FORM 10-Q/A
AMENDMENT NO. 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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(Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter period ended January 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER 1-10615
EMISPHERE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3306985
-------- (I.R.S. Employer
(State or jurisdiction of Identification Number)
incorporation or organization)
15 SKYLINE DRIVE 10532
HAWTHORNE, NEW YORK -----
------------------- (Zip Code)
(Address of principal executive offices)
(914) 347-2220
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(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be files by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
Registrant was required to file such reports) and (2) has been subject to
such filing requirements for at least the past 90 days. Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of the Registrant's common stock, $.01 par value,
outstanding as of March 7, 1997 was: 9,520,066
EMISPHERE TECHNOLOGIES, INC.
TABLE OF CONTENTS
AMENDMENT NO. 1 TO QUARTERLY REPORT FOR THE QUARTER ENDED
January 31, 1997
PAGE
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Explanatory Note 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 4
Item 5. Other Information 7
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Item 6. Exhibits and Reports on Form 8-K 8
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2
EXPLANATORY NOTE
This Amendment No. 1 to the Quarterly Report for the quarter ended
January 31, 1997 (the "Quarterly Report") of Emisphere Technologies, Inc. (the
"Company") amends and restates items 2, 5 and 6 contained in the Company's
Quarterly Report as filed by the Company on Form 10-Q on March 17, 1997.
3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements under the caption "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" and elsewhere in
this report on Form 10-Q constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance, or achievements expressed or implied by such forward-
looking statements. Such factors include, among others, the following:
uncertainties related to future test results and viability of the Company's
product candidates, which are in the early stages of development; the need to
obtain regulatory approval for the Company's product candidates; the Company's
dependence on partnerships with pharmaceutical and other companies to develop,
manufacture and commercialize products using the Company's drug delivery
technologies; the Company's dependence on the success of its joint venture with
Elan Corporation plc ("Elan") for the development and commercialization of an
oral heparin product and its strategic alliance with Eli Lilly and Company
("Lilly") for the development and commercialization of certain of Lilly's
therapeutic proteins; the risk of technological obsolescence and risks
associated with the Company's highly competitive industry; the Company's
dependence on patents and proprietary rights; the Company's absence of
profitable operations and need for additional capital; the Company's dependence
on others to manufacture the Company's chemical compounds; the risk of product
liability and policy limits of product liability insurance; potential liability
for human clinical trials; the Company's dependence on key personnel and the
quality, judgment and strategic decisions of management and other personnel;
uncertain availability of third-party reimbursement for commercial medical
products; general business and economic conditions; and other factors referenced
in the Company's report on Form 10-K for the fiscal year ended July 31, 1996.
GENERAL
Emisphere is a drug delivery company focused on the discovery and
application of proprietary synthetic chemical compounds that enable the oral
delivery of therapeutic macromolecules and other compounds that are not
currently deliverable by oral means. Since its inception in 1986, the Company
has devoted substantially all of its efforts and resources to research and
development conducted on its own behalf and through collaborations with
corporate partners and academic research institutions. The Company has had no
product sales to date. The major sources of the Company's working capital have
been proceeds from its initial public offering in 1989, a second public offering
in February 1993, private equity financing, the latest of which occurred with an
affiliate of Elan in October 1995, reimbursement of expenses and other payments
from corporate partners, the registered sale of one million shares of Common
Stock to two institutional investors in April 1996, and income earned on the
investment of available funds. The Company's operations are not significantly
affected by inflation or seasonality.
On February 27, 1997, the Company and Lilly announced that they entered
into a strategic alliance (the "Lilly Strategic Alliance") to utilize
Emisphere's technologies for the improved delivery of certain Lilly therapeutic
proteins with a focus on oral delivery. The major therapeutic focus of the
collaboration is in the area of endocrinology, including growth disorders.
Initially, Lilly is committing limited funds to the Company for research on
delivery of two proteins for a period of 18 months, which will automatically be
extended to 24 months unless the Company and Lilly agree not to extend the term.
The Lilly Strategic Alliance contemplates that Lilly may ultimately exercise
options to license the applicable carriers and market the products utilizing the
combined technologies. If the options are exercised, the Company may receive
from Lilly milestone and other payments aggregating, together with initial
funding, up to $60 million, as well as future royalty payments. The Lilly
Strategic Alliance also contemplates that the Company could receive further
payments for other delivery applications if the focus of the Lilly Strategic
Alliance is expanded beyond the two specified therapeutic proteins or to non-
oral applications.
