UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________.
Commission file number: 000-23265
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SALIX PHARMACEUTICALS, LTD.
(Exact name of Registrant as specified in its charter)
British Virgin Islands 94-3267443
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8540 Colonnade Center Drive, Suite 501
Raleigh, North Carolina 27615
(Address of principal executive offices, including zip code)
(919) 862-1000
(Registrant's telephone number, including area code)
3801 Wake Forest Road, Suite 205
Raleigh, North Carolina 27609
(Former address of principal executive offices, including zip code)
--------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or 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 [ ]
The number of shares of the Registrant's Common Stock outstanding as of
May 1, 2001 was 13,872,847.
SALIX PHARMACEUTICALS, LTD.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page No.
- ------- --------------------- --------
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2001
(unaudited) and December 31, 2000 (audited)..................... 1
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 2001 and 2000 (unaudited)................ 2
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2001 and 2000 (unaudited)................ 3
Notes to Condensed Consolidated Financial Statements............... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................... 5
Item 3. Quantitative and Qualitative Disclosures About Market Risk............. 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ..................................... 8
Signatures ......................................................................... 9
PART I. FINANCIAL INFORMATION.
Item 1. Condensed Consolidated Financial Statements
SALIX PHARMACEUTICALS, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(expressed in U.S. dollars)
March 31, December 31,
2001 2000
-------- --------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents $ 6,311 $ 13,244
Accounts receivable 9,044 6,156
Inventory 3,642 2,819
Prepaids and other current assets 2,479 3,208
-------- --------
Total current assets 21,476 25,427
Property and equipment, net 239 208
Other assets -- 126
-------- --------
Total assets $ 21,715 $ 25,761
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 5,246 $ 4,532
Deferred revenue 6,959 8,487
-------- --------
Total current liabilities 12,205 13,019
Commitments -- --
Shareholders' equity:
Preferred stock, issuable in series, no par value;
5,000,000 shares authorized; none outstanding -- --
Common stock, no par value; 40,000,000 shares authorized;
13,783,571 shares issued and outstanding at March 31, 2001
and 13,562,771 shares issued and outstanding at
December 31, 2000 41,793 41,128
Accumulated deficit (32,283) (28,386)
-------- --------
Shareholders' equity 9,510 12,742
-------- --------
Total liabilities and shareholders' equity $ 21,715 $ 25,761
======== ========
1
The accompanying notes are an integral part of these financial statements.
SALIX PHARMACEUTICALS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
(expressed in U.S. dollars)
Three months ended
March 31,
------------------------------
2001 2000
---- ----
Product revenues and costs:
Product sales $ 3,290 $ 380
Cost of products sold 786 313
-------------- --------------
Gross margin 2,504 67
Operating expenses:
Research and development 1,435 570
Selling, general and administrative 5,558 644
------------- --------------
Total operating expenses 6,993 1,214
Loss from operations (4,489) (1,147)
Other revenues and expenses:
Other revenues 1,375 467
Other expenses 891 22
Interest, income and (expense), net 108 20
-------------- --------------
Net loss before tax $ (3,897) $ (682)
Income tax --- ---
-------------- ---------------
Net loss $ (3,897) $ (682)
============= ====--------===
Net loss per share, basic and diluted $ (0.28) $ (0.06)
============== ===============
Shares used in computing net loss per share 13,711 10,610
============= ==============
The accompanying notes are an integral part of these financial statements.
2
SALIX PHARMACEUTICALS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
(expressed in U.S. dollars)
Three months ended
March 31,
--------------------------------
2001 2000
------------ --------------
Cash flows from operating activities
Net loss $ (3,897) $ (682)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 27 53
Loss on disposal of equipment --- 13
Changes in assets and liabilities:
Accounts receivable, inventory and other assets (2,856) (360)
Accounts payable and accrued liabilities 714 (284)
Deferred revenue (1,528) ---
---------- -------------
Net cash used in operating activities (7,540) (1,260)
Cash flows from investing activities
Purchases of property and equipment (58) (4)
----------- --------------
Net cash used in investing activities (58) (4)
Cash flows from financing activities
Proceeds from issuance of common stock 665 101
---------- --------
Net cash provided by financing activities 665 101
Net decrease in cash and cash equivalents (6,933) (1,163)
Cash and cash equivalents at beginning of period 13,244 2,402
--------- -----------
Cash and cash equivalents at end of period $ 6,311 $ 1,239
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
SALIX PHARMACEUTICALS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
(Unaudited)
1. Organization and Basis of Presentation
The Company was incorporated in the British Virgin Islands in
December 1993 as Salix Holdings, Ltd. In March 1998, the Company changed
its name to Salix Pharmaceuticals, Ltd. Prior to December 1993, the
business of the Company was conducted by Salix Pharmaceuticals, Inc., a
California corporation, incorporated in 1989, and Glycyx Pharmaceuticals,
Ltd., a Bermuda corporation, each of which is now a subsidiary of Salix
Pharmaceuticals, Ltd. Unless the context otherwise requires, references
in this report to Salix and the Company refer to Salix Pharmaceuticals,
Ltd., a corporation organized under the laws of the British Virgin
Islands, and its wholly owned subsidiaries, Salix Pharmaceuticals, Inc.
and Glycyx Pharmaceuticals, Ltd.
