SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 2001
Commission File Number 000-31191
The Medicines Company
(Exact Name of Registrant as Specified in Its Charter)
Delaware 04-3324394
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
One Cambridge Center, Cambridge, MA 02142
----------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (617) 225-9099
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 for 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 [_]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date: As of October 31, 2001, there
were 34,571,656 shares of Common Stock, $0.001 par value per share, outstanding.
THE MEDICINES COMPANY
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION 1
ITEM 1 - UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 9
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 20
PART II. OTHER INFORMATION 22
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS 22
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 23
SIGNATURES 24
EXHIBIT INDEX 25
PART I. FINANCIAL INFORMATION
ITEM 1 - UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THE MEDICINES COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 63,227,496 $ 36,802,356
Marketable securities 5,970,616 42,522,729
Accrued interest receivable 260,686 1,392,928
------------- -------------
69,458,798 80,718,013
------------- -------------
Accounts receivable 3,011,355 --
Inventory 6,832,226 1,963,491
Prepaid expenses and other current assets 705,965 465,650
------------- -------------
Total current assets 80,008,344 83,147,154
Fixed assets, net 1,219,183 965,832
Other assets 153,076 250,144
------------- -------------
Total assets $ 81,380,603 $ 84,363,130
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,917,032 $ 5,987,213
Accrued expenses 7,932,670 9,136,934
------------- -------------
Total current liabilities 12,849,702 15,124,147
Stockholders' equity:
Common stock, $.001 par value, 75,000,000 shares authorized at September 30,
2001 and December 31, 2000, respectively; 34,566,441 and 30,320,455 issued
and outstanding at September 30, 2001 and December 31, 2000, respectively 34,566 30,320
Additional paid-in capital 321,509,054 279,126,337
Deferred compensation (10,159,996) (13,355,694)
Accumulated deficit (242,928,078) (196,560,034)
Accumulated other comprehensive income (loss) 75,355 (1,946)
------------- -------------
Total stockholders' equity 68,530,901 69,238,983
------------- -------------
Total liabilities and stockholders' equity $ 81,380,603 $ 84,363,130
============= =============
See accompanying notes to condensed consolidated financial statements.
Page 1
THE MEDICINES COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
--------------------------------- ---------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net revenue $ 3,526,234 $ -- $ 7,435,063 $ --
Operating expenses:
Cost of revenue 564,835 -- 1,216,278 --
Research and development 6,325,575 6,734,799 27,229,728 23,503,579
Selling, general and administrative 8,732,412 3,562,440 27,359,289 7,339,618
------------ ------------ ------------ ------------
Total operating expenses 15,622,822 10,297,239 55,805,295 30,843,197
Loss from operations (12,096,588) (10,297,239) (48,370,232) (30,843,197)
Other income (expense):
Interest income 787,659 838,606 2,852,188 1,124,331
Interest expense -- -- -- (19,390,414)
Loss on sale of investments -- -- (850,000) --
------------ ------------ ------------ ------------
Net loss (11,308,929) (9,458,633) (46,368,044) (49,109,280)
Dividends and accretion to redemption
value of redeemable preferred stock -- (1,624,395) -- (30,342,988)
------------ ------------ ------------ ------------
Net loss attributable to
common stockholders $(11,308,929) $(11,083,028) $(46,368,044) $(79,452,268)
============ ============ ============ ============
Basic and diluted net loss attributable
to common stockholders per
common share $ (0.33) $ (0.67) $ (1.43) $ (13.32)
============ ============ ============ ============
Unaudited pro forma basic and
diluted net loss attributable to
common stockholders per common
share $ (0.33) $ (0.34) $ (1.43) $ (1.28)
============ ============ ============ ============
Shares used in computing net loss
attributable to common stockholders
per common share:
Basic and diluted 34,502,886 16,467,030 32,382,878 5,964,852
============ ============ ============ ============
Unaudited pro forma basic and diluted 34,502,886 27,514,031 32,382,878 23,222,614
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
Page 2
THE MEDICINES COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
(unaudited)
REDEEMABLE CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------------------- ------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
----------- ------------- ----------- ------------ -------------
Balance at December 31, 1999 22,962,350 85,277,413 833,400 834 339,144
Repurchase of common stock (22,205) (22)
Employee stock purchases 227,525 226 286,068
Issuance of redeemable preferred stock 5,946,366 25,688,284
Dividends paid on preferred stock 1,751,241 4,898,537
Dividend from beneficial conversion of convertible debt 25,444,299
Issuance of warrants associated with debt financing 18,789,805
Issuance of common stock through initial public offering 6,900,000 6,900 101,343,162
Conversion of preferred stock to common stock (30,659,957) (115,864,234) 22,381,735 22,382 115,841,732
Deferred compensation expense associated with
stock options 17,279,612
Adjustments to deferred compensation for terminations (197,485)
Amortization of deferred stock compensation
Net loss
Currency translation adjustment
Unrealized loss on marketable securities
Comprehensive loss
----------- ------------- ----------- ------------ -------------
Balance at December 31, 2000 -- -- 30,320,455 30,320 279,126,337
Repurchase of common stock (10,859) (11) --
Employee stock purchases 256,845 257 583,742
Issuance of common stock through private placement 4,000,000 4,000 41,798,975
Adjustments to deferred compensation for terminations
Amortization of deferred stock compensation
Fair value of warrants outstanding 51,225,075
(51,225,075)
Net loss
Currency translation adjustment
Unrealized loss on marketable securities
Comprehensive loss
----------- ------------- ----------- ------------ -------------
Balance at September 30, 2001 -- $ -- 34,566,441 $ 34,566 $ 321,509,054
=========== ============= =========== ============ =============
DEFERRED COMPREHENSIVE TOTAL
STOCK ACCUMULATED INCOME STOCKHOLDERS'
COMPENSATION DEFICIT (LOSS) DEFICIT
------------ ------------- ------------ -------------
Balance at December 31, 1999 (94,925,028) 27,395 (94,557,655)
Repurchase of common stock (22)
Employee stock purchases 286,294
Issuance of redeemable preferred stock --
Dividends paid on preferred stock (4,898,537) (4,898,537)
Dividend from beneficial conversion of convertible debt (25,444,299) --
Issuance of warrants associated with debt financing 18,789,805
Issuance of common stock through initial public offering 101,350,062
Conversion of preferred stock to common stock 115,864,114
Deferred compensation expense associated with --
stock options (17,279,612) --
Adjustments to deferred compensation for terminations 197,485 --
Amortization of deferred stock compensation 3,726,433 3,726,433
Net loss (71,292,170) (71,292,170)
Currency translation adjustment 5,141 5,141
Unrealized loss on marketable securities (34,482) (34,482)
-------------
Comprehensive loss (71,321,511)
------------ ------------- ------------ -------------
Balance at December 31, 2000 (13,356,694) (196,560,034) (1,946) 69,238,983
Repurchase of common stock (11)
Employee stock purchases 583,999
Issuance of common stock through private placement 41,802,975
Adjustments to deferred compensation for terminations -- --
Amortization of deferred stock compensation 3,195,698 3,195,698
Fair value of warrants outstanding 51,225,075
(51,225,075)
Net loss (46,368,044) (46,368,044)
Currency translation adjustment 32,415 32,415
Unrealized loss on marketable securities 44,886 44,886
-------------
Comprehensive loss (46,290,743)
------------ ------------- ------------ -------------
Balance at September 30, 2001 $(10,159,996) $(242,928,078) $ 75,355 $ 68,530,901
============ ============= ============ =============
See accompanying notes to condensed consolidated financial statements