RESULTS OF OPERATIONS
The Company has since its inception generated significant losses from
operations. The Company does not expect to achieve profitability in the
foreseeable future. Profitability will ultimately depend on the Company's
ability, either alone or in conjunction with third parties, to develop and
commercialize products utilizing the Company's technology. There can be no
assurance that the development will be completed or if completed, any regulatory
agency will approve the final product. Even if final products are developed and
approved, there is no assurance that sales will be sufficient to achieve
profitability. If development of such products is not achieved or approval not
granted, the Company's prospects will be materially affected.
The ability of the Company to reduce its operating losses in the near term
will be dependent upon, among other things, its ability to attract new
pharmaceutical and other companies who are willing to provide funding to the
Company for a portion of the Company's research and development with respect to
specific projects. While the Company is constantly engaged in discussions with
pharmaceutical
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and other companies, there can be no assurance that the Company will enter into
any additional agreements or that the agreements will provide research and
development revenues to the Company.
THREE MONTHS ENDED JANUARY 31, 1997 VS. THREE MONTHS ENDED JANUARY 31, 1996:
For the three months ended January 31, 1997, the Company recognized $535,000 of
research and development revenue compared to $3,033,000 for the three months
ended January 31, 1996. Research and development revenue for the three months
ending January 31, 1997 consisted of the recognition of revenues from the Elan-
Emisphere Joint Venture of approximately $386,000 and payments from two
pharmaceutical companies for which the Company performed feasibility studies.
For the three months ending January 31, 1996 revenue consisted of the
recognition of payments under the Company's agreements with Elan ($3,000,000)
and Pasteur Merieux ("Pasteur"). The recognition of the revenue from Elan was
for work Emisphere performed on the development of an oral Heparin USP
formulation prior to entering into the Elan-Emisphere Venture. Revenue
recognized from Pasteur was a payment for Emisphere's completion of a defined
milestone as called for in its feasibility agreement with Pasteur.
Total operating expenses for the three months ended January 31, 1997, increased
by $1,104,000, or 52%, as compared to the three months ended January 31, 1996.
The details of this increase are as follows:
Research and development costs increased by approximately $364,000, or 24%, in
the three months ended January 31, 1997, as compared to the three months ended
January 31, 1996. This increase is mainly attributable to increased personnel
and related expenses associated with the Company's development of an oral
heparin formulation. The Company also experienced an increase in funding of
outside consultants and universities engaged to conduct studies to help advance
the Company's scientific research efforts. The Company believes that this level
of research and development spending will continue for the foreseeable future
and may increase if operations are expanded.
The increase of $306,000 in the loss in Elan-Emisphere Venture represents the
Company's pro-rata portion of the Venture's loss for the period. No loss was
experienced in the comparable period as the Venture did not commence operations
until September 1996.
General and administrative expenses increased by approximately $434,000, or 71%,
in the three months ended January 31, 1997, as compared to the three months
ended January 31, 1996. This increase is primarily the result of increased
legal and professional fees incurred in connection with the finalization of the
Elan-Emisphere Venture and the agreement with Lilly. This was partially offset
by a decrease in payments made to an outside consultant who assisted the Company
in discussions and negotiations with pharmaceutical companies.
The Company's other income in the three months ended January 31, 1997 increased
by approximately $17,000, or 7%, as compared to the three months ended January
31, 1996. The increase was primarily due to better returns on the Company's
larger investment portfolio.
Based on the above factors, the Company's net loss for the second quarter of
fiscal 1997 totaled $2,429,000, as compared to $1,157,000 net income for the
1996 fiscal quarter.
SIX MONTHS ENDED JANUARY 31, 1997 VS. SIX MONTHS ENDED JANUARY 31, 1996:
For the six months ended January 31, 1997, the Company recognized $2,530,000 of
research and development revenue compared to $3,033,000 for the six months ended
January 31, 1996. Research and development revenue for the six months ending
January 31, 1997 consisted of $2,381,000 from the Elan-Emisphere Venture in
connection with the development of an oral formulation of heparin and $149,000
from two pharmaceutical companies for which the Company performed feasibility
studies. Research and development revenue for the six months ending January 31,
1996 consisted of recognition of payments under the Company's agreements with
Elan ($3,000,000) and Pasteur. The recognition of the revenue from Elan was for
work Emisphere performed on the development of an oral formulation of heparin
prior to entering into the strategic alliance with Elan. Revenue recognized from
Pasteur was a payment for Emisphere's completion of a defined milestone as
called for in its feasibility agreement with Pasteur.
Total operating expenses for the six month period ended January 31, 1997,
increased by approximately $2,361,000, or 57%, as compared to the six month
period ended January 31, 1996. The details of this increase are as follows:
5
Research and development costs increased by approximately $642,000, or 22%, for
the six months ended January 31, 1997, as compared to the six months ended
January 31, 1996. This increase is mainly attributable to increased personnel
and related expenses associated with the Company's development of an oral
heparin formulation. The Company also experienced an increase in funding of
outside consultants and universities engaged to conduct studies to help advance
the Company's scientific research efforts. The Company believes that this level
of research and development spending will continue for the foreseeable future
and may increase if operations are expanded.