The condensed consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated. All amounts
are denominated in United States dollars. Unless otherwise indicated,
all references to "dollars" or "$" refer to United States dollars.
The accompanying unaudited condensed consolidated financial
statements include all adjustments (consisting only of normal recurring
items) which, in the opinion of management, are necessary for a fair
presentation of financial position, results of operations and cash flows.
These financial statements should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results
of Operations included elsewhere in this Report and with the audited
financial statements for the fiscal year ended December 31, 2000 included
in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000 filed with the Securities and Exchange Commission. The
results of operations for interim periods are not necessarily indicative
of results to be expected for a full year or any future period.
These statements have been prepared in accordance with accounting
principles generally accepted in the United States. The application of
these principles conforms in all material respects with financial
statements prepared using accounting principles generally accepted in
Canada. The Company's common stock is currently traded on the Nasdaq
National Market under the symbol "SLXP".
2. Commitments
At March 31, 2001, the Company had a binding purchase order
commitment for inventory purchases aggregating approximately $9.6
million.
3. Inventory
Inventory at March 31, 2001 consisted of $2.3 million of raw
materials and of $1.3 million finished goods. Inventory at December 31,
2000 consisted of $2.8 million of raw materials and $0.02 million of
finished goods.
4. Revenue Recognition
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements", which among other guidance clarifies certain
conditions to be met in order to recognize revenue. SAB 101 requires
companies to recognize certain up-front non-refundable fees over the term
of the related agreement unless the fee is in exchange for products
delivered or services performed that represent the culmination of a
separate earnings process. In the fourth quarter of 2000, Salix
implemented SAB 101. As a result of the adoption of SAB 101, $8.7 million
of the $11.7 million initial payment received
4
and recognized in full during the second quarter of 2000 from Shire
Pharmaceuticals Group plc has been deferred and is now being recognized
as revenue through the end of 2001.
5. Recent Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board approved the
exposure draft to delay for one year the effective date of Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is effective for fiscal years
beginning after June 15, 2000. SFAS 133 establishes reporting standards
for derivative instruments, including derivative instruments embedded in
other contracts, and for hedging activities. SFAS 133 requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. The Company adopted SFAS 133 for its fiscal year ending December
31, 2001. The adoption of this pronouncement did not have a material
impact on the Company's results of operations or financial position.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains 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. These forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from
historical results or anticipated results, including those set forth under
"Cautionary Statement" under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this report. The
following discussion should be read in conjunction with the Company's Condensed
Consolidated Financial Statements and notes thereto included elsewhere in this
report.
Overview
Salix Pharmaceuticals, Ltd.'s objective is to be a market-driven specialty
pharmaceutical company focused on the needs of physicians specializing in
gastroenterology. In late 2000, the Company established a 30-member direct sales
force to promote its products to this specialist audience. The Company's
strategy is to identify and acquire products that have near-term commercial
potential and apply its regulatory, product development and sales and marketing
expertise to commercialize these products. The Company selects products that it
believes serve a gastrointestinal disease in need of new treatments, have the
potential for rapid regulatory approval, and are marketable to this small group
of specialized physicians. The Company believes this strategy will reduce the
expense, time and risk normally associated with pharmaceutical development. The
Company believes that its first two products, balsalazide disodium, presently
marketed in the United States under the brand name COLAZAL(TM), and rifaximin
demonstrate the Company's ability to execute this strategy.
The Company licensed its first product, balsalazide disodium, from Biorex
Laboratories Limited in exchange for participation in future milestone revenues,
royalties and profits. In May 2000, the Company signed an agreement with Shire
Pharmaceuticals Group plc under which Shire purchased from Salix the exclusive
rights to balsalazide, a treatment for ulcerative colitis, for Austria, Belgium,
Denmark, Finland, France, Germany, Iceland, Republic of Ireland, Luxembourg,
Norway, The Netherlands, Switzerland, Sweden and the United Kingdom. Under the
agreement, Shire agreed to pay Salix up to a total of approximately $24 million,
including approximately $12.1 million in up-front fees and up to $12 million
upon the achievement of certain milestones. In accordance with the Company's
license arrangement with Biorex Laboratories, Salix will share a portion of
these payments, including all of the new Shire ordinary shares, with Biorex. On
July 18, 2000 the Food and Drug Administration, or FDA, approved COLAZAL(TM)
(balsalazide disodium) for marketing in the United States for the treatment of
mildly to moderately active ulcerative colitis.