Page 3
THE MEDICINES COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED SEPT. 30,
----------------------------------
2001 2000
------------ -------------
Cash flows from operating activities:
Net loss $(46,368,044) $ (49,109,280)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 355,324 178,385
Amortization of discount on convertible notes -- 19,013,486
Amortization of deferred stock compensation 3,195,698 1,539,472
Loss on sales of fixed assets 520 9,156
Changes in operating assets and liabilities:
Accrued interest receivable 1,132,242 (138,184)
Accounts receivable (3,011,355) --
Inventory (4,868,735) --
Prepaid expenses and other current assets (241,064) (304,611)
Other assets 96,926 (135,164)
Accounts payable (1,068,655) (3,916,349)
Accrued expenses (1,191,672) 3,330,229
------------ -------------
Net cash used in operating activities (51,968,815) (29,532,860)
Cash flows from investing activities:
Purchases of marketable securities (7,430,886) (30,057,921)
Maturities and sales of marketable securities 44,025,759 541,400
Purchase of fixed assets (614,020) (420,879)
------------ -------------
Net cash provided by (used in) investing
activities 35,980,853 (29,937,400)
Cash flows from financing activities:
Proceeds from issuance of convertible notes and warrants -- 13,348,779
Proceeds from issuances of preferred stock, net -- 6,095,338
Proceeds from issuances of common stock, net 42,386,974 101,445,745
Repurchases of common stock (11) (30)
Dividends paid in cash -- (118)
-------------
Net cash provided by financing activities 42,386,963 120,889,714
Effect of exchange rate changes on cash 26,139 46,315
------------ -------------
Increase in cash and cash equivalents 26,425,140 61,465,769
Cash and cash equivalents at beginning of period 36,802,356 6,643,266
------------ -------------
Cash and cash equivalents at end of period $ 63,227,496 $ 68,109,035
============ =============
See accompanying notes to condensed consolidated financial statements.
Page 4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. NATURE OF BUSINESS
The Medicines Company (the Company) was incorporated in Delaware on July 31,
1996. The Company is a pharmaceutical company engaged in the acquisition,
development and commercialization of late-stage development drugs. As a result
of the U.S. Food and Drug Administration approval of Angiomax (R) (bivalirudin)
for use as an anticoagulant in patients with unstable angina undergoing
percutaneous transluminal coronary angioplasty in December 2000, and the
commencement of sales of Angiomax in the first quarter of 2001, the Company is
no longer considered to be a development-stage enterprise, as defined in
Statement of Financial Accounting Standards No. 7, "Accounting and Reporting by
Development Stage Enterprises".
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all the information and footnotes required by
accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, the accompanying financial
statements include all adjustments, including normal recurring accruals,
considered necessary for a fair presentation of the Company's financial
position, results of operations, and cash flows for the periods presented.
The results of operations for the three and nine month periods ended September
30, 2001 are not necessarily indicative of the results that may be expected for
the entire fiscal year ending December 31, 2001. These condensed consolidated
financial statements should be read in conjunction with the audited financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2000, filed with the Securities and Exchange Commission.
Cash, Cash Equivalents and Marketable Securities
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Cash equivalents
consist of investments in money market funds, corporate bonds and taxable
auction securities. These investments are carried at cost, which approximates
fair value. Marketable securities consist of securities with original maturities
of greater than three months. The Company classifies its marketable securities
as available-for-sale. Securities under this classification are recorded at fair
market value and unrealized gains and losses are included in the accumulated
other comprehensive income and loss component of stockholders' equity.
Page 5
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
Revenue Recognition
The Company recognizes revenue from product sales when there is pervasive
evidence that an arrangement exists, delivery has occurred, the price is fixed
and determinable, and collectibility is reasonably assured. Revenue is recorded
net of applicable allowances, including estimated allowances for returns,
rebates and other discounts.
3. NET LOSS AND UNAUDITED PRO FORMA NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted, and
unaudited pro forma basic and diluted, net loss per share for the three and nine
months ended September 30, 2001 and 2000. The unaudited pro forma basic and
diluted net loss per share for the three and nine months ended September 30,
2000 gives effect to the conversion of redeemable convertible preferred stock
and accrued dividends and convertible notes and accrued interest as if converted
at the date of original issuance. All redeemable convertible preferred stock and
convertible notes were converted during 2000. Accordingly, the basic and diluted
net loss per share and unaudited pro forma basic and diluted net loss per share
for the three and nine months ended September 30, 2001 are the same.
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
-------------------------------- ---------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
BASIC AND DILUTED
Net loss $(11,308,929) $ (9,458,633) $(46,368,044) $(49,109,280)
Dividends and accretion to redemption
value of redeemable preferred stock -- (1,624,395) -- (30,342,988)
------------ ------------ ------------ ------------
Net loss attributable to common stockholders $(11,308,929) $(11,083,028) $(46,368,044) $(79,452,268)
============ ============ ============ ============
Weighted average common shares outstanding 34,542,242 16,644,520 32,449,717 6,156,622
Less: unvested restricted common shares
outstanding (39,356) (177,490) (66,839) (191,770)
------------ ------------ ------------ ------------
Weighted average common shares used to
compute net loss per share 34,502,886 16,467,030 32,382,878 5,964,852
============ ============ ============ ============
Basic and diluted net loss per share $ (0.33) $ (0.67) $ (1.43) $ (13.32)
============ ============ ============ ============
Page 6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
------------------------------- -------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
UNAUDITED PRO FORMA BASIC AND DILUTED
Net loss $(11,308,929) $ (9,458,633) $(46,368,044) $(49,109,280)
Interest expense on convertible notes -- -- -- 19,390,414
Dividends and accretion to redemption
value of redeemable preferred stock -- -- -- --
------------ ------------ ------------ ------------
Net loss to compute pro forma net loss per share $(11,308,929) $ (9,458,633) $(46,368,044) $(29,718,866)
============ ============ ============ ============
Weighted average common shares used to
compute pro forma net loss per share 34,502,886 16,467,030 32,382,878 5,964,852
Weighted average number of common shares
assuming the conversion of all redeemable
convertible preferred stock and accrued dividends
and convertible notes and accrued interest at the
date of original issuance -- 11,047,001 -- 17,257,762
------------ ------------ ------------ ------------
Weighted average common shares used to
compute pro forma net loss per share 34,502,886 27,514,031 32,382,878 23,222,614
============ ============ ============ ============
Unaudited pro forma basic and diluted pro
forma net loss per share $ (0.33) $ (0.34) $ (1.43) $ (1.28)
============ ============ ============ ============
Options to purchase 4,161,465 and 2,521,316 shares of common stock as of
September 30, 2001 and 2000, respectively, have not been included in the
computation of diluted net loss per share, as their effect would have been
antidilutive. Outstanding warrants to purchase 3,156,073 shares of common stock
as of September 30, 2001 were also excluded from the computation of diluted net
loss per share as their effect would have been antidilutive.
