial statements.
2
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
(Unaudited)
Cumulative from
For the three months ended For the nine months ended inception to
September 30 September 30 September 30
1997 1998 1997 1998 1998
---- ---- ---- ---- ----
Revenues $ - $ - $ - $ - $ 3,311,000
------------- ------------- ------------- -------------- --------------
Operating expenses:
Research and development 2,370,380 3,396,058 7,504,423 10,399,536 25,976,167
Selling, general and administrative 622,823 1,438,204 1,857,154 3,294,583 10,407,833
------------- ------------- ------------- -------------- --------------
Total operating expenses 2,993,203 4,834,262 9,361,577 13,694,119 36,384,000
------------- ------------- ------------- -------------- --------------
Loss from operations (2,993,203) (4,834,262) (9,361,577) (13,694,119) (33,073,000)
Interest income 625,167 428,501 1,838,029 1,508,306 5,088,960
------------- ------------- ------------- -------------- --------------
Net loss $ (2,368,036) $ (4,405,761) $ (7,523,548) $ (12,185,813) $ (27,984,040)
============= ============= ============= ============== ==============
Net loss per common share,
basic and diluted $ (0.15) $ (0.28) $ (0.48) $ (0.76)
Weighted average common
shares outstanding, basic and
diluted 15,899,597 16,018,284 15,832,849 15,991,067
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
For the nine months ended from inception to
September 30, September 30,
1997 1998 1998
---- ---- ----
Cash flows from operating activities $ (6,326,115) $ (11,150,111) $ (23,386,928)
Cash flows from investing activities:
Purchases of marketable securities (48,014,558) (25,034,720) (72,848,168)
Redemption of marketable securities 13,000,000 22,947,969 49,764,042
Purchases of property and equipment (106,886) (1,017,223) (1,326,234)
------------- -------------- -------------
Net cash used in investing activities (35,121,444) (3,103,974) (24,410,360)
------------- -------------- -------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock 6,659,015
Proceeds from issuance of common stock 74,201 311,725 47,442,065
------------- -------------- -------------
Net cash provided by financing activities 74,201 311,725 54,101,080
------------- -------------- -------------
Net increase (decrease) in cash and cash equivalents (41,373,358) (13,942,360) 6,303,792
Cash and cash equivalents, beginning of period 48,575,719 20,246,152 -
------------- -------------- -------------
Cash and cash equivalents, end of period $ 7,202,361 $ 6,303,792 $ 6,303,792
============= ============== ==============
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 non-owner 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 1,018,737 and
1,399,755 shares of Common Stock at September 30, 1997 and 1998, respectively
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, September 30,
1997 1998
------------- --------------
Leasehold improvements - $ 515,151
Office furniture and equipment 152,727 582,903
Computer equipment 156,284 228,180
------------- --------------
309,011 1,326,234
Less accumulated depreciation 162,683 274,893
------------- --------------
$146,328 $1,051,341
============= ==============
5
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
5. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
December 31, September 30,
1997 1998
------------- ------------
Accrued research expenses $392,618 $423,823
Accrued compensation 346,797 270,000
------------- ------------
$739,415 $693,823
============= ============
6. COMMITMENTS
In April 1998, the Company's ten-year operating lease for its executive
offices 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
7. SUBSEQUENT EVENT
In November 1998, the Company received $25,000,000 from a private
placement of 1,000,000 shares of Common Stock and a warrant to purchase
250,000 shares of Common Stock at an exercise price of $25 per share.
The warrant is exercisable beginning November 9, 1999 and expires November 9,
2003. Algos has agreed to provide certain resale registration rights under the
Securities Act of 1933 with respect to the Common Stock sold or issuable under
the warrant.
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's product development expenses may
increase as additional drugs are developed. In August 1998, the Company filed a
New Drug Application for its most developmentally advanced drug, MorphiDex'TM'.
The Company may incur significant costs associated with the possible
commercialization of MorphiDex'TM' prior to the first commercial sale of the
product, including the purchase of inventory, the establishment of a sales
force, preparation of promotional plans and materials, additions to and changes
in financial and operating systems and other related administrative expenses.
Results of Operations
Three months ended September 30, 1997 and 1998
Research and development:
In the three months ended September 30, 1998, research and development
expenses were $3.4 million, an increase of approximately $1.0 million or 43%,
from the comparable 1997 period. The significant increase in 1998 third quarter
expenses was primarily attributable to large-scale, advanced clinical trials of
MorphiDex'TM'. The Company also incurred higher expenses due to increased
development activity for HydrocoDex'TM' and the expansion of the Company's
development staff since the 1997 third quarter. The effect of these increases
was partially offset by reduced expenses in other development programs.
Selling, general and administrative:
In the three months ended September 30, 1998, selling, general and
administrative expenses were $1.4 million, an increase of $0.8 million or 131%,
from the comparable 1997 period. The 1998 third quarter expense increase was
primarily attributable to general expansion of the Company's business, additions
to management personnel, market research and expenditures related to the
possible future commercialization of products such as the addition of sales and
marketing personnel and the move to the Company's new administrative offices.
Interest income:
Interest income decreased 31% in the three months ended September 30,
1998 to $0.4 million due to lower average cash and securities balances compared
to the 1997 third quarter.