The Company's second product, rifaximin, is currently under development.
The Company obtained the rights to develop, make, use and sell rifaximin in the
United States and Canada from Alfa Wassermann S.p.A. in exchange for future
royalties and milestone payments. Alfa Wassermann has also agreed to supply
Salix with active pharmaceutical ingredient rifaximin at a fixed price. The
Company intends to pursue development of rifaximin for infections of the
gastrointestinal tract. A second Phase III trial for the treatment of infectious
diarrhea in travelers was completed during the fourth quarter of 2000. The
Company believes there are opportunities to develop rifaximin for other
indications,
5
including antibiotic associated colitis, hepatic encephalopathy, diverticulitis,
small bowel overgrowth and irritable bowel syndrome and intends to pursue such
opportunities as financial resources will allow. In February 1998, the Company
received Orphan Drug Designation from the FDA for rifaximin to treat hepatic
encephalopathy. Orphan Drug Designation can entail advantages in the testing and
approval process for the drug. If regulatory approvals are obtained, the Company
intends to market rifaximin in the United States through its own direct sales
force.
The Company has generated limited revenues to date from the sales of its
products. The Company expects both sales revenues and operating expenses to
increase as the Company continues its launch of COLAZAL(TM) in the United States
through its specialized sales force and continues product development and
clinical programs for rifaximin. As of March 31, 2001, the Company had
accumulated losses of approximately $32.2 million. Since 1992, the Company has
financed its operations principally through reimbursement payments, license fees
and milestone revenues under collaborative research and licensing agreements,
and sales of equity and convertible debt securities.
Results of Operations
Three-Month Periods Ended March 31, 2001 and 2000
Product sales for the three-month period ended March 31, 2001 were
$3.3 million. During the three-month period ended March 31, 2000, the Company
recorded product revenue of $0.4 million. Higher product revenues for the
three-month period ended March 31, 2001 relate to the Company's U.S. sales of
COLAZAL(TM).
Cost of products sold for the three-month periods ended March 31, 2001
and 2000 were $0.8 million and $0.3 million, respectively. The increase in cost
of products sold relates to the U.S. sales of COLAZAL(TM). Gross margins for the
three-month periods ended March 31, 2001 and 2000 were $2.5 million and $0.07
million respectively.
Operating expenses for the three-month periods ended March 31, 2001 and
2000 were $6.9 million and $1.2 million, respectively. The increase in operating
expenses from the corresponding prior period was due to higher research and
development expenditures combined with higher selling, general and
administrative expenses associated with the launch of COLAZAL(TM) in the United
States.
Research and development expenses were $1.4 million for the three-month
period ended March 31, 2001, compared to $0.6 million for the comparable period
in 2000. The increase in research and development expenses in the three-month
period ended March 31, 2001 versus the same prior year period was primarily due
to costs associated with the preparation of the New Drug Application for
rifaximin, initiation of a Phase III trial for rifaximin as a treatment for
hepatic encephalopathy and cost-saving initiatives in effect during the first
quarter of 2000.
Selling, general and administrative expenses were $5.6 million for the
three-month period ended March 31, 2001, compared to $0.6 million in the
corresponding three-month period in 2000. This increase was primarily due to
sales and marketing expenses related to the Company's launch of COLAZAL(TM) in
the United States.
Other revenues were $1.4 million for the three-month period ended March
31, 2001 compared to $0.4 million in the corresponding three-month period in
2000. This increase was primarily the result of the recognition in 2001 of
revenue under our agreement with Shire Pharmaceutical Group plc under which
Shire purchased from Salix the intellectual property related to balsalazide
disodium, a treatment for ulcerative colitis, for Austria, Belgium, Denmark,
Finland, France, Germany, Iceland, Republic of Ireland, Luxembourg, Norway, the
Netherlands, Switzerland and the United Kingdom. Under the agreement, Shire paid
the Company a first payment of $11.7 million in the second quarter of 2000. As a
result of the adoption of SAB 101, $8.7 million of the $11.7 million initial
payment received and recognized in full during the second quarter of 2000 from
Shire has been deferred and is now being recognized as revenue ratably through
the end of 2001.
Other expenses totaled $0.9 million for the three-month period ended
March 31, 2001 compared to $0.02 million in the corresponding three-month period
in 2000. The increase was due primarily to the Company's obligation to its
licensor of balsalazide in connection with funds received under the May 2000
balsalazide agreement with Shire.
6
Interest income for the three-month period ended March 31, 2001
compared to the same three-month period in the prior year is mainly attributable
to larger average cash balances as a result of the agreement with Shire
Pharmaceuticals Group plc and cash received in connection with the Company's
private placement in the fourth quarter of 2000.