During the three and nine months ended September 30, 2000, the Company issued
options to purchase 636,286 and 2,247,615 shares of common stock, respectively,
at exercise prices below the estimated fair value of the Company's common stock
as of the date of grant of such options, based on the estimated price (as of the
date of grant) of the Company's common stock in the Company's initial public
offering. The total deferred compensation associated with options granted during
the three and nine months ended September 30, 2000 was approximately $4.6
million and $17.3 million, respectively.
The Company amortizes deferred stock compensation over the respective vesting
periods of the individual stock options. The Company recorded amortization
expense for deferred compensation of approximately $977,000 and $3.2 million for
the three and nine months ended September 30, 2001, respectively, and $932,000
and $1.5 million for the three and nine months ended September 30, 2000,
respectively.
Page 7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
4. COMPREHENSIVE INCOME (LOSS)
Comprehensive losses for the three and nine months ended September 30, 2001 were
$11.4 million and $46.3 million, respectively, and for the three and nine months
ended September 30, 2000 were $9.5 million and $49.2 million, respectively.
Comprehensive losses are primarily comprised of net losses, unrealized losses
on marketable securities and currency translation adjustments.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The
effective date of this statement was deferred to fiscal years beginning after
June 15, 2000 by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of SFAS No. 133." The
Company adopted this new standard and it did not have a material impact on
the Company's financial condition or results of operations.
In September 2000, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board reached a consensus on Issue 00-19, "Determination of
Whether Share Settlement is Within the Control of the Issuer for Purposes of
Applying Issue No. 96-13, "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock." The consensus
provides specific guidance regarding when a contract indexed to a company's own
stock must be classified in stockholders' equity versus classified as an asset
or liability. Any new contracts entered into after the date of consensus must
comply with the consensus, and any contracts outstanding as of the September
2000 consensus date are grand fathered until June 2001 before compliance is
required. Management anticipates that compliance with the consensus will not
have a material impact on the Company's consolidated financial statements.
6. SHARE ISSUANCE
In May 2001, the Company received net proceeds of $41.8 million from the private
placement of 4.0 million shares of newly issued common stock to both new and
existing stockholders at a price of $11.00 per share.
Page 8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
We acquire, develop and commercialize biopharmaceutical products that are in
late stages of development or have been approved for marketing. In December
2000, we received marketing approval from U.S. Food and Drug Administration (the
"FDA") for Angiomax (bivalirudin), our lead product, for use as an anticoagulant
in combination with aspirin in patients with unstable angina undergoing coronary
balloon angioplasty. Coronary angioplasty is a procedure used to restore normal
blood flow in an obstructed artery in the heart. In August and September 2000,
we consummated our initial public offering (the "IPO") resulting in $101.4
million in net proceeds. In May 2001, we completed a private placement of 4.0
million shares of common stock resulting in net proceeds of $41.8 million.
We began selling Angiomax in the United States in January 2001. Until October 1,
2001, we marketed Angiomax in the United States using a sales force contracted
from Innovex, Inc., which we managed. On October 1, 2001, members of the sales
force became our full-time employees rather than employees of Innovex. In
addition, during September 2001 we hired additional members of the sales force,
which resulted in an increase of approximately 30%.
Since our inception, we have incurred significant losses. Most of our
expenditures to date have been for research and development activities and
selling, general and administrative expenses. Research and development expenses
represent costs incurred for product acquisition, clinical trials, activities
relating to regulatory filings and manufacturing development efforts. We
generally outsource our clinical trials and manufacturing development activities
to independent organizations to maximize efficiency and minimize our internal
overhead. We expense our research and development costs as they are incurred.
Selling, general and administrative expenses consist primarily of salaries and
related expenses, general corporate activities and costs associated with product
marketing activities. Interest expense consists of costs associated with
convertible notes that were issued in 2000 and 1999 to fund our business
activities. These convertible notes were converted into equity in 2000.
We expect to continue to incur operating losses during the balance of 2001 and
for the foreseeable future as a result of research and development activities
attributable to new and existing products and costs associated with the
sales and marketing of our products. We will need to generate
significant revenues to achieve and maintain profitability.
During the three and nine months ended September 30, 2000, we recorded deferred
stock compensation on the grant of stock options of approximately $4.6 million
and $17.3 million, respectively, representing the difference between the
exercise price of such options and the fair market value of our common stock at
the date of grant of such options. The exercise prices of these options were
below the estimated fair market value of our common stock as of the date of
grant based on the estimated price of our common stock in our initial public
offering.
We amortize deferred stock compensation over the respective vesting periods of
the individual stock options. We recorded amortization expense for deferred
compensation of approximately
Page 9
$977,000 and $3.2 million for the three and nine months ended September 30,
2001, respectively, and $932,000 and $1.5 million for the three and nine months
ended September 30, 2000, respectively. We expect to record amortization expense
for the deferred compensation as follows: approximately $1.0 million for the
remainder of 2001, approximately $3.8 million in 2002, approximately $3.8
million in 2003 and approximately $1.3 million in 2004.
We have not generated taxable income to date. At December 31, 2000, net
operating losses available to offset future taxable income for federal income
tax purposes were approximately $122.2 million. If not utilized, federal net
operating loss carryforwards will expire at various dates beginning in 2011 and
ending 2020. We have not recognized the potential tax benefit of our net
operating losses in our statements of operations. The future utilization of our
net operating loss carryforwards may be limited pursuant to regulations
promulgated under the Internal Revenue Code of 1986, as amended.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2001 and 2000
Product Revenue. We had product revenue of $3.5 million for the three months
ended September 30, 2001 from sales of Angiomax, which was commercially launched
during the first quarter of 2001. We had no product revenue during the three
months ended September 30, 2000.