The increase of $1,298,000 in the loss in Elan-Emisphere Venture represents the
Company's pro-rata portion of the Venture's loss for the period. No loss was
experienced in the comparable period as the Venture did not commence operations
until September 1996.
General and administrative expenses increased by approximately $422,000, or 34%,
for the six months ended January 31, 1997, as compared to the six months ended
January 31, 1996. This increase is attributable to an increase in legal and
professional fees incurred in connection with the finalization of the Elan-
Emisphere Venture and the agreement with Lilly. This was partially offset by a
decrease in payments made to an outside consultant who assisted the Company in
discussions and negotiations with pharmaceutical companies.
The Company's other income in the six months ended January 31, 1997 increased by
approximately $213,000, or 72%, compared to the six months ended January 31,
1996. This was primarily the result of a larger investment portfolio and better
returns. In addition, the Company realized losses of approximately $41,000 on
the sale of investment securities during the six months ended January 31, 1996,
whereas no losses were incurred during the six months ended January 31, 1997.
Based on the above factors, the Company sustained a net loss for the six months
ended January 31, 1997 of $3,435,000, as compared to a net loss of $783,000 for
the six months ended January 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 1997, the Company had working capital of approximately
$16,578,000 as compared with approximately $17,799,000 at July, 31, 1996. Cash
and cash equivalents and marketable securities were approximately $15,868,000 as
of January 31, 1997, as compared to approximately $18,237,000 at July 31, 1996.
The decrease in the Company's cash and cash equivalents and marketable
securities was primarily due to cash used to fund operations in the first half
of fiscal 1997, partially offset by the exercise of options and reimbursement
from the Elan-Emisphere Venture for certain development costs.
The Company has recently entered into a ten-year noncancelable lease for
new office and laboratory space commencing August 1997. The annual minimum
rental is anticipated to be approximately $1,300,000. Build-out cost for this
space, net of amounts to be paid by the landlord, are expected to total
approximately $3,000,000. On April 9, 1997, the landlord under the Company's new
lease filed for bankruptcy protection under Chapter 11 of Title 11 of the United
States Code. In connection with such a proceeding, the landlord may continue to
honor the lease during and after the bankruptcy proceeding or may reject the
lease, in which case it will no longer be bound by the terms of the lease. In
connection with its efforts to obtain operating funding, the landlord has asked
that the bankruptcy court permit it to use some of the funds for its portion of
the build-out costs under the new lease. The Company intends promptly to begin
the build-out project and to petition the bankruptcy court to direct the
landlord to determine whether it will accept or reject the lease. Should the
landlord reject the lease, there can be no assurance that the Company will be
able to occupy the new space or that it will recover any of its build-out
expenses not previously funded by the landlord. Although there can be no
assurances, the Company believes that, should the landlord reject the lease and
the Company not occupy the new space, the remaining term of the Company's
current lease and the facilities covered by its current lease are sufficient to
allow the Company adequate time to find and lease suitable alternative new
office and laboratory
space.
The Company expects to continue to incur substantial research and
development expenses associated with the development of the Company's oral drug
delivery system. As a result of the ongoing research and development efforts of
the Company, management believes that the Company will continue to incur
operating losses and that, potentially, such losses could increase. The Company
expects to need substantial resources to continue its research and development
efforts. In addition, the Company is obligated to fund one-half of the Elan-
Emisphere Venture's cash needs upon the Venture's request. Such funding is
expected to commence in the near future and is expected to total approximately
$2,000,000 during the next 12 months. The Company and Elan are sharing the
financial benefits and expense obligations of the Venture on a 50/50 basis. The
Company expects the research funding from Lilly to approximate the costs to be
incurred by the Company in connection with the development of the Lilly
therapeutic proteins. Under present operating assumptions, the Company expects
that cash, cash equivalents and marketable securities will be adequate to meet
its liquidity and capital requirements through the third quarter of fiscal 1998.
Thereafter, the Company would need to seek additional funds, primarily in the
public and private equity markets and, to the extent necessary and available,
through debt financing. The Company has no firm agreements with respect to any
additional financing and there can be no assurance that the Company would be
able to obtain adequate funds on acceptable terms. If adequate funds were not
available, the Company would be required to delay, scale back, or eliminate one
or more of its research or development programs, or obtain funds, if available,
through arrangements with collaborative partners or others that may require the
Company to relinquish rights to certain of its technologies, product candidates,
or products that the Company would not otherwise relinquish. The Company does
not maintain any credit lines with financial institutions.