The Company recorded a net loss of $3.9 million for the three months
ended March 31, 2001 compared with a net loss of $0.7 million in the
corresponding three-month period prior year. The increase in net loss for the
three-month period was primarily due to higher operating expenses associated
with the Company's launch of COLAZAL(TM) in the United States.
Liquidity and Capital Resources
Since inception, the Company has financed product development,
operations and capital expenditures primarily from funding arrangements with
collaborative partners and from public and private sales of debt and equity
securities.
As of March 31, 2001, the Company had approximately $6.3 million in
cash and cash equivalents. As of December 31, 2000, the Company had
approximately $13.2 million in cash and cash equivalents. The decrease of $6.9
million was primarily a result of increased operating expenditures associated
with the Company's U.S. launch of COLAZAL(TM) and increased working capital
expenditures including inventory and accounts receivable.
As of March 31, 2001, the Company had no long-term obligations. During
the first quarter of 2001, the Company secured a $7.0 million working capital
line of credit.
The Company has sustained continuing operating losses and had an
accumulated deficit of $32.2 million as of March 31, 2001. The Company expects
to incur substantial and increasing operating losses until product revenues
reach a sufficient level to support ongoing operations. The Company believes its
current cash and investment balances should be sufficient to satisfy the cash
requirements of the Company for the foreseeable future and until such time, if
at all, that it needs to raise additional funds in the form of debt or equity
financing to fund future licensing, development and commercialization of
rifaximin and new products. However, the Company's actual cash requirements
might vary materially from those now planned because of a number of factors,
including market acceptance of COLAZAL, the results of research and development
activities, FDA and foreign regulatory processes, establishment of and change in
relationships with strategic partners, technological advances by the Company and
other pharmaceutical companies, the terms of the Company's collaborative
arrangements, and the status of competitive products. The Company might also
enter into additional collaborative arrangements with corporate partners that
could provide the Company with additional funding in the form of equity, debt,
licensing, milestone and/or royalty payments. There can be no assurance that the
Company will be able to enter into such arrangements or raise any additional
funds on terms favorable to the Company.
Cautionary Statement
The Company operates in a highly competitive environment that involves
a number of risks, some of which are beyond the Company's control. The following
statement highlights some of these risks.
Statements contained in "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" which are not historical facts
are or might constitute forward-looking statements under the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Although the
Company believes the expectations reflected in such forward-looking statements
are based on reasonable assumptions, it can give no assurance that its
expectations will be attained. Forward-looking statements involve known and
unknown risks that could cause the Company's actual results to differ materially
from expected results. Factors that could cause actual results to differ
materially from the Company's expectations include, among others: the Company's
limited sales and marketing experience; the high cost and uncertainty of the
research, clinical trials and other development activities involving
pharmaceutical products; the Company's ability to fund its activities internally
or through additional financing, if necessary; the unpredictability of the
duration and results of regulatory review of New Drug Applications and
Investigational New Drug Applications; the Company's dependence on its two
pharmaceutical products, balsalazide
7
and rifaximin, and the uncertainty of market acceptance of those products; the
possible impairment of, or inability to obtain, intellectual property rights and
the costs of obtaining such rights from third parties; intense competition; the
uncertainty of obtaining, and the Company's dependence on, third parties to
manufacture and sell its products; and results of future litigation and other
risk factors detailed from time to time in the Company's Securities and Exchange
Commission filings. The Company does not undertake any obligation to release
publicly any revisions to these statements to reflect later events or
circumstances or to reflect the occurrence of unanticipated events.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's purchases of raw materials and its product sales to its
European distribution partners are denominated in Pounds Sterling. Translation
into the Company's reporting currency, the United States dollar, has not
historically had a material impact on the Company's financial position.
Additionally, the Company's net assets denominated in currencies other than the
functional currency have not exposed the Company to material risk associated
with fluctuations in currency rates. Given these facts, the Company has not
considered it necessary to use foreign currency contracts or other derivative
instruments to manage changes in currency rates.
Due to the nature and maturity of the Company's short-term investments,
the Company does not believe these investments present significant market risk.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
The Company filed a Form 8-K with the United States Securities and
Exchange Commission on February 27, 2001 to file press releases announcing
the launch of its first product, COLAZAL(TM), operating results for the
quarter and year ended December 31, 2000, and the commencement of trading
of the Company's shares of common stock on the Nasdaq National Market.
8
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SALIX PHARMACEUTICALS, LTD.
Date: May 14, 2001 By: /s/ Robert P. Ruscher
--------------------------------------------
Robert P. Ruscher, President and
Chief Executive Officer
Date: May 14, 2001 By: /s/ Adam C. Derbyshire
-----------------------------------------
Adam C. Derbyshire, Vice President,
Finance & Administration, Chief
Financial Officer and Corporate Secretary
9