Cost of Revenue. Cost of revenue for the three months ended September 30, 2001
was $565,000, or 16% of product revenue. Cost of revenue includes the cost of
manufacturing Angiomax, logistical costs associated with distributing Angiomax
and accrued royalties. The cost of manufacturing as a percentage of product
revenue was approximately 2% in the third quarter of 2001 and is expected to
continue to be at, or near, this level into December 2001 as we continue to sell
Angiomax that was manufactured prior to the date of FDA approval of Angiomax in
December 2000 because the cost associated with the manufacture of Angiomax
incurred by us prior to the date of FDA approval of Angiomax was expensed as
research and development.
Research and Development Expenses. Research and development expenses decreased
6% to $6.3 million for the three months ended September 30, 2001, from $6.7
million for the three months ended September 30, 2000. The decrease in research
and development expenses of $409,000 was primarily due to a decrease in expenses
associated with the completion of our Phase 3 trial in acute myocardial
infarction, called HERO-2. The decrease in research and development expenses was
partly offset by increased expenses in connection with our REPLACE trial program
and expenses associated with the manufacture of Angiomax bulk product using a
second-generation production process, the Chemilog process, which we will
continue to expense as research and development until the FDA approves the
process.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 145% to $8.7 million for the three months
ended September 30, 2001, from $3.6 million for the three months ended September
30, 2000. The increase in selling, general and administrative expenses of $5.2
million was primarily due to an increase in marketing and selling expenses and
corporate infrastructure costs relating to the sales and marketing of Angiomax.
Our selling, general and administrative expenses also increased due to the
hiring that we began in
Page 10
September 2001 of additional sales personnel in connection with the formation of
our own sales force to market Angiomax.
Other Income and Expense. Interest income decreased 6% to $788,000 for the three
months ended September 30, 2001, from $839,000 for the three months ended
September 30, 2000. The decrease in interest income of $51,000 was primarily due
to lower cash and marketable securities balances due to operating expenses and
working capital requirements and to lower available interest rates on
securities. The primary source of interest income is interest income from the
investment of the proceeds from our IPO in August and September 2000 and our
private placement of common stock in May 2001.
We had no interest expense during the three months ended September 30, 2001 and
September 30, 2000.
Nine Months Ended September 30, 2001 and 2000
Product Revenue. We had product revenue of $7.4 million for the nine months
ended September 30, 2001 from sales of Angiomax. We had no product revenue
during the nine months ended September 30, 2000.
Cost of Revenue. Cost of revenue for the nine months ended September 30, 2001
was $1.2 million, or 16% of product revenue. The cost of manufacturing as a
percentage of product revenue was approximately 2% for the first nine months of
2001 and is expected to continue to be at, or near, this level into December
2001 as we continue to sell Angiomax that was manufactured prior to the date of
FDA approval of Angiomax in December 2000 because the cost associated with
the manufacture of Angiomax incurred by us prior to date of FDA approval of
Angiomax was expensed as research and development.
Research and Development Expenses. Research and development expenses increased
16% to $27.2 million for the nine months ended September 30, 2001, from $23.5
million for the nine months ended September 30, 2000. The increase in research
and development expenses of $3.7 million was primarily due to increased expenses
associated with our REPLACE trial program, which was initiated in the fourth
quarter of 2000. The increase in research and development expenses was partly
offset by a decrease in expenses associated with the completion of the HERO-2
trial program.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 273% to $27.4 million for the nine months
ended September 30, 2001, from $7.3 million for the nine months ended September
30, 2000. The increase in selling, general and administrative expenses of $20.0
million was primarily due to an increase in marketing and selling expenses and
corporate infrastructure costs arising from an increase in activity relating to
the commercial launch of Angiomax in 2001.
Other Income and Expense. Interest income increased 154% to $2.8 million for the
nine months ended September 30, 2001, from $1.1 million for the nine months
ended September 30, 2000. The increase in interest income of $1.7 million was
primarily due to interest income arising from
Page 11
the investment of the proceeds from our IPO in August and September 2000 and
from the sale of 4.0 million shares of our common stock in a private placement
in May 2001.
We had no interest expense for the nine months ended September 30, 2001.
Interest expense of $19.4 million for the nine months ended September 30, 2000
was related to interest charges and amortization of discount on our convertible
notes issued in October 1999 and March 2000.
During the second quarter of 2001, we liquidated our $3.0 million principal
investment in Southern California Edison 5 7/8% bonds, recognizing a loss of
$850,000 on the sale.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2001, we had $69.2 million in cash, cash equivalents and
marketable securities, as compared to $79.3 million as of December 31, 2000.
In August and September 2000, we received $101.4 million in net proceeds from
the sale of common stock in our IPO and received an additional $41.8 million in
net proceeds in May 2001 from the sale of 4.0 million shares of our common stock
in a private placement. Prior to the IPO, we had received net proceeds of $79.4
million from the private placement of equity securities, primarily redeemable
convertible preferred stock, and $19.4 million from the issuance of convertible
notes and warrants.
During the nine months ended September 30, 2001, we used net cash of $52.0
million in operating activities. This consisted of a net loss of $46.4 million,
combined with increases in total receivables of $1.9 million, inventory of $4.9
million, and decreases in accrued expenses of $1.2 million and accounts payable
of $1.1 million, partly offset by non-cash amortization of deferred compensation
of $3.2 million and depreciation of $355,000. The increase in inventory of $4.9
million was primarily attributed to the scheduled receipt of bulk Angiomax from
our supplier, UCB Bioproducts S.A.
During the nine months ended September 30, 2001, we generated approximately
$36.0 million of cash from net investing activities, which consisted principally
of the maturity or sale of marketable securities, partly offset by the purchase
of fixed assets of $614,000, which is primarily computer related equipment.
During the nine months ended September 30, 2001, we received $42.4 million from
financing activities primarily from proceeds from the sale of shares of our
common stock in a private placement and from employees purchasing stock under
our stock plans.
We expect to devote substantial resources to our research and development
efforts and to our sales, marketing and manufacturing programs associated with
the commercialization of our products. Our funding requirements will depend on
numerous factors, including whether Angiomax is commercially successful, the
progress, level and timing of our research and development activities, the cost
and outcomes of regulatory reviews, the continuation or termination of third
party manufacturing or sales and marketing arrangements, the cost and
effectiveness of our sales and marketing programs, the status of competitive
products, our ability to defend and enforce our intellectual property rights and
the establishment of additional strategic or licensing arrangements with other
companies or acquisitions.