7
Nine months ended September 30, 1997 and 1998
Research and development:
In the nine months ended September 30, 1998, research and development
expenses were $10.4 million, an increase of approximately $2.9 million or 39%,
from the 1997 nine-month period. The significant increase in the nine-month 1998
expenses was primarily attributable to large-scale, advanced clinical trials for
MorphiDex'TM' and the expansion of the Company's development staff. The impact
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'TM', which occurred in 1997.
Selling, general and administrative:
In the nine months ended September 30, 1998, selling, general and
administrative expenses were $3.3 million, an increase of $1.4 million or 77%,
from the 1997 nine-month period. The nine-month results included approximately
$0.8 million of expenses for pre-marketing and related activities in preparation
for the commercialization of MorphiDex'TM'. The company incurred increased
general and administrative costs to support the Company's business activities,
including the relocation and expansion of the Company's headquarters facilities
in April 1998.
Interest income:
Interest income decreased 18% in the nine months ended September 30,
1998 to $1.5 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 nine months ended September 30, 1998, cash outflows from operations amounted
to approximately $11.2 million compared to $6.3 million in the first nine months
of 1997, primarily as a result of its increased MorphiDex'TM' development
spending.
The Company intends to continue certain ongoing large-scale clinical
trials for MorphiDex'TM' and has entered into several research and development
commitments for HydrocoDex'TM'. The Company expects to incur continued product
development expenses as clinical trials of MorphiDex'TM' continue and other
drugs that the Company currently has under development including HydrocoDex'TM',
move into advanced clinical trials and as additional drugs are developed and its
research and development staff increased. In addition, in August 1998, the
Company filed a New Drug Application for its most developmentally advanced drug,
MorphiDex'TM'. The Company may incur significant costs associated with the
possible commercialization of MorphiDex'TM' prior to the first commercial sale
of the product, including the purchase of inventory, the establishment of a
sales force, preparation of promotional plans and materials, additions to and
changes in financial and operating systems, and other administrative expenses.
In November 1998, to provide greater financial flexibility the Company raised
$25 million in a private sale of common stock and warrants. The Company expects
that its cash and
8
marketable securities will be sufficient to fund its development activities for
approximately two years and provide for certain pre-launch activities based upon
the Company's current schedule of clinical trials and level of business
activities.
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; preparation of promotional plans and
materials and other activities in preparation for the possible commercialization
of MorphiDex'TM'; 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. If additional funds are required in the preparation for the possible
commercialization of MorphiDex'TM', or if additional trials are necessary or
advisable, or if additional products are developed, the Company may require
additional funds. 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
A potential problem exists for all companies that rely on computers as
the year 2000 approaches. Any of the Company's computer software applications
and systems that use only the last two digits of a year to refer to a year may
not properly recognize the year 2000. This phenomenon (the 'Year 2000 Issue')
could cause a disruption of operations, including, among other things, a
temporary inability to engage in normal business activities.
The Company is in the process of evaluating the impact of the Year 2000
Issue and currently believes that the financial and operational systems of the
Company, as currently used, will function adequately with respect to the Year
2000 Issue given that the Company is not significantly reliant on its computer
software applications and systems during its developmental stage. In addition,
the Company has very limited information concerning the compliance status of
its third party contractors. The Company's third party contractors generally
test the Company's pharmaceuticals and provide the Company with its results.
The Company believes that any Year 2000 Issue for such third-party contractors
would not be material, since many activities could be performed without the aid
of a computer. As part of the commercialization of Morphidex'TM', the Company
intends to have third parties manufacture and distribute its products. The
Company will evaluate each potential third party manufacturer's and
distributor's readiness for the Year 2000 Issue and will reevaluate the Year
2000 Issue as it relates to the Company as part of its preparation for the
commercialization of Morphidex'TM'. The Company has filed an NDA for
MorphiDex'TM' and may make significant additions to and changes in its existing
computer software applications and systems and/or the use of such systems in
anticipation of the possible commercialization of MorphiDex'TM'. If the Company
makes any such additions or changes, it would effect the Company's exposure to
the Year 2000 Issue since the Company would become more reliant on its computer
software applications and systems. Therefore, the Company's assessment of its
Year 2000 Issue is not complete and the Company cannot complete its assessment
or develop any contingency plans until mid-1999.
At this time, the Company does not expect that the cost of its Year
2000 Issue compliance program will be material to its business, financial
condition or results of operations and does not currently anticipate any
material disruption in its operations. The Company has not incurred significant
costs to date related to the Year 2000 Issue.
9
Forward-Looking Statements
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 and
commercialization 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 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. Readers should evaluate any statement in light of these important
factors. See "Risk Factors".
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(5)
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 Consumer Products Company(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, 1998.
(5 ) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1998.
'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 11/16/98 /s/ John W. Lyle
------------------- ----------------------------------------
John W. Lyle
President and Chief Executive Officer
Date 11/16/98 /s/ Gary R. Anthony
------------------- ----------------------------------------
Gary R. Anthony
Chief Financial Officer and Principal
Accounting Officer
12
STATEMENT OF DIFFERENCES
The trademark sysmbol shall be expressed as.................................'TM'
The dagger symbol shall be expressed as..................................... 'D'