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, 1999
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 (I.R.S. Employer Identification No.)
of 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 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
April 23, 1999 was 17,353,545.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ALGOS PHARMACEUTICAL CORPORATION
(A Development Stage Enterprise)
BALANCE SHEETS
(Unaudited)
December 31, March 31,
1998 1999
---- ----
ASSETS
Current assets:
Cash and cash equivalents $37,025,445 $28,529,862
Marketable securities, current 9,001,528 13,888,702
Interest receivable 417,042 268,203
Prepaid expenses and other current assets 683,866 629,456
----------- -----------
Total current assets 47,127,881 43,316,223
Marketable securities, noncurrent 4,052,824 4,042,709
Restricted cash 150,000 150,000
Property and equipment, net 1,098,819 1,152,266
----------- -----------
Total assets $52,429,524 $48,661,198
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,117,795 $ 3,561,978
Other current liabilities 794,044 741,696
----------- -----------
Total current liabilities 2,911,839 4,303,674
----------- -----------
Commitments
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares
authorized, 17,028,649 and 17,353,045 shares
issued and outstanding, respectively 170,287 173,531
Additional paid-in-capital 81,626,800 81,781,877
Unearned compensation expense (611,108) (519,010)
Deficit accumulated during the development stage (31,668,294) (37,078,874)
----------- -----------
Total stockholders' equity 49,517,685 44,357,524
----------- -----------
Total liabilities and stockholders' equity $52,429,524 $48,661,198
----------- -----------
----------- -----------
The accompanying notes are an integral part of these financial statements.
1
ALGOS PHARMACEUTICAL CORPORATION
(A Development Stage Enterprise)
STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended Cumulative
March 31, from inception
-------------------------------- to March 31,
1998 1999 1999
---- ---- ----
Revenues $ - $ - $ 3,311,000
--------------- ---------------- ----------------
Operating expenses:
Research and development 3,220,459 2,516,989 31,179,119
Selling, general and administrative 741,532 3,462,049 15,388,576
--------------- ---------------- ----------------
Total operating expenses 3,961,991 5,979,038 46,567,695
--------------- ---------------- ----------------
Loss from operations (3,961,991) (5,979,038) (43,256,695)
Interest income 564,189 568,458 6,177,821
--------------- ---------------- ----------------
Net loss $ (3,397,802) $ (5,410,580) $(37,078,874)
=============== ================ ================
Net loss per common share, basic and diluted $ (0.21) $ (0.31)
=============== ================
Weighted average common
shares, outstanding basic and diluted 15,955,367 17,299,134
=============== ================
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)
For the three months ended Cumulative
March 31, from inception
-------------------------------- to March 31,
1998 1999 1999
---- ---- ----
Cash flows from operating activities $ (3,011,963) ($3,706,149) $(31,267,627)
Cash flows from investing activities:
Investment in marketable securities (15,035,672) (9,842,358) (76,753,015)
Redemption of marketable securities 7,968,575 5,000,000 58,853,072
Purchases of property and equipment (69,430) (105,397) (1,508,992)
----------------- ---------------- ------------------
Net cash used in investing activities (7,136,527) (4,947,755) (19,408,935)
----------------- ---------------- ------------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock 6,659,015
Proceeds from issuance of common stock 123,126 158,321 72,547,409
----------------- ---------------- ------------------
Net cash provided by financing activities 123,126 158,321 79,206,424
----------------- ---------------- ------------------
Net increase (decrease) in cash and cash equivalents (10,025,364) (8,495,583) 28,529,862
Cash and cash equivalents, beginning of period 20,246,152 37,025,445 -
----------------- ---------------- ------------------
Cash and cash equivalents, end of period $ 10,220,788 $ 28,529,862 $ 28,529,862
================= ================ ==================
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 1,060,455 and 1,508,481 shares
of Common Stock at March 31, 1998 and 1999, respectively, were not included in
diluted per share calculations, as their effect would be antidilutive.
4
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, 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 (NDA) for its most developmentally advanced drug, MorphiDex'r'. The
Company may incur significant costs associated with the possible
commercialization of MorphiDex'r' prior to the first commercial sale of the
product, including the purchase of inventory, the establishment of a sales
force, the 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 March 31, 1998 and 1999
Research and development:
In the three months ended March 31, 1999, research and development expenses
were $2.5 million, a decrease of approximately $700,000, or 22%, from 1998. In
1999, expenses decreased due to the impact in 1998 of large-scale, advanced
clinical trials and toxicology studies of MorphiDex'r' and the conduct of
formulation and manufacture of HydrocoDex'TM'clinical supplies. These effects
were offset by expenses related to Phase II clinical studies of HydrocoDex'TM'
in 1999.