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We believe, based on our current operating plan, including anticipated sales of
Angiomax, that our current cash, cash equivalents and marketable securities will
be sufficient to fund our operations for approximately 18 months. If our
existing resources are insufficient to satisfy our liquidity requirements due to
slower than anticipated sales of Angiomax or otherwise, or if we acquire
additional product candidates, we may need to sell additional equity or debt
securities. The sale of additional equity and debt securities may result in
additional dilution to our stockholders, and we cannot be certain that
additional financing will be available in amounts or on terms acceptable to us,
if at all. If we are unable to obtain this additional financing, we may be
required to reduce the scope of our planned research, development and
commercialization activities, which could harm our financial condition and
operating results.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This quarterly report on Form 10-Q includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. All statements, other than statements of
historical facts, included in this report regarding our strategy, future
operations, financial position, future revenues, projected costs, prospects,
plans and objectives of management are forward-looking statements. The words
"anticipates," "believes," "estimates," "expects," "intends," "may," "plans,"
"projects," "will," "would" and similar expressions are intended to identify
forward-looking statements, although not all forward-looking statements contain
these identifying words. We cannot guarantee that we actually will achieve the
plans, intentions or expectations disclosed in our forward-looking statements.
There are a number of important factors that cause actual results or events to
differ materially from those disclosed in the forward-looking statements we
make. These important factors include the risk factors set forth below. Although
we may elect to update forward-looking statements in the future, we specifically
disclaim any obligation to do so, even if our estimates change, and readers
should not rely on those forward-looking statements as representing our views as
of any date subsequent to the date of filing this Quarterly Report.
Risks Related to Our Business
WE HAVE A HISTORY OF NET LOSSES, AND WE EXPECT TO CONTINUE TO INCUR NET
LOSSES AND MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY
We have incurred net losses since our inception, including net losses of
approximately $46.4 million for the nine months ended September 30, 2001. As of
September 30, 2001, we had an accumulated deficit of approximately $242.9
million. We expect to make substantial expenditures to further develop and
commercialize our products, including costs and expenses associated with
clinical trials, regulatory approval and commercialization of products. As a
result, we are unsure when we will become profitable, if at all.
OUR BUSINESS IS VERY DEPENDENT ON THE COMMERCIAL SUCCESS OF ANGIOMAX
Other than Angiomax, our products are in clinical phases of development and,
even if approved by the FDA, are a number of years away from entering the
market. As a result, Angiomax will account for almost all of our revenues for
the foreseeable future. The commercial success of Angiomax will depend upon its
acceptance by physicians, patients and other key decision-makers as a
therapeutic and cost-effective alternative to heparin and other products used in
Page 13
current practice. If Angiomax is not commercially successful, we will have to
find additional sources of revenues or curtail or cease operations.
FAILURE TO RAISE ADDITIONAL FUNDS IN THE FUTURE MAY AFFECT THE DEVELOPMENT,
MANUFACTURE AND SALE OF OUR PRODUCTS
Our operations to date have generated substantial and increasing needs for cash.
Our negative cash flow from operations is expected to continue into the
foreseeable future. The clinical development of Angiomax for additional
indications, the development of our other product candidates and the acquisition
and development of additional product candidates by us will require a commitment
of substantial funds. Our future capital requirements are dependent upon many
factors and may be significantly greater than we expect.
We believe, based on our current operating plan, including anticipated sales of
Angiomax, that our current cash, cash equivalents and marketable securities will
be sufficient to fund our operations for at least 18 months. If our existing
resources are insufficient to satisfy our liquidity requirements due to slower
than anticipated sales of Angiomax or otherwise, or if we acquire additional
product candidates, we may need to sell additional equity or debt securities.
The sale of additional equity and debt securities may result in additional
dilution to our stockholders, and we cannot be certain that additional financing
will be available in amounts or on terms acceptable to us, if at all. If we are
unable to obtain this additional financing, we may be required to reduce the
scope of our planned research, development and commercialization activities,
which could harm our financial condition and operating results.
WE CANNOT EXPAND THE INDICATIONS FOR ANGIOMAX UNLESS WE RECEIVE FDA APPROVAL
FOR EACH ADDITIONAL INDICATION. FAILURE TO EXPAND THESE INDICATIONS WILL
LIMIT THE SIZE OF THE COMMERCIAL MARKET FOR ANGIOMAX
We received in December 2000 approval from the FDA for the use of Angiomax as an
anticoagulant in combination with aspirin in patients with unstable angina
undergoing coronary balloon angioplasty. One of our key objectives is to expand
the indications for which the FDA will approve Angiomax. In order to do this, we
will need to conduct additional clinical trials and obtain FDA approval for each
proposed indication. If we are unsuccessful in expanding the approved
indications for the use of Angiomax, the size of the commercial market for
Angiomax will be limited.
FAILURE TO OBTAIN REGULATORY APPROVAL IN FOREIGN JURISDICTIONS WILL PREVENT
US FROM MARKETING ANGIOMAX ABROAD
We intend to market our products in international markets, including Europe. In
order to market our products in the European Union and many other foreign
jurisdictions, we must obtain separate regulatory approvals. In February 1998,
we submitted a Marketing Authorization Application to the European Agency for
the Evaluations of Medicinal Products, or the EMEA, for use of Angiomax in
unstable angina patients undergoing angioplasty. Following extended interaction
with European regulatory authorities, the Committee of Proprietary Medicinal
Products of the EMEA voted in October 1999 not to recommend Angiomax for
approval in angioplasty. The United Kingdom and Ireland dissented from this
decision. We have withdrawn our application to the EMEA and are in active dialog
with European regulators to determine our course of action including seeking
approval of Angiomax in Europe on a country-by-country basis. We may not be able
to obtain approval from any or all of the jurisdictions in which we seek
approval to market Angiomax. Obtaining foreign approvals may require additional
trials and additional expense.
Page 14
THE DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCTS MAY BE TERMINATED OR
DELAYED, AND THE COSTS OF DEVELOPMENT AND COMMERCIALIZATION MAY INCREASE, IF
THIRD PARTIES WHO WE RELY ON TO MANUFACTURE AND SUPPORT THE DEVELOPMENT AND
COMMERCIALIZATION OF OUR PRODUCTS DO NOT FULFILL THEIR OBLIGATIONS
Our development and commercialization strategy entails entering into
arrangements with corporate and academic collaborators, contract research
organizations, distributors, third-party manufacturers, licensors, licensees and
others to conduct development work, manage our clinical trials and manufacture,
market and sell our products. Although we manage these services, we do not have
the expertise or the resources to conduct such activities on our own and, as a
result, are particularly dependent on third parties in most areas.