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ITEM 5. OTHER INFORMATION
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In February 1997, the Company and Lilly entered into a Research
Collaboration and Option Agreement (the "Lilly Agreement") to combine Lilly's
therapeutic protein and formulation capabilities with the Company's carrier
technologies.
The Lilly Agreement provides initially for payments to the Company to fund
a research and development program (the "Program") to study the use of the
Company's technologies to develop oral and non-oral methods of delivering
formulations of two of Lilly's therapeutic proteins (the "Subject Proteins") in
the area of endocrinology, including growth disorders. The Lilly Agreement
represents the vehicle through which Lilly and the Company may together develop
and market orally deliverable products based on the Subject Proteins and the
Company's carrier technologies (the "Lilly Products"). The initial term of the
Program is 18 months, which term will be extended automatically for an
additional six months unless the Company and Lilly agree not to extend the term.
Any extensions beyond 24 months must be approved by the Company and Lilly. If
Lilly decides to expand the scope of the Program, payments will be increased.
Pursuant to the Lilly Agreement, the Company has granted to Lilly a series
of options (the "Options"), each to acquire an exclusive, worldwide license to
use the Company's technologies to develop one of the Lilly Products. Options
relating to the two of the Subject Proteins expire from one to two years from
the date of the Lilly Agreement, subject to certain extensions. Lilly's exercise
of the Options as to one of the Subject Proteins is mandatory upon satisfaction
of specified conditions. During the respective option periods, the Company has
agreed not to license its technologies to anyone other than Lilly for the
purpose of delivering the Subject Proteins.
Upon exercise of an Option, the Company and Lilly will enter into a license
agreement (each a "License Agreement") granting Lilly a license to use the
Company's technologies to develop Lilly Products to deliver the Subject Protein
by a particular route of delivery. The Lilly Agreement and the License
Agreements will provide for payments of initial fees and milestone payments of
up to $60 million in the aggregate, as well as royalty payments if a Lilly
Product to which the License Agreement relates is sold commercially. The License
Agreements will further provide that Lilly is obligated to seek to market the
Lilly Products and that the Company is obligated to provide a material portion
of the supply of carrier necessary for the production of any such Lily Products.
The Lilly Agreement further provides Lilly with a right of first refusal to
make an offer to enter into a license to use the Company's technologies for the
delivery of a limited number of other therapeutic proteins and peptides, or,
after the expiration of the option period, for the delivery of the Subject
Proteins (if not already licensed). The right of first refusal allows Lilly to
obtain the license if it exceeds a third-party offer by a specified premium. The
right of first refusal expires on February 26, 1998, subject to certain rights
to extend. The Lilly Agreement also contemplates the possibility of a continuing
relationship for the development of delivery systems for other therapeutic
proteins.
Under the Lilly Agreement, the Company will own all patents, patent
applications, and other proprietary expertise relating to its technologies that
it develops as well as any material Lilly improvements or additions to the
Company's technologies, and Lilly will own all patents, patent applications and
other proprietary expertise relating to the therapeutic uses of its proteins (to
the extent invented during the Program). If Lilly makes recommendations,
suggestions or has discussions with the Company that result in a material
addition to or improvement of the Company's technologies, then Lilly may, in
certain circumstances, obtain limited preferences with respect to licenses for
Emisphere technologies covering Lilly proteins or products not included in the
Lilly Products.
In addition, the Lilly Agreement includes a standstill provision pursuant
to which Lilly has agreed, with certain exceptions, not to acquire shares of the
Company's outstanding voting stock above a specified limit during a period
ending less than five years from the date of the Lilly Agreement.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits
3.1** Amended and Restated By-laws.
10.1* Research Collaboration and Option Agreement dated as of February
26, 1997 between Emisphere Technologies, Inc. and Eli Lilly and
Company. Portions of this exhibit have been omitted based on a
request for confidential treatment filed separately with the
Securities and Exchange Commission.
10.2** Form of Lease between Keren Limited Partnership and Emisphere
Technologies, Inc.
11.1* Statement of Computation of Per Share Data for the three months
ended January 31, 1996 and 1997
11.2* Statement of Computation of Per Share Data for the six months ended
January 31, 1996 and 1997
27.1*** Financial Data Schedule
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* Replaces previously filed exhibit
** Filed herewith
*** Previously Filed
(b) Reports
No reports on Form 8-K were filed by the Registrant during the quarter
ended January 31, 1997.
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SIGNATURE
Pursuant to the requirement 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.
Emisphere Technologies, Inc.
Dated: April 18, 1997 /S/Michael M. Goldberg
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Michael M. Goldberg, M.D.
Chairman, and Chief Executive Officer
/S/Joseph D. Poveromo
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Joseph D. Poveromo, C.P.A.
Controller (Principal Financial
and Accounting Officer)
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