Selling, general and administrative:
In the three months ended March 31, 1999, selling, general and
administrative expenses were $3.5 million, an increase of $2.7 million from
1998. The significant increase was primarily attributable to the possible future
commercialization of products including fees to sales and marketing consultants,
educational materials and activities, and the addition of marketing personnel,
as well as the general expansion of the Company's business activities.
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 three
months ended March 31, 1999, cash outflows from operations amounted to
approximately $3.7 million compared to $3.0 million in the first quarter of
1998, primarily as a result of its increased expenses related to the possible
commercialization of MorphiDex'r'.
The Company intends to continue certain pre-commercialization activities
and ongoing large-scale clinical trials for MorphiDex'r' in 1999 and has entered
into several research and development commitments for HydrocoDex'TM'. The
Company expects to incur product development expenses as clinical
trials of MorphiDex'r' 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 research and development staff
increased. In August 1998, the Company filed an NDA for MorphiDex'r'. Algos may
incur significant costs associated with the possible commercialization of
MorphiDex'r' prior to the first commercial sale of
5
the product, including the purchase of inventory, the establishment of a sales
force, the preparation of promotional plans and materials, additions to and
changes in financial and operating systems and other related administrative
expenses. The Company currently expects that its cash and marketable securities
at March 31, 1999 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. However, if a significant portion of existing funds is required
in the preparation for the possible commercialization of MorphiDex'r', 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.
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; the preparation of promotional plans and
materials and other activities in preparation for the possible commercialization
of MorphiDex'r'; 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.
Year 2000
A potential problem exists for all companies that rely on computers as the
year 2000 approaches. Any of Algos' 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.
Algos is in the process of evaluating the impact of the Year 2000 Issue and
currently believes that the financial and operational systems of Algos, as
currently used, will function adequately with respect to the Year 2000 Issue
given that Algos is not significantly reliant on its computer software
applications and systems during its developmental stage. However, if certain
data management and statistical applications do not function properly, the
analysis and reporting of study results could be delayed and the timing of
subsequent development activities and regulatory filings adversely affected. In
addition, Algos has very limited information concerning the compliance status of
its third-party contractors. Algos' current third party contractors generally
test Algos products and provide Algos with the results of those tests. Algos
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'r', Algos intends to
have third parties manufacture and distribute its products. Algos will place
significant dependence on the third parties' computer systems for purchasing,
production, customer order entry and invoicing and other related activities. A
disruption in these systems could result in lost revenue from inventory
shortages, improper execution of customer orders and/or delays in the resolution
and collection of outstanding invoices. Algos 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 Algos as part of its
preparation for the commercialization of MorphiDex'r'. Algos has filed an NDA
for MorphiDex'r' 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'r'. If
Algos makes any such additions or changes, it would affect Algos' exposure to
the Year 2000 Issue since Algos would become more reliant on its computer
software applications and systems. Therefore, Algos' assessment of its Year 2000
Issue is not complete and Algos cannot complete its assessment or develop any
contingency plans until mid-1999.
6
At this time, Algos 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. Algos has not incurred more than $10,000 of costs to date
related to the Year 2000 Issue.
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 the Company's development or
commercialization schedules 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 and others. Readers should evaluate any statement in
light of these important factors. See "Risk Factors".
7
Item 6. Exhibits and Reports on Form 8-K
(3) Exhibits:
Exhibit
No. Title
- ------- ----------------------------------------------------
1.1 --Purchase and Registration Rights Agreement, dated as of November 9, 1998(6)
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)
10.4.3 --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, March 31, 1999
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.
(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.
(A) Portions of this Exhibit have received confidential treatment pursuant to
Rule 406(b) under the Securities Act.
8
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 14, 1999 /s/ John W. Lyle
---------------- ----------------------------------------
John W. Lyle
President and Chief Executive Officer
Date May 14, 1999 /s/ Gary R. Anthony
---------------- ----------------------------------------
Gary R. Anthony
Chief Financial Officer and Principal
Accounting Officer
9
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as............................. 'TM'
The registered trademark symbol shall be expressed as.................. 'r'