We may not be able to maintain our existing arrangements with respect to the
commercialization of Angiomax or establish and maintain arrangements to develop
and commercialize any additional products on terms that are acceptable to us.
Any current or future arrangements for the development and commercialization of
our products may not be successful. If we are not able to establish or maintain
our agreements relating to Angiomax or any additional products on terms which we
deem favorable, our financial condition would be materially adversely affected.
Third parties may not perform their obligations as expected. The amount and
timing of resources that third parties devote to developing, manufacturing and
commercializing our products may not be within our control. Furthermore, our
interests may differ from those of third parties that manufacture or
commercialize our products. Disagreements that may arise with these third
parties could delay or lead to the termination of the development or
commercialization of our product candidates, or result in litigation or
arbitration, which would be time consuming and expensive. If any third party
that manufactures or supports the development or commercialization of our
products breaches or terminates its agreement with us, or fails to conduct its
activities in a timely manner, such breach, termination or failure could:
- - delay or otherwise adversely impact the development or commercialization
of Angiomax, our other product candidates or any additional product
candidates that we may acquire or develop;
- - require us to undertake unforeseen additional responsibilities or devote
unforeseen additional resources to the development or commercialization of
our products; or
- - result in the termination of the development or commercialization of our
products.
WE ARE CURRENTLY DEPENDENT ON A SINGLE SUPPLIER FOR THE PRODUCTION OF ANGIOMAX
BULK DRUG SUBSTANCE AND A DIFFERENT SINGLE SUPPLIER TO CARRY OUT ALL FILL-FINISH
ACTIVITIES FOR ANGIOMAX
Currently, we obtain all of our Angiomax bulk drug substance from one
manufacturer, UCB Bioproducts S.A., and rely on another manufacturer, Ben Venue
Laboratories, Inc., to carry out all fill-finish activities for Angiomax, which
includes final formulation and transfer of the drug into vials where it is then
freeze-dried and sealed. The FDA requires that all manufacturers of
pharmaceuticals for sale in or from the United States achieve and maintain
compliance with the FDA's current Good Manufacturing Practice, or cGMP,
regulations and guidelines. There are a limited number of manufacturers that
operate under cGMP regulations capable of manufacturing Angiomax. The FDA has
inspected Ben Venue Laboratories for cGMP compliance for the manufacture of
Angiomax and UCB Bioproducts for cGMP compliance in the manufacture of
Page 15
pharmaceutical ingredients generally. Ben Venue Laboratories and UCB Bioproducts
have informed us that they have no material deficiencies in cGMP compliance. We
do not currently have alternative sources for production of Angiomax bulk drug
substance or to carry out fill-finish activities. In the event that either of
our current manufacturers is unable to carry out its respective manufacturing
obligations to our satisfaction, we may be unable to obtain alternative
manufacturing, or obtain such manufacturing on commercially reasonable terms or
on a timely basis.
Any delays in the manufacturing process may adversely impact our ability to meet
commercial demands for Angiomax on a timely basis and supply product for
clinical trials of Angiomax.
IF WE DO NOT SUCCEED IN DEVELOPING A SECOND-GENERATION PROCESS FOR THE
PRODUCTION OF BULK ANGIOMAX DRUG SUBSTANCE, OUR GROSS MARGINS MAY BE BELOW
INDUSTRY AVERAGES
We are currently developing with UCB Bioproducts a second-generation process for
the production of bulk Angiomax drug substance. This process involves limited
changes to the early manufacturing steps of our current process in order to
improve our gross margins on the future sales of Angiomax. If we cannot develop
the process successfully or regulatory approval of the process is not obtained
or is delayed, then our ability to improve our gross margins on future sales of
Angiomax may be limited.
CLINICAL TRIALS OF OUR PRODUCT CANDIDATES ARE EXPENSIVE AND TIME CONSUMING,
AND THE RESULTS OF THESE TRIALS ARE UNCERTAIN
Before we can obtain regulatory approvals for the commercial sale of any product
that we wish to develop, we will be required to complete pre-clinical studies
and extensive clinical trials in humans to demonstrate the safety and efficacy
of such product. We are currently conducting clinical trials of Angiomax for use
in the treatment of ischemic heart disease. There are numerous factors that
could delay our clinical trials or prevent us from completing these trials
successfully. We, or the FDA, may suspend a clinical trial at any time on
various grounds, including a finding that patients are being exposed to
unacceptable health risks.
The rate of completion of clinical trials depends in part upon the rate of
enrollment of patients. Patient enrollment is a function of many factors,
including the size of the patient population, the proximity of patients to
clinical sites, the eligibility criteria for the trial, the existence of
competing clinical trials and the availability of alternative or new treatments.
In particular, the patient population targeted by some of our clinical trials
may be small. Delays in future planned patient enrollment may result in
increased costs and program delays.
In addition, clinical trials, if completed, may not show any potential product
to be safe or effective. Results obtained in pre-clinical studies or early
clinical trials are not always indicative of results that will be obtained in
later clinical trials. Moreover, data obtained from pre-clinical studies and
clinical trials may be subject to varying interpretations. As a result, the FDA
or other applicable regulatory authorities may not approve a product in a timely
fashion, or at all.
OUR FAILURE TO ACQUIRE AND DEVELOP ADDITIONAL PRODUCT CANDIDATES OR APPROVED
PRODUCTS WILL IMPAIR OUR ABILITY TO GROW
As part of our growth strategy, we intend to acquire and develop additional
pharmaceutical product candidates or approved products. The success of this
strategy depends upon our ability
Page 16
to identify, select and acquire pharmaceutical products in late-stage
development or that have been approved that meet the criteria we have
established. Because we neither have, nor intend to establish, internal
scientific research capabilities, we are dependent upon pharmaceutical and
biotechnology companies and other researchers to sell or license product
candidates to us.
Identifying suitable product candidates and approved products and proposing,
negotiating and implementing an economically viable acquisition is a lengthy and
complex process. In addition, other companies, including those with
substantially greater financial, marketing and sales resources, may compete with
us for the acquisition of product candidates and approved products. We may not
be able to acquire the rights to additional product candidates and approved
products on terms that we find acceptable, or at all.
IF WE BREACH ANY OF THE AGREEMENTS UNDER WHICH WE LICENSE COMMERCIALIZATION
RIGHTS TO PRODUCTS OR TECHNOLOGY FROM OTHERS, WE COULD LOSE LICENSE RIGHTS THAT
ARE IMPORTANT TO OUR BUSINESS
We license commercialization rights to products and technology that are
important to our business, and we expect to enter into additional licenses in
the future. For instance, we acquired our first three products through exclusive
licensing arrangements. Under these licenses we are subject to commercialization
and development, sublicensing, royalty, insurance and other obligations. If we
fail to comply with any of these requirements, or otherwise breach these license
agreements, the licensor may have the right to terminate the license in whole or
to terminate the exclusive nature of the license. In addition, upon the
termination of the license we may be required to license to the licensor the
intellectual property that we developed.
OUR ABILITY TO MANAGE OUR BUSINESS EFFECTIVELY COULD BE HAMPERED IF WE ARE
UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL AND CONSULTANTS
The biopharmaceutical industry has experienced a high rate of turnover of
management personnel in recent years. We are highly dependent on our ability to
attract and retain qualified personnel for the acquisition, development and
commercialization activities we conduct or sponsor. If we lose one or more of
the members of our senior management, including our executive chairman, Dr.
Clive A. Meanwell, or our chief executive officer, David M. Stack, or other key
employees or consultants, our business and operating results could be seriously
harmed. Our ability to replace these key employees may be difficult and may take
an extended period of time because of the limited number of individuals in the
biotechnology industry with the breadth of skills and experience required to
develop and commercialize products successfully. Competition to hire from this
limited pool is intense, and we may be unable to hire, train, retain or motivate
such additional personnel.
WE FACE SUBSTANTIAL COMPETITION, WHICH MAY RESULT IN OTHERS DISCOVERING,
DEVELOPING OR COMMERCIALIZING COMPETING PRODUCTS BEFORE OR MORE SUCCESSFULLY
THAN WE DO
The biopharmaceutical industry is highly competitive. Our success will depend on
our ability to acquire and develop products and apply technology and our ability
to establish and maintain a market for our products. Potential competitors in
the United States and other countries include major pharmaceutical and chemical
companies, specialized biotechnology firms, universities and other research
institutions. Many of our competitors have substantially greater research and
development capabilities and experience, and greater manufacturing, marketing
and financial resources than we do. Accordingly, our competitors may develop
products or other novel technologies that are more effective, safer or less
costly than existing products or technologies or
Page 17
products or technologies that are being developed by us or may obtain FDA
approval for products more rapidly than we are able. Technological development
by others may render our products or product candidates noncompetitive. We may
not be successful in establishing or maintaining technological competitiveness.
BECAUSE THE MARKET FOR THROMBIN INHIBITORS IS COMPETITIVE, OUR PRODUCT MAY
NOT OBTAIN WIDESPREAD USE
We have positioned Angiomax as a replacement for heparin, which is widely used
and inexpensive, for use in patients with ischemic heart disease. Because
heparin is inexpensive and has been widely used for many years, medical
decision-makers may be hesitant to adopt our alternative treatment. In addition,
due to the high incidence and severity of cardiovascular diseases, the market
for thrombin inhibitors is large and competition is intense and growing. There
are a number of thrombin inhibitors currently on the market, awaiting regulatory
approval and in development, including orally administered agents.
THE LIMITED RESOURCES OF THIRD-PARTY PAYERS MAY LIMIT THE USE OF OUR PRODUCTS
In general, anticoagulant drugs may be classified in three groups: drugs that
directly or indirectly target and inhibit thrombin, drugs that target and
inhibit platelets and drugs that break down fibrin. Because each group of
anticoagulants acts on different components of the clotting process, we believe
that there will be continued clinical work to determine the best combination of
drugs for clinical use. We expect Angiomax to be used with aspirin alone or in
conjunction with other therapies. Although we are not positioning Angiomax
as a direct competitor to platelet inhibitors or fibrinolytic drugs, platelet
inhibitors and fibrinolytic drugs may compete with Angiomax for the use of
hospital financial resources. Many U.S. hospitals receive a fixed reimbursement
amount per procedure for the angioplasties and other treatment therapies they
perform. Because this amount is not based on the actual expenses the hospital
incurs, U.S. hospitals may have to choose among Angiomax, platelet inhibitors
and fibrinolytic drugs.
FLUCTUATIONS IN OUR OPERATING RESULTS COULD AFFECT THE PRICE OF OUR COMMON
STOCK
Our operating results may vary from period to period based on the amount and
timing of sales of Angiomax to customers in the United States, the availability
and timely delivery of a sufficient supply of Angiomax, the timing and expenses
of clinical trials, the availability and timing of third-party reimbursement and
the timing of approval for our product candidates. If our operating results do
not match the expectations of securities analysts and investors as a result of
these and other factors, the trading price of our common stock may fluctuate.
Risks Related to Our Industry
IF WE DO NOT OBTAIN FDA APPROVALS FOR OUR PRODUCTS OR COMPLY WITH GOVERNMENT
REGULATIONS, WE MAY NOT BE ABLE TO MARKET OUR PRODUCTS AND MAY BE SUBJECT TO
STRINGENT PENALTIES
Except for Angiomax, which has been approved for sale in the United States and
New Zealand, we do not have a product approved for sale in the United States or
any foreign market. We must obtain approval from the FDA in order to sell our
product candidates in the United States and from foreign regulatory authorities
in order to sell our product candidates in other countries. We must successfully
complete our clinical trials and demonstrate manufacturing capability before we
can file with the FDA for approval to sell our products. The FDA could require
us to repeat clinical trials as part of the regulatory review process. Delays in
obtaining or failure to obtain regulatory approvals may:
Page 18
- - delay or prevent the successful commercialization of any of our product
candidates;
- - diminish our competitive advantage; and
- - defer or decrease our receipt of revenues or royalties.
The regulatory review and approval process is lengthy, expensive and uncertain.
Extensive pre-clinical data, clinical data and supporting information must be
submitted to the FDA for each additional indication to obtain such approvals,
and we cannot be certain when we will receive these regulatory approvals, if
ever.
In addition to initial regulatory approval, our products and product candidates
will be subject to extensive and rigorous ongoing domestic and foreign
government regulation. Any approvals, once obtained, may be withdrawn if
compliance with regulatory requirements is not maintained or safety problems are
identified. Failure to comply with these requirements may also subject us to
stringent penalties.
WE MAY NOT BE ABLE TO OBTAIN OR MAINTAIN PATENT PROTECTION FOR OUR PRODUCTS,
AND WE MAY INFRINGE THE PATENT RIGHTS OF OTHERS
The patent positions of pharmaceutical and biotechnology companies like us are
generally uncertain and involve complex legal, scientific and factual issues.
Our success depends significantly on our ability to:
- - obtain patents;
- - protect trade secrets;
- - operate without infringing the proprietary rights of others; and
- - prevent others from infringing our proprietary rights.
We may not have any patents issued from any patent applications that we own or
license. If patents are granted, the claims allowed may not be sufficiently
broad to protect our technology. In addition, issued patents that we own or
license may be challenged, invalidated or circumvented. Our patents also may not
afford us protection against competitors with similar technology. Because patent
applications in the United States are maintained in secrecy until patents issue,
others may have filed or maintained patent applications for technology used by
us or covered by our pending patent applications without our being aware of
these applications. In all, we exclusively license 10 issued U.S. patents and a
broadly filed portfolio of corresponding foreign patents and patent
applications. We have not yet filed any independent patent applications.
We may not hold proprietary rights to some patents related to our product
candidates. In some cases, others may own or control these patents. As a result,
we may be required to obtain licenses under third-party patents to market some
of our product candidates. If licenses are not available to us on acceptable
terms, we will not be able to market these products.
Page 19
We may become a party to patent litigation or other proceedings regarding
intellectual property rights. The cost to us of any patent litigation or other
proceeding, even if resolved in our favor, could be substantial. If any patent
litigation or other intellectual property proceeding in which we are involved is
resolved unfavorably to us, we may be enjoined from manufacturing or selling our
products without a license from the other party, and we may be held liable for
significant damages. We may not be able to obtain any required license on
commercially acceptable terms, or at all.
IF WE ARE NOT ABLE TO KEEP OUR TRADE SECRETS CONFIDENTIAL, OUR TECHNOLOGY AND
INFORMATION MAY BE USED BY OTHERS TO COMPETE AGAINST US
We rely significantly upon unpatented proprietary technology, information,
processes and know-how. We seek to protect this information by confidentiality
agreements with our employees, consultants and other third-party contractors, as
well as through other security measures. We may not have adequate remedies for
any breach by a party to these confidentiality agreements. In addition, our
competitors may learn or independently develop our trade secrets.
WE COULD BE EXPOSED TO SIGNIFICANT LIABILITY CLAIMS IF WE ARE UNABLE TO OBTAIN
INSURANCE AT ACCEPTABLE COSTS AND ADEQUATE LEVELS OR OTHERWISE PROTECT OURSELVES
AGAINST POTENTIAL PRODUCT LIABILITY CLAIMS
Our business exposes us to potential product liability risks, which are inherent
in the testing, manufacturing, marketing and sale of human healthcare products.
Product liability claims might be made by consumers, health care providers or
pharmaceutical companies or others that sell our products. These claims may be
made even with respect to those products that are manufactured in licensed and
regulated facilities or otherwise possess regulatory approval for commercial
sale.
These claims could expose us to significant liabilities that could prevent or
interfere with the development or commercialization of our products. Product
liability claims could require us to spend significant time and money in
litigation or pay significant damages. We are currently covered, with respect to
our commercial sales in the United States and New Zealand and our clinical
trials, by primary product liability insurance in the amount of $20.0 million
per occurrence and $20.0 million annually in the aggregate on a claims-made
basis. This coverage may not be adequate to cover any product liability claims.
As we commercialize our products, we may wish to increase our product liability
insurance. Product liability coverage is expensive. In the future, we may not be
able to maintain or obtain such product liability insurance on reasonable terms,
at a reasonable cost or in sufficient amounts to protect us against losses due
to product liability claims.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is confined to our cash, cash equivalents and
marketable securities. We place our investments in high-quality financial
instruments, primarily money market funds and corporate debt securities with
maturities or auction dates of less than one year, which we believe are subject
to limited credit risk. We currently do not hedge interest rate exposure. At
September 30, 2001, we held $69.2 million in cash, cash equivalents, and
marketable securities, all due within one year, which had an average interest
rate of approximately 4.0%. We do not believe that a 10% increase or decrease in
interest rates in effect at September 30, 2001 would have a material impact on
our results of operations or cash flows.
Page 20
Most of our transactions are conducted in U.S. dollars. We do have certain
development and commercialization agreements with vendors located outside the
United States. Transactions under certain of these agreements are conducted in
U.S. dollars, subject to adjustment based on significant fluctuations in
currency exchange rates. Transactions under certain other of these agreements
are conducted in the local foreign currency. We do not believe that a 10%
increase or decrease in foreign currency exchange rates would have a material
impact on our results of operations or cash flows.
Page 21
PART II. OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
In our IPO, we sold 6.9 million shares of common stock (including an
over-allotment option of 900,000 shares) pursuant to a Registration
Statement on Form S-1 (File No. 333-37404) that was declared
effective by the Securities and Exchange Commission on August 7,
2000. Of the aggregate net proceeds of approximately $101.4 million
from the IPO, from August 7, 2000 through September 30, 2001, we
used approximately $79.0 million for general corporate purposes,
including operations, working capital and capital expenditures, with
the remaining $22.4 million in proceeds invested in cash, cash
equivalents and marketable securities. Of the approximately $79.0
million, we have paid approximately $332,000 to Stack
Pharmaceuticals, Inc., and approximately $6.3 million to Innovex,
Inc. Prior to becoming our President and Chief Executive Officer,
David M. Stack was the President and General Partner of Stack
Pharmaceuticals and a Senior Advisor to the Chief Executive Officer
of Innovex. Other than these payments, none of the net proceeds of
the IPO has been paid by us, directly or indirectly, to any
director, officer or general partner of us, or any of their
associates, or to any person owning ten percent or more of any class
of our equity securities, or any of our affiliates.
Page 22
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See the Exhibit Index on the page immediately preceding the exhibits
for a list of exhibits filed as part of this Quarterly Report, which
Exhibit Index is incorporated herein by this reference.
(b) Reports on Form 8-K
On July 26, 2001, the Company filed a Current Report on Form 8-K
with the SEC in connection with its announcement of financial
results for the quarter and six-month periods ended June 30, 2001.
On September 4, 2001, the Company filed a Current Report on Form 8-K
with the SEC in connection with its announcement of the results of
the Hirulog Early Reperfusion/Occlusion-2, or HERO-2, clinical trial
program.
On September 27, 2001, the Company filed a Current Report on Form
8-K with the SEC in connection with its announcement of the election
of Clive A. Meanwell to the position of Executive Chairman and
promotion of David M. Stack to President and Chief Executive
Officer.
Page 23
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.
THE MEDICINES COMPANY
Date: November 14, 2001 By: /s/ Peyton J. Marshall
------------------------------
Peyton J. Marshall
Chief Financial Officer
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EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
10.1 Assignment and Assumption of Lease, dated October 18,
2001, by and between the Registrant and Stack
Pharmaceuticals, Inc.
10.2 Termination Agreement, dated November 1, 2001,
by and between the Registrant and Stack
Pharmaceuticals, Inc. relating to the Services
Agreement dated April 1, 2000, as amended.
10.3 Amendment to Employment Agreement, dated July
10, 2001, by and between the Registrant and
David M. Stack.
10.4 Amended and Restated Employment Agreement, dated
November 1, 2001, by and between the Registrant
and David M. Stack